10-Q 1 v359284_10q.htm 10-Q
 UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended: September 30, 2013
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
ABTECH HOLDINGS, INC.
(Name of registrant as specified in its charter)
 
Nevada
 
14-1994102
(State or Other Jurisdiction of
 
(I.R.S. Employer
Incorporation or Organization)
 
Identification Number)
 
 
 
4110 N. Scottsdale Road, Suite 235
 
 
Scottsdale, Arizona
 
85251
(Address of Principal Executive Offices)
 
(Zip Code)
 
 
(480) 874-4000
 
 
(Registrant’s telephone number, including area code)
 
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
 
YES   x
 
NO   ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
YES   x
 
NO   ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
¨ Large accelerated filer
¨ Accelerated filer
¨ Non-accelerated filer
x Smaller reporting company
 
 
(Do not check if smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
YES   ¨
 
NO   x
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
Class
 
Outstanding at November 8, 2013
Common stock, $.001 par value
 
67,843,879
 
 
 
ABTECH HOLDINGS, INC.
FORM 10-Q
 
September 30, 2013
 
INDEX
 
 
 
PAGE
PART I—FINANCIAL INFORMATION
 
3
 
 
 
Item 1.  Financial Statements
 
3
 
 
 
Condensed Consolidated Balance Sheets as of September 30, 2013 (Unaudited) and December 31, 2012
 
3
 
 
 
Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2013 and 2012
 
4
 
 
 
Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2013 and 2012
 
5
 
 
 
Notes to the Unaudited Condensed Consolidated Financial Statements
 
6
 
 
 
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
11
 
 
 
Item 3.  Quantitative and Qualitative Disclosures About Market Risk
 
17
 
 
 
Item 4.  Controls and Procedures
 
17
 
 
 
PART II—OTHER INFORMATION
 
18
 
 
 
Item 1.  Legal Proceedings
 
18
 
 
 
Item 1A.  Risk Factors
 
18
 
 
 
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
 
18
 
 
 
Item 3.  Defaults Upon Senior Securities
 
18
 
 
 
Item 4.  Mine Safety Disclosures
 
18
 
 
 
Item 5.  Other Information
 
18
 
 
 
Item 6.  Exhibits
 
19
 
 
 
Signature Page
 
20
 
 
 
Certifications
 
 
Exhibit 31.1
 
 
Exhibit 31.2
 
 
Exhibit 32
 
 
 
 
 
FORWARD-LOOKING STATEMENTS
 
This Quarterly Report on Form 10-Q contains forward-looking statements regarding the Company.  Reference is made in particular to the description of our plans and objectives for future operations, assumptions underlying such plans and objectives, and other forward-looking statements included in this report.  Such statements may be identified by the use of forward-looking terminology such as “may,” “will,” “should,” “would,” “could,” “confident,” “forecast,” “hope,” “likely,” “plan,” “possible,” “potential,” “predict,” “project,” “expect,” “believe,” “estimate,” “anticipate,” “intend,” “continue,” or similar terms, variations of such terms or the negative of such terms.  Such statements are based on management’s current expectations and are subject to a number of factors and uncertainties, which could cause actual results to differ materially from those described in the forward-looking statements.   Such statements address future events and conditions concerning, among others, capital expenditures, earnings, litigation, regulatory matters, liquidity and capital resources, and accounting matters.  Actual results in each case could differ materially from those anticipated in such statements by reason of factors such as future economic conditions, changes in consumer demand, legislative, regulatory and competitive developments in markets in which we operate, results of litigation, and other circumstances affecting anticipated revenues and costs, and the risk factors set forth under “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012, filed on March 29, 2013.
 
YOU SHOULD NOT PLACE UNDUE RELIANCE ON THESE FORWARD LOOKING STATEMENTS
 
The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events or information as of the date on which the statements are made in this Quarterly Report on Form 10-Q.  Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events.  You should read this report and the documents that we reference in this report, including documents referenced by incorporation, completely and with the understanding that our actual future results may be materially different from what we expect or hope.
 
Explanatory Note
 
As used in this Quarterly Report on Form 10-Q, “we,” “us,” “our,” “ABHD” and the “Company” refer to Abtech Holdings, Inc.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.  The December 31, 2012 consolidated balance sheet included in this Quarterly Report on Form 10-Q was derived from audited financial statements but does not include all disclosures required by generally accepted accounting principles.  In the opinion of management, all adjustments considered necessary for a fair presentation have been included.  Operating results for the nine-month period ended September 30, 2013 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2013.  For further information, refer to the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012.
 
 
2

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

 
ABTECH HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 

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

 
ABTECH HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
 

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

 
ABTECH HOLDINGS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
NOTE 1 – ORGANIZATION
 
Abtech Holdings, Inc. (“ABHD” or the “Company”) was incorporated under the laws of the State of Nevada on February 13, 2007, with authorized capital stock of 300,000,000 shares at $0.001 par value.
 
AbTech Industries, Inc. (“AbTech”), a Delaware corporation with an authorized capital of 15,000,000 shares of $0.01 par value common stock and 5,000,000 shares of $0.01 par value preferred stock, was acquired by ABHD in a reverse acquisition transaction on February 10, 2011 (the “Merger”).  In accordance with the merger agreement between AbTech and ABHD (the “Merger Agreement”), ABHD acquired all of the issued and outstanding common stock of AbTech, including shares issuable upon the conversion of Series A preferred stock and convertible promissory notes outstanding, in exchange for the stockholders of AbTech acquiring 46,000,000 shares of ABHD common stock.  ABHD also agreed to reduce its number of common shares outstanding to 10,000,000 shares prior to the Merger.  The preferred stockholders of AbTech that elected not to convert and exchange their shares for ABHD common shares represent the non-controlling interest shown on the Condensed Consolidated Balance Sheets as of September 30, 2013 and December 31, 2012.
 
AbTech is an environmental technologies firm that provides innovative solutions to address issues of water pollution.  AbTech has developed and patented the Smart Sponge® polymer technology.  This technology’s oil absorbing capabilities make it highly effective as a filtration media to remove hydrocarbons and other pollutants from flowing or pooled water.  AbTech is headquartered in Scottsdale, Arizona and has a manufacturing facility located in Phoenix, Arizona.
 
AbTech’s wholly-owned subsidiary, Environmental Security Corporation (“ESC”), was formed in 2003 to develop a sensor array technology designed to detect impurities in water flows.  ESC owns a U.S. patent on this technology and has acquired rights to another monitoring technology, but otherwise had no operations during 2013 or 2012.
 
In May, 2012, the Company formed a new subsidiary, AEWS Engineering, LLC (“AEWS”), an independent civil and environmental engineering firm, established to provide engineering and technology innovation to the water infrastructure sector.  AEWS is owned 80% by the Company and 20% by Bjornulf White, the President of AEWS and Executive Vice President of AbTech.  Under the AEWS operating agreement, the Company will fund the initial start-up costs of AEWS.  Any future profits will be allocated first to those members that have funded prior losses (AbTech) and then to members in proportion to their membership interests.  Accordingly, the operations of AEWS for the periods reflected in these condensed consolidated financial statements are allocated 100% to the Company.  AEWS has an office located in Raleigh, North Carolina.  Through September 30, 2013, AEWS had no revenues and its activities comprised setting up operations and developing business opportunities.
 
In July 2013, the Company formed a new subsidiary, AbTech Industries (UK) Limited (“AbTech UK”).  This entity is intended to handle operations related to various projects the Company intends to pursue in the United Kingdom and potentially other European countries.  As of September 30, 2013 AbTech UK had not yet begun operations and had entered into no transactions. 
 
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 non-controlling interest shown on the Condensed Consolidated Balance Sheet as of September 30, 2013, represents the ownership interest in AbTech of the holders of AbTech Series A preferred stock that elected not to exchange their Series A preferred shares for common shares of ABHD as allowed by the Merger Agreement.
 
 
6

 
The condensed consolidated financial statements for the three and nine month periods ended September 30, 2013 and September 30, 2012 are unaudited and, in the opinion of the Company’s management, include all adjustments necessary for a fair presentation of such condensed consolidated financial statements.  Such adjustments are of a normal recurring nature.
 
Use of Estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from these estimates.
 
Net Loss Per Share Basic net loss per share is computed by dividing net loss attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period. The calculation of basic loss per share gives retroactive effect to the recapitalization related to the reverse acquisition of AbTech by ABHD.  The Company has other potentially dilutive securities outstanding that are not shown in a diluted net loss per share calculation because their effect in both 2013 and 2012 would be anti-dilutive.  The following chart lists the securities as of September 30, 2013 and 2012 that were not included in the computation of diluted net loss per share because their effect would have been antidilutive:
 
 
Common Shares
 
 
September 30, 2013 
Unaudited
 
September 30, 2012 
 
 
 
Unaudited
 
Options to purchase common stock
 
9,529,863
 
9,223,458
 
Warrants to purchase common stock
 
7,094,839
 
8,339,599
 
Convertible promissory notes
 
2,807,008
 
9,758,700
 
Convertible preferred stock in AbTech
 
6,457,467
 
6,563,943
 
 
 
25,889,177
 
33,885,700
 
 
Recent Accounting Pronouncements – There have been no recent accounting pronouncements or changes in accounting pronouncements that are expected to have a material impact on the Company’s condensed consolidated financial statements.

NOTE 3 – INVENTORIES
 
The Company uses a perpetual inventory system and periodic physical test counts to determine inventory amounts at interim balance sheet dates.  Inventories are stated at the lower of cost or market, with cost computed on an average cost method which approximates the first-in, first-out basis.
 
 
 
September 30, 2013 
 
 
December 31, 2012
 
 
 
(Unaudited)
 
 
 
Raw materials
$
98,724
 
$
105,971
 
Work in process
 
389,658
 
 
354,554
 
Finished goods
 
53,612
 
 
47,279
 
Reserve for obsolescence
 
(110,000)
 
 
(110,000)
 
Total
$
431,994
 
$
397,804
 
 
 
7

 
NOTE 4 – GOING CONCERN
 
These unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States, which contemplate continuation of the Company as a going concern.  The Company has not yet established an ongoing source of revenue sufficient to cover its operating costs, which raises doubts about the ability of the Company to continue as a going concern.   In order to continue as a going concern, the Company will need to generate additional revenue and obtain additional capital to fund its operating losses and service its debt.  Management of the Company has developed a strategy, which it believes will accomplish this objective through revenue growth and additional funding, which will enable the Company to operate for the coming year.  On June 25, 2013, the Company entered into an equity line of credit agreement with Dutchess Opportunity Fund, II, LP (“Dutchess”) whereby Dutchess is irrevocably committed to purchase from the Company up to $2 million of ABHD common stock over the course of 36 months (see NOTE 8 – STOCKHOLDERS’ EQUITY). However, even with this funding commitment in place there can be no assurance that the Company’s overall efforts will be successful.  As a result, the Company’s independent registered public accounting firm issued a going concern opinion on the consolidated financial statements of the Company for the year ended December 31, 2012.  These condensed consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.

NOTE 5 – RELATED PARTY TRANSACTIONS
 
Accounts payable, related party –  At December 31, 2012, the accounts payable – related party balance included $42,500 of fees due to directors of the Company for unpaid directors fees earned during 2012 and $10,000 for advertising and sponsorship fees due to a non-profit organization of which the president of the Company is a director.
 
At September 30, 2013,  accounts payable – related party included $53,500 of fees due to directors of the Company for their services as directors during the nine months ended September 30, 2013.

NOTE 6 – DEBT
 
On April 11, 2013 the Company completed a transaction (the “Transaction”) wherein the Company assigned to new investors its right to repurchase eleven outstanding convertible promissory notes (the “Notes”) issued by the Company’s subsidiary, AbTech Industries, Inc.  The Notes were all non-interest bearing with an aggregate principal amount of $1,856,000 and maturity dates ranging from March 31, 2013 to May 11, 2014.  The Company assigned these notes to new investors pursuant to Assignment and Assumption Agreements whereby the new investors agreed to immediately convert the Notes into shares of Series A preferred stock of AbTech Industries, Inc. in accordance with the conversion terms of the Notes and then to further convert the shares of Series A preferred stock into shares of the Company’s common stock as provided for in the terms of the Company’s merger with AbTech Industries, Inc. that occurred in February 2011.  The transaction was a cashless transaction for the Company, handled by an escrow agent for the buyers and sellers of the Notes.  As a result of the transaction, the Company reduced its outstanding convertible debt by $1,856,000 and issued 2,649,640 shares of its common stock.
 
On June 14, 2013, the Company issued to an investor who is a member of the Company’s Advisory Board, a Bridge Loan Promissory Note (the “Bridge Note”) with a principal amount of $500,000, an interest rate of 6.5% per annum and a maturity date of October 1, 2013 (later extended to December 1, 2013).  The Bridge Note is a multi-advance loan facility pursuant to which the lender, upon request by the Company, will advance loans to the Company aggregating up to $500,000.  As of September 30, 2013, the Company had borrowed the full $500,000 principal amount of the Bridge Note.  In conjunction with the Bridge Note, the lender received a detachable warrant (the “Bridge Warrant”) for the purchase of 35,000 shares of the Company’s common stock with an exercise price of $0.66 per share and a term of five (5) years.  The Bridge Note was discounted by the value of the Bridge Warrant, determined to be $10,399 using the Black–Scholes model. The discount was amortized as interest expense over the term of the Bridge Note.  As of September 30, 2013, the Bridge Note discount was fully amortized.  On September 27, 2013 the Company issued to this investor a secured convertible promissory note with principal amount of $250,000, an interest rate of 6.5% per annum, a conversion rate of $0.53 per share and a maturity date of December 26, 2013.
 
On August 9, 2013, the Company issued to an investor a secured convertible promissory note with a principal amount of $600,000, an interest rate of 6.5% per annum, a conversion rate of $0.70 per share (adjusted to $0.53 per share – see Note 10) and a maturity date of November 7, 2013 (extended to January 31, 2014 – see Note 10). On September 30, 2013, the Company issued to the same investor a secured convertible promissory note with a principal amount of $420,000, an interest rate of 6.5% per annum, a conversion rate of $0.53 per share and a maturity date of December 1, 2013 (extended to January 31, 2013 – see Note 10). As of September 30, 2013, the Company had two other secured convertible promissory notes outstanding held by the same investor with a combined principal amount of $480,000.  These notes have an interest rate of 6% per annum, mature on October 1, 2013 (later extended to January 31, 2014 – see Note 10) and are convertible into shares of the Company’s common stock at $0.70 per share (adjusted to $0.53 per share – see Note 10).
 
 
8

 
During 2013, the Company received a bank line of credit with a credit limit of $100,000.  The line of credit has an annual initial interest rate of prime plus 6.75% (current promotional rate of 4.25%) and requires monthly payment of any interest due plus approximately 1% of the outstanding balance.  At September 30, 2013 the principal amount outstanding on the bank line of credit was $20,000.

NOTE 7 – FAIR VALUE OF FINANCIAL INSTRUMENTS
 
The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, capital lease obligation, 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.

NOTE 8 – STOCKHOLDERS’ EQUITY (DEFICIENCY)
 
During the nine-month period ended September 30, 2013, the Company issued:
 
 
52,479 shares of ABHD common stock for the conversion of $36,736 of interest accrued on Secured Convertible Promissory Notes;
 
2,649,640 shares of ABHD common stock for the conversion of all remaining convertible notes issued by AbTech with an aggregate principal amount of $1,856,000 and a conversion rate of $0.70 per share;
 
260,000  shares of ABHD common stock for services valued at $181,400 and accrued an additional $10,600 for the estimated value of 20,000 additional shares that the Company was obligated to issue for services rendered as of September 30, 2013;
 
136,912 shares of ABHD common stock for the cashless exercise of warrants for 696,666 shares of common stock; and
 
106,476 shares of ABHD common stock for the conversion of 20,000 shares of AbTech Series A preferred stock.
 
Paid-in capital for the nine-months ended September 30, 2013 also increased by $256,626 for the value of stock based compensation attributable to options and warrants vesting during the period and by $10,399 for the value of the warrant issued with the Bridge Note in June 2013.
 
On June 25, 2013, the Company entered into an agreement (the “Investment Agreement” or “Equity Line of Credit”) with Dutchess Opportunity Fund, II, LP (“Dutchess”) whereby Dutchess is irrevocably committed to purchase up to $2 million of ABHD common stock from the Company over the course of 36 months.  The aggregate number of shares issuable by the Company and purchasable by Dutchess under the Investment Agreement is limited by the dollar amount sold, in this instance no more than $2 million, and will depend upon the trading price of the Company’s shares. The purchase price will be set at ninety-seven percent (97%) of the lowest daily volume weighted average price of the Company’s common stock during the five consecutive trading days beginning on the date of the applicable put. The Company may draw on the Equity Line of Credit from time to time, as and when it determines appropriate in accordance with the terms and conditions of the Investment Agreement.  The Company has no obligation to utilize the full amount available under the Equity Line of Credit.  As of September 30, 2013, the Company had made no draws on the Equity Line of Credit.
 
 
9

 
NOTE 9 – LITIGATION AND CONTINGENCIES
 
On February 28, 2013, the Company filed a complaint (the “Complaint”) with the Superior Court of the State of Arizona against Arctech, Inc. (“Arctech”) arising from the Company’s License, Supply and Distribution Agreement with Arctech, dated June 6, 2012 (the “Agreement”).  The Complaint claims that, due to fraudulent misrepresentations and omissions made by Arctech regarding the performance of their Humasorb technology, which technology is the subject of the Agreement, the Agreement should be declared null, void, unenforceable, and should be rescinded, such that the Company and Arctech should be placed in their respective positions prior to the execution of the Agreement. The Complaint also requests that the Company should be awarded damages and attorney’s fees in an amount to be determined at trial.  Prior to filing the Complaint, the Company made payments of $75,000 to Arctech which, under the terms of the Agreement, were to be creditable against certain products and services to be provided to the Company by Arctech.  On April 4, 2013, Arctech filed with the court a response to the complaint largely denying the Company’s claims and making certain counterclaims alleging that the Company had breached the Agreement by not making certain periodic payments to Arctech as specified in the Agreement, that Arctech had suffered damages of at least $220,000 as a result and that Arctech should be awarded damages, attorney’s fees, costs and interest in an amount to be determined at trial. The Company believes it has meritorious defenses and intends to aggressively defend its position regarding this matter.  No estimated loss has been accrued in the accompanying financial statements as of September 30, 2013 and December 31, 2012, as management deems the likelihood of the Company incurring a liability to be not probable.
   
In July 2010, AbTech received approval from the U.S. Environmental Protection Agency (“EPA”) of a time limited registration of its antimicrobial Smart Sponge Plus material under the Federal Insecticide, Fungicide and Rodenticide Act, which was conditioned upon AbTech Industries submitting additional data regarding the active ingredient in Smart Sponge Plus to the EPA by July 1, 2011.  Subsequently, the EPA granted additional extensions of the time-limited registration to May 31, 2014.  Provided that the data is submitted before the expiration of the time-limited registration and is acceptable to the EPA, the time-limited condition of the registration will be lifted and the registration will be effective without a time limitation.  If the data is not submitted prior to the expiration of the time-limited registration and the EPA does not grant additional extensions, the registration will expire and the Company will not be able to sell Smart Sponge Plus products.  While the Company would be able to continue to sell regular Smart Sponge products that do not include the antimicrobial agent, the inability to sell Smart Sponge Plus products could have a significant adverse effect on the Company’s prospects for revenue growth.

NOTE 10 – SUBSEQUENT EVENTS
 
On October 10, 2013 the Company announced that it executed a contract with Nassau County (the “County”) for a project involving the installation of stormwater systems (the “Project”). The Company reported that it had been awarded this project on July 2, 2013, but the work could not begin until the contract was fully executed.  In connection with the Project, AbTech will provide services to the County pertaining to the design, installation, maintenance and inspection of stormwater treatment technology at up to ten stormwater drainage outfall sites in the County.  The Project has a term of three years and the maximum amount to be paid to the Company for the Company’s services related to the Project is not to exceed twelve million dollars ($12,000,000).  AbTech is expected to use subcontractors, including AEWS, for the design, construction and installation work pertaining to the Project.  Project work began on October 11, 2013.  The Company’s fee for services will be paid in monthly installments by the County based on the portion of the work completed.
 
In November 2013, the Company agreed to extend the maturity dates of three secured convertible promissory notes totaling $1,080,000 to January 31, 2014 and to adjust the conversion price of these notes from $0.70 per share to $0.53 per share. In addition, the Company agreed to extend the maturity date of the $420,000 secured convertible promissory note to January 31, 2014.  These four notes are held by the same investor and now have the same maturity dates and conversion price.
 
10

 
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q. This discussion includes forward-looking statements that involve risks, uncertainties and assumptions.  Our actual results and the timing of events may differ materially from those anticipated in these forward-looking statements as a result of a variety of business, economic and competitive uncertainties and contingencies, many of which are beyond our control and many of which, with respect to future business decisions, are subject to change.
 
Overview
 
ABHD and its subsidiaries are involved in the business of providing water treatment solutions to address the contamination of water resources that occurs in stormwater runoff, oil and gas extraction and mining operations, and other industrial operations with the objective of making such water streams dischargeable or reusable.  ABHD is the parent holding company.  Its subsidiary, AbTech, is the operating company that manufactures and sells water treatment products, many of which incorporate its patented Smart Sponge technology.  ABHD’s other operating subsidiary, AEWS, provides engineering services to assist government and industry in developing effective solutions to their specific water treatment needs.  ESC is a dormant subsidiary that holds a patent regarding sensor array technology designed to detect impurities in water flows.  AbTech UK is a newly created foreign subsidiary with no operations as of September 30, 2013.
 
This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” is based on the consolidated operations of ABHD and its subsidiaries.  Key factors affecting ABHD’s results of operations during the periods covered in this section include revenues, cost of revenues, operating expenses and income.
 
Results of Operations
 
Comparison of the nine months ended September 30, 2013 and 2012
 
Revenues
 
Revenues for the nine months ended September 30, 2013 decreased by $254,921 (45%), compared to revenues in the same period of the prior year, due entirely to a reduction in the volume of products sold.  These revenue figures reflect the challenges the Company has met in moving projects forward in the face of continued funding constraints for new municipal and federal facility stormwater projects and the complexities of developing public private partnerships (“P3s”) for large municipal projects.  The Company continues to focus its efforts on these large projects that could have a significant impact on revenue.  However, the timing of such revenue realization is difficult to project.  In October, 2013, the Company announced that it had signed a contract for a project in Nassau County, New York.  This contract is a three year contract for an amount not to exceed $12 million and will begin to generate revenue in the fourth quarter of 2013.  AbTech will use subcontractors, including AEWS, for the design, construction and installation work pertaining to the contract.  Most of the contract work will be completed in the first year of the contract with maintenance and monitoring services continuing for 3 years.
 
The Company continues to work with its distributor, Waste Management, Inc. (“WMI”), to bring other large municipal projects to fruition, and while significant effort has been expended to date to move these projects ahead, no new projects have yet been awarded.  The Company has also submitted various proposals for produced water applications in the oil and gas and mining industries.  We expect that these proposals, if awarded to the Company, could begin to affect revenue in the fourth quarter of 2013. 
 
Gross Margin
 
The Company’s gross margin on sales decreased from 32% for the nine months ended September 30, 2012 to 8% for the same period of 2013.  This reduction in gross margin is the direct result of decreased levels of production in the first nine months of 2013 that caused excess capacity costs to flow through to cost of revenues.  The Company operated at approximately 3% of operating capacity for the nine months ended September 30, 2013 and expects that such excess capacity will continue to adversely affect gross margins until product sales increase with a corresponding increase in product manufacturing. 
 
 
11

  
Selling, general and administrative expenses
 
Selling, general and administrative expenses increased by approximately $510,000 or 16% in the nine months ended September 30, 2013, as compared to the same period in 2012.  These increases were due primarily to the addition of approximately $314,000 of operating costs for the new subsidiary, AEWS, and a continued expansion of our business development effort.  Cost increases related to the business development effort amounted to $57,000 for payroll costs, $97,000 for consulting costs related to sourcing new opportunities and preparing corresponding proposals, $62,000 for travel and trade show expenses and $20,000 for legal fees.  Other cost increases in the first nine months of 2013 compared to the same period of the prior year included other consulting costs of $49,000 related primarily to international activities, auditing costs of $18,000 due primarily to registration statement filings with the SEC, dues and fees paid to various industry groups of $24,000, insurance costs of $23,000 due to increased insurance policy liability limits, investor relations costs of $38,000 due primarily to stock issued to investor relations consultants and stock based compensation of $27,000 due to the vesting of options granted in prior periods.  The Company decreased its expenditures for public relations by $162,000 and government affairs by $56,000 in the first nine months of 2013 compared to the same period of 2012.
 
Research and development expenses
 
Research and development expenses increased by approximately $7,000 (1%) for the nine month period ended September 30, 2013 as compared to the same period of the prior year reflecting a relatively consistent level of research and development activity although involving different projects from year to year.
 
Other income (expense)
 
Interest expense decreased substantially for the nine months ended September 30, 2013 as compared to the same period of 2012.  The various components of interest expense that accounted for the decrease are summarized in the table below:
 
 
Interest Components
 
2013
 
2012
 
1.
Interest accrued on notes outstanding and other finance charges.
 
$
40,984
 
$
624,580
 
2.
Amortization of the note discount created by the bifurcation of the warrant value for warrants issued with convertible promissory notes.
 
 
10,399
 
 
1,243,812
 
3.
Interest imputed on promissory notes issued with beneficial conversion terms.
 
 
-
 
 
971,513
 
4.
Amortization of deferred financing costs related to private offerings of debt.
 
 
7,596
 
 
867,053
 
 
TOTAL INTEREST EXPENSE
 
$
58,979
 
$
3,706,958
 
   
Included in other income (expense) for the nine months ended September 30, 2012 was a loss of $1,232,291 on the valuation of a warrant liability.  The warrant liability represented the estimated bifurcated value of certain warrants issued in conjunction with convertible promissory notes sold by the Company during 2011 and 2012.  The Company revalued this warrant liability at each balance sheet date resulting in a gain or loss for the period.  As of December 31, 2012, the warrant liability had been reclassified to additional paid-in capital due to the expiration of certain factors that had originally qualified the warrants to be classified as a derivative, and was, therefore, not revalued as of September 30, 2013.  Accordingly, there is no gain or loss recorded for the nine months ended September 30, 2013.
 
 
12

 
Comparison of the three months ended September 30, 2013 and 2012
 
Revenues
 
Revenues for the three months ended September 30, 2013 decreased by $8,732 (11%) compared to revenues in the same period of the prior year.  As with year to date sales, these revenue figures reflect the challenges the Company has met in moving projects forward in the face of continued funding constraints for new municipal and federal facility stormwater projects and the complexities of developing public private partnerships (“P3s”) for large municipal projects.  The reduction in revenue for this period was due entirely to the volume of products sold.
   
Gross Margin
 
The Company’s gross margin on sales of negative (25)% for the three months ended September 30, 2013 declined significantly from the 15% gross margin reported for the same period of the prior year reflecting the high sensitivity of gross margins to production levels and the corresponding absorption of fixed production costs by the units produced.  Unabsorbed production costs drive the gross margin down in periods of low production.  In the third quarter of 2013, the Company’s production facility operated at only 2% of capacity.
 
Selling, general and administrative expenses
 
Selling, general and administrative expenses increased by approximately $221,000 or 21% for the three months ended September 30, 2013 as compared to the same period in 2012.  This increase in SG&A expenses was largely attributable to new operations of AEWS of $89,000, legal fees of $24,000 resulting from SEC filings, investor relations expenses of $112,000 resulting from the issuance of stock for services to an investor relations consultant, and other consulting fees of $33,000. These expense increases were partially offset by a reduction in government affairs consulting expenses in the amount of $24,000.
 
Research and development
 
Research and development costs increased by approximately $40,000 or 22% for the three months ended September 30, 2013 as compared to the same period of the prior year due primarily to approximately $37,000 of costs for research conducted for AbTech by a university. 
 
Other income (expense)
 
Interest expense decreased substantially for the three months ended September 30, 2013 as compared to the same period of 2012.  The various components of interest expense that accounted for the decrease are summarized in the table below:
 
Interest Components
 
2013
 
2012
 
1.
Interest accrued on notes outstanding and other finance charges.
 
$
22,401
 
$
209,474
 
2.
Amortization of the note discount created by the bifurcation of the warrant liability at the time the convertible promissory notes were issued.
 
 
8,924
 
 
458,332
 
3.
Interest imputed on promissory notes issued with beneficial conversion terms.
 
 
-
 
 
545,369
 
4.
Amortization of deferred financing costs related to private offerings of debt.
 
 
2,532
 
 
266,948
 
 
TOTAL INTEREST EXPENSE
 
$
33,857
 
$
1,480,123
 
   
Included in other income (expense) for the three months ended September 30, 2012 was a loss of $(553,536) on the valuation of a warrant liability.  The warrant liability represented the estimated bifurcated value of certain warrants issued in conjunction with convertible promissory notes sold by the Company during 2011 and 2012.  The Company revalued this warrant liability at each balance sheet date resulting in a gain or loss for the period.  As of December 31, 2012, the warrant liability had been reclassified to additional paid-in capital due to the expiration of certain factors that had originally qualified the warrants to be classified as a derivative, and was, therefore, not revalued as of September 30, 2013.  Accordingly, there is no gain or loss recorded for the three months ended September 30, 2013.
 
 
13

 
Liquidity and Capital Resources
 
Liquidity
 
As of September 30, 2013, the Company had a working capital deficiency of approximately $1,949,000 compared to a working capital surplus of approximately $645,000 at December 31, 2012. The change from a working capital surplus to a deficiency is primarily attributable to the use of cash for operations and short-term debt borrowings during the nine months ended September 30, 2013 of approximately $1,790,000. The Company’s cash balance decreased from $2,543,898 at December 31, 2012 to $620,568 at September 30, 2013. This September 30, 2013 cash balance represents less than two months of the Company’s historical monthly cash used for operations and evidences the Company’s need to raise additional capital in the 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 expect 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. In addition, rapid sales growth may require the Company to enter into working capital financing arrangements. 
 
In April 2013, the Company completed a transaction (the “Transaction”) wherein the Company assigned to new investors its right to repurchase eleven outstanding convertible promissory notes issued by AbTech (the “AbTech Notes”). The AbTech Notes were all non-interest bearing with an aggregate principal amount of $1,856,000 and maturity dates ranging from March 31, 2013 to May 11, 2014. The new investors purchased the AbTech Notes pursuant to Assignment and Assumption Agreements whereby they agreed to immediately convert the AbTech Notes into shares of Series A preferred stock of AbTech Industries, Inc. in accordance with the conversion terms of the AbTech Notes and then to further convert the shares of Series A preferred stock into shares of the Company’s common stock as provided for in the terms of the Company’s merger with AbTech Industries, Inc. that occurred in February 2011. The transaction was a cashless transaction for the Company handled by an escrow agent for the buyers and sellers of the Notes. As a result of the transaction, the Company reduced its outstanding convertible debt by $1,856,000 and issued 2,649,640 shares of its common stock.
 
In June, 2013, the Company entered into a Bridge Loan Promissory Note (the “Bridge Note”) whereby the Company is entitled to borrow up to $500,000 from the Bridge Note holder. As of September 30, 2013, the Company had borrowed the full $500,000 allowed under this Bridge Note. The Bridge Note has an interest rate of 6.5% and matures on December 1, 2013. The Company intends to enter into a working capital facility secured by future revenues and use the proceeds to repay the Bridge Note and fund operations as such revenues are generated. There is no assurance that the Company will be successful in securing such a working capital facility.
 
On June 25, 2013, the Company entered into an agreement (the “Investment Agreement” or “Equity Line of Credit”) with Dutchess Opportunity Fund, II, LP (“Dutchess”) whereby Dutchess is irrevocably committed to purchase up to $2 million of ABHD common stock from the Company over the course of 36 months. The Company may draw on the Equity Line of Credit from time to time, as and when it determines appropriate in accordance with the terms and conditions of the Investment Agreement. The maximum amount that the Company is entitled to put in any one notice is the greater of (i) 200% of the average daily volume (U.S. market only) of the common stock for the three (3) trading days prior to the date of delivery of the applicable put notice, multiplied by the average of the closing prices for such trading days or (ii) $200,000. We have no obligation to utilize the full amount available under the Equity Line of Credit. The Company chose this form of financing facility because of the flexibility it affords in meeting future cash requirements that are difficult to project at this stage of the Company’s development. The Company believes it is likely that it will use a significant portion of the Equity Line of Credit but intends to draw on the Equity Line of Credit only as needed to meet immediate capital requirements that are not met with other sources of capital. Accordingly, the Company limited the amount of the Equity Line of Credit to $2,000,000, which represents approximately five months of historical cash used in operations. As of September 30, 2013, the Company had not sold any shares under the Equity Line of Credit.
 
On August 9, 2013, the Company borrowed $600,000 pursuant to a secured convertible promissory note with an interest rate of 6.5% per annum and a feature that allows conversion into shares of the Company’s common stock at a conversion rate of $0.70 per share (later adjusted to $0.53 per share). This note is due January 31, 2014.
 
 
14

 
On September 27, 2013 the Company borrowed $250,000 pursuant to a Convertible Promissory Note with an interest rate of 6.5% per annum and a feature that allows conversion into shares of the Company’s common stock at a conversion rate of $0.53 per share. This note is due December 26, 2013.
 
On September 30, 2013 the Company borrowed $420,000 pursuant to a Secured Convertible Promissory Note with an interest rate of 6.5% per annum and a feature that allows conversion into shares of the Company’s common stock at a conversion rate of $0.53 per share. This note is due January 31, 2014.
 
Comparison of cash flows for the nine months ended September 30, 2013 and 2012
 
Operating Activities
 
The Company had negative cash flows from operations for the nine months ended September 30, 2013 of $3,689,228 compared to negative cash flows from operations of $3,769,818 in the same period of 2012.  Although the Company’s operating loss increased by approximately $673,000 for the nine months ended September 30, 2013, compared to the same period of the prior year, this increased use of cash was offset by the source of cash created by an increase in accounts payable of approximately $322,000. Consequently, the net cash used in operating expenses was $81,000 less for the nine months ended September 30, 2013 than in the same period of the prior year which period experienced a $141,000 decrease in accounts payable. During the nine months ended September 30, 2013, the Company experienced a $75,000 increase in accounts receivable (due largely to one sale of approximately $70,000 shipped in June with payment delayed due to federal funding issues) and an increase of approximately $34,000 in inventory.
 
Investing Activities
 
The Company had approximately $17,000 of capital expenditures for the nine months ended September 30, 2013 compared to $31,000 for the same period of 2012. As of September 30, 2013, the Company had no commitments for any material future capital expenditures.  However, if the Company is successful in achieving significant sales growth in the second half of 2013, it may need to expand its manufacturing capacity or outsource some of its manufacturing. The Company is currently considering both options. 
 
Financing Activities
 
In February 2012, the Company completed the final closing of a private offering that raised $2.6 million from the sale of convertible promissory notes and warrants.  During the nine months ended September 30, 2013, the Company made $2,787 of scheduled payments pursuant to an outstanding capital lease, reduced the amount due to related party by $4,166 and borrowed $1,790,000 pursuant to the various promissory notes referenced in the discussion under “Liquidity” above.
 
Going Concern and Management’s Plans
 
The accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States, which contemplate continuation of the Company as a going concern and the realization of assets and satisfaction of liabilities and commitments in the normal course of business. As discussed in Note 4 to the accompanying condensed consolidated financial statements, we have not achieved a sufficient level of revenues to support our business and have suffered substantial recurring losses from operations since our inception. These factors raise substantial doubt about the Company’s ability to continue operations as a going concern. As such, the Company’s independent registered public accounting firm has expressed an uncertainty about the Company’s ability to continue as a going concern in their opinion attached to the Company’s audited financial statements for the year ended December 31, 2012. The accompanying condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amount and classification of liabilities or any other adjustment that might be necessary should the Company be unable to continue as a going concern. Management believes that the Company’s ability to continue as a going concern will be dependent on its ability to generate significant sales growth in the short term and raise additional capital. The Company’s ability to achieve these objectives cannot be determined at this time. Management’s plans in regard to these matters are described in Note 4 to the accompanying condensed consolidated financial statements. If the Company is unable to generate significant sales growth in the near term and raise additional capital, there is a risk that the Company could default on debt maturing during 2013, and could be required to significantly reduce the scope of its operations if no other means of financing operations are available.
 
 
15

 
Off-Balance Sheet Arrangements
 
The Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on the Company’s financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
 
Contractual Obligations
 
As a smaller reporting company, as defined in Rule 12b-2 of the Exchange Act, we are not required to provide the information required by this item.
 
Critical Accounting Policies and Estimates
 
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. An entity’s most critical accounting policies are 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.
 
This Management’s Discussion and Analysis of Financial Condition and Results of Operations is based on ABHD’s condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported net sales and expenses during the reporting periods. On an ongoing basis, management evaluates these estimates and assumptions. Management bases the estimates on historical experience and on various other factors that it believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
 
The going concern basis of presentation assumes we will continue in operation throughout the next fiscal year and into the foreseeable future and will be able to realize our assets and discharge our liabilities and commitments in the normal course of business. As discussed above, certain conditions currently exist which raise substantial doubt upon the validity of this assumption. The financial statements do not include any adjustments that might result from the outcome of the uncertainty.
 
The following discussion provides supplemental information regarding the significant estimates, judgments and assumptions made in implementing the Company’s critical accounting policies.
 
Inventory valuation
 
The Company’s inventory is stated at the lesser of cost or market value of inventory in stock at the valuation date due to obsolescence, slow movement or defects. This estimated valuation requires that management make certain judgments about the likelihood that specific inventory items may have minimal or no realizable value in the future. These judgments are based on the current quantity of the item on hand compared to historical sales volumes, potential alternative uses of the products and the age of the inventory item. 
 
 
16

 
Revenue recognition and allowance for doubtful accounts
 
There are four factors that the Company uses to determine the appropriate timing of the recognition of revenue.  Three of these factors (evidence of arrangement exists, delivery occurs and fee is fixed or determinable) are generally factual considerations that are not subject to material estimates or assumptions.  The fourth factor involves judgment regarding the collectability of the sales price.  The Company only ships product when it has reasonable assurance that it will receive payment from the customer.  When such assurance is not available, the Company will require payment in advance.  The assessment of a customer’s credit worthiness is reliant on management’s judgment regarding such factors as previous payment history, credit rating, credit references and market reputation.  If any sales are made that ultimately become uncollectible, the Company charges the uncollected amount against a reserve for uncollectible accounts receivable.  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-Sholes 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 (using the plain vanilla method) of the options or warrants, along with the current market price of the underlying stock, to estimate the value of the options and warrants on the date of grant.  In addition, the calculation of compensation costs requires that the Company estimate the number of awards that will be forfeited during the vesting period.  The fair value of the stock-based awards is amortized over the vesting period of the awards.  For stock-based awards that vest based on performance conditions, expense is recognized when it is probable that the conditions will be met.
 
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 accounting principles generally accepted in the United States due to the specific terms of the conversion option and management’s estimate that the underlying shares would not be readily convertible into cash.  However, whenever such conversion options represent a right to convert at a price that is less than the market price at the date of issuance, the Company imputes the value of such beneficial conversion feature and charges it to interest expense.
 
Item 3.  Quantitative and Qualitative Disclosures About Market Risk.
 
As a smaller reporting company, as defined by Rule 12b-2 of the Exchange Act, we are not required to provide the information required by this item.
 
Item 4.  Controls and Procedures.
 
Evaluation of Disclosure Controls and Procedures
 
Under the supervision and with the participation of our principal executive officer, and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2013 (the “Evaluation Date”). No system of controls, no matter how well-designed and operated, can provide absolute assurance that the objectives of the system of controls are met, and no evaluation of controls can provide assurance that the system of controls has operated effectively in all cases.  Our disclosure controls and procedures are designed to provide reasonable assurance that the objective of disclosure controls and procedures are met.
   
Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of September 30, 2013, in providing a reasonable level of assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods in Securities and Exchange Commission rules and forms, including reasonable level of assurance that information required to be disclosed by us in such reports is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
 
Changes in Internal Control over Financial Reporting
 
There were no changes in our internal controls over financial reporting that occurred during the fiscal quarter ended September 30, 2013, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We believe that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within any company have been detected.
 
 
17

 
PART IIOTHER INFORMATION
 
Item 1.  Legal Proceedings.
 
On February 28, 2013, the Company filed a complaint (the “Complaint”) with the Superior Court of the State of Arizona against Arctech, Inc. (“Arctech”) arising from the Company’s License, Supply and Distribution Agreement with Arctech, dated June 6, 2012 (the “Agreement”).  The Complaint claims that, due to fraudulent misrepresentations and omissions made by Arctech regarding the performance of their Humasorb technology, which technology is the subject of the Agreement, the Agreement should be declared null, void, unenforceable, and should be rescinded, such that the Company and Arctech should be placed in their respective positions prior to the execution of the Agreement. The Complaint also requests that the Company should be awarded damages and attorney’s fees in an amount to be determined at trial.  Prior to filing the Complaint, the Company made payments of $75,000 to Arctech which, under the terms of the Agreement, were to be creditable against certain products and services to be provided to the Company by Arctech.  On April 4, 2013, Arctech filed with the court a response to the complaint largely denying the Company’s claims and making certain counterclaims alleging that the Company had breached the Agreement by not making certain periodic payments to Arctech as specified in the Agreement, that Arctech had suffered damages of at least $220,000 as a result and that Arctech should be awarded damages, attorney’s fees, costs and interest in an amount to be determined at trial. The Company believes it has meritorious defenses and intends to aggressively defend its position regarding this matter.
 
Item 1A.  Risk Factors.
 
As a smaller reporting company, as defined by Rule 12b-2 of the Exchange Act, we are not required to provide the information required by this item.
 
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.
 
Common stock issued for exercise of warrants
 
In July 2013, the Company issued 7,941 shares of ABHD common stock pursuant to the cashless exercise of a warrant for 30,000 shares and an exercise price of $0.50 per share.  The number of shares issued represented the difference between the market price at the date of exercise and the $.50 per share exercise price multiplied by the number of warrant shares being exercised, divided by the market price per share at the date of exercise. The Company issued the common stock pursuant to the exemption contained in Section 4(2) of the Securities Act.
   
Item 3.  Defaults Upon Senior Securities.
 
None
 
Item 4.  Mine Safety Disclosures
 
Not applicable.

Item 5.  Other Information
 
On June 25, 2013, the Company entered into an agreement (the “Investment Agreement” or “Equity Line of Credit”) with Dutchess Opportunity Fund, II, LP (“Dutchess”) whereby Dutchess is irrevocably committed to purchase up to $2 million of our common stock over the course of 36 months. The aggregate number of shares issuable by the Company and purchasable by Dutchess under the Investment Agreement (the “Dutchess Shares”) is limited by the dollar amount sold, in this instance no more than $2 million, and will depend upon the trading price of the Company’s shares.
 
 
18

 
We may draw on the Equity Line of Credit from time to time, as and when we determine appropriate in accordance with the terms and conditions of the Investment Agreement. The maximum amount that we are entitled to put in any one notice is the greater of (i) 200% of the average daily volume (U.S. market only) of the common stock for the three (3) trading days prior to the date of delivery of the applicable put notice, multiplied by the average of the closing prices for such trading days or (ii) $200,000. The purchase price will be set at ninety-seven percent (97%) of the lowest daily volume weighted average price of the Company’s common stock during the five consecutive trading days beginning on the date of the put (the “Pricing Period”). However, if, on any trading day during a Pricing Period, the daily volume weighted average price of the common stock is lower than the floor price specified by us in the put notice, then we must withdraw that portion of the put amount for each such trading day during the Pricing Period, with only the balance of such put amount above the minimum acceptable price being put to Dutchess. There are put restrictions applied on days between the put notice date and the closing date with respect to each particular put. During such time, we are not entitled to deliver another put notice.
 
If the full amount of the Equity Line of Credit is used by the Company, and assuming each put is based on the closing market price of the Company’s common stock on June 21, 2013 ($0.66 per share), Dutchess would receive 3,124,024 ($2,000,000/($0.66 x 97%)) shares of the Company’s common stock. This would represent approximately 4.4% of total shares issued and outstanding based on the number of shares of common stock outstanding at June 21, 2013 of 67,529,462 shares.  The Company has no obligation to utilize the full amount available under the Equity Line of Credit.
 
Item 6.  Exhibits.
 
Exhibit Number
 
Name
10.1
 
Investment Agreement, dated June 25, 2013, between the Company and Dutchess Opportunity Fund, II, L.P. (filed as Exhibit 1.1 of the Amendment No. 1 to the Registration Statement on Form S-1 as filed on July 29, 2013, Registration No. 333- 189587, and incorporated herein by reference)
10.2
 
Registration Rights Agreement, dated June 25, 2013, between the Company and Dutchess Opportunity Fund, II, L.P. (filed as Exhibit 1.2 of the Amendment No. 1 to the Registration Statement on Form S-1 as filed on July 29, 2013, Registration No. 333- 189587, and incorporated herein by reference)
10.3 *
 
Contract for Services, dated October 8, 2013, between the Company’s subsidiary, AbTech Industries, Inc., and Nassau County, a municipal corporation acting on behalf of the County Department of Public Works.
31.1 *
 
Rule 13a-14(a)/15d-14(a) Certification (Principal Executive Officer)
31.2 *
 
Rule 13a-14(d)/15d-14(d) Certification (Principal Financial Officer)
32 **
 
Section 1350 Certifications
101.SCH ***
 
XBRL Taxonomy Extension Schema Document
101.CAL ***
 
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF ***
 
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB ***
 
XBRL Taxonomy Extension Label Linkbase Document
101.PRE ***
 
XBRL Taxonomy Extension Presentation Linkbase Document
*
Filed herewith
**
Furnished herewith
***
Furnished herewith.  In accordance with Rule 406T of Regulation S-T, the information in these exhibits shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing.
 
 
19

 
 SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
ABTECH HOLDINGS, INC.
 
(Registrant)
 
 
 
Date: November 14, 2013
           By: 
/s/ Glenn R. Rink
 
          Glenn R. Rink
 
          Chief Executive Officer, President, and Director
 
 
 
Date: November 14, 2013
           By: 
/s/ Lane J. Castleton
 
          Lane J. Castleton
 
          Chief Accounting Officer, Chief Financial Officer,
 
          Vice President and Treasurer
 
 
20