10-Q: ABTECH HOLDINGS, INC.
(Menafn - EDGAR Online via COMTEX) --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 financial statements and notes thereto included elsewhere in this quarterly report. 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 was incorporated in the state of Nevada on February 13, 2007 under the name Laural Resources, Inc. On February 10, 2011, ABHD consummated the Merger with AbTech, pursuant to the Merger Agreement. Prior to the Merger, ABHD was a development stage company engaged in the business of acquiring and developing mineral properties, and a public reporting "shell company," as defined in SEC Rule 12b-2 under the Exchange Act. As a result of the Merger, ABHD acquired all of the issued and outstanding common stock of AbTech (through a reverse acquisition transaction) in exchange for the stockholders of AbTech acquiring a 78% ownership interest in ABHD, AbTech became ABHD's majority-owned subsidiary, and ABHD acquired the business and operations of AbTech.
This "Management's Discussion and Analysis of Financial Condition and Results of Operations" is based on and related only to the operations of AbTech. Prior to the consummation of the Merger, ABHD was a "shell company" that did not have an active business and its results of operations are immaterial and are not included in the discussion below. Key factors affecting AbTech's results of operations during the periods covered in this section include revenues, cost of revenues, operating expenses and income.
For accounting purposes, the Merger transaction has been accounted for as a reverse acquisition, with AbTech as the acquirer. The condensed consolidated financial statements of ABHD included in this quarterly report on Form 10-Q represent a continuation of the financial statements of AbTech, with one adjustment, which is to retroactively adjust the legal capital of AbTech to reflect the legal capital of ABHD. See Note 1 of the Notes to condensed consolidated financial statements included elsewhere in this quarterly report on Form 10-Q.
This Management's Discussion and Analysis of Financial Condition and Results of Operations is based on AbTech'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.
Results of Operations
During the three and nine-month periods ended September 30, 2011, the Company continued to experience the negative effects of a worldwide economic downturn resulting in sales that were, respectively, 30% and 22% lower than in the same periods of the prior year. Sales were also negatively impacted by the Company's decision in 2010 to terminate most of its exclusive distribution agreements in anticipation of engaging a nationwide distributor for its stormwater products. The Company's new distributor, Waste Management, Inc. ("WMI"), announced in April 2011, that it was launching its entry into the stormwater market and intended to initiate its sales efforts in four pilot market areas in 2011. As of September 30, 2011 WMI had identified and launched sales efforts in three of these pilot areas. While the Company has not yet recognized significant revenue from this distribution arrangement, gradual revenue growth is anticipated as the Company and WMI pursue these initial efforts in the pilot market areas and potential additional geographic markets beginning in 2012.
The Company continues to operate with significant excess manufacturing capacity. The costs associated with the excess capacity are charged to "cost of revenues" in the period incurred and resulted in a gross margin of only 13% for the three months ended September 30, 2011, and a negative gross margin of 16% for the nine-month period ended September 30, 2011. Gross margins in 2010 were favorably affected by a brief period in which the Company experienced higher than normal production levels as it built inventory to meet anticipated demand. This increased level of production offset excess capacity costs incurred during other portions of the nine-month period ended September 30, 2010 and resulted in a positive gross margin of 15% for the period compared to a negative gross margin of 16% for the same period of 2011. We do not currently have plans to reduce excess manufacturing capacity, and we anticipate that the excess capacity will continue to adversely affect gross margins at least through 2011.
Selling, general and administrative expenses increased by 96,946 (15%) and 534,043 (34%), respectively, during the three and nine-month periods ended September 30, 2011 as compared to the same periods in 2010. These increases were due primarily to the costs associated with the Merger and the additional costs of operating as a public company including legal, audit, public relations and financial printing costs. In addition, the Company engaged three senior level individuals as employees or full time consultants during the nine months ended September 30, 2011 that were not engaged by the Company during the same period of 2010. Other part-time consultants were also engaged during the period to assist the Company in its market development and public relations efforts. Research and development costs were up approximately 27% and 16% , respectively, for the three-month and nine-month periods ended September 30, 2011 as compared to the same periods of the prior year due to a variety of new product development activities and the associated lab and field testing of such products.
Interest expense increased substantially for the three-months ended September 30, 2011 due to the issuance of new Secured Convertible Promissory Notes by the Company in conjunction with its private offerings conducted in the third quarter of 2011 (see Note 7 to the Unaudited Condensed Consolidated Financial Statements included in Part I of this report on Form 10-Q). Interest for the nine-month period ended September 30, 2011 was also substantially higher than in the same period of the prior year due to a non-recurring charge of 1,620,955 for imputed interest on promissory notes that were converted to common stock on beneficial conversion terms during the second quarter of 2011. See Note 6 to the Unaudited Condensed Consolidated Financial Statements included in Part I of this report on Form 10-Q.
In summary, due primarily to decreased sales, increased operating expenses and a non-recurring charge for imputed interest, the net loss for the three and nine-month periods ended September 30, 2011, increased by 43,610 and 2,175,093, respectively, as compared to the corresponding periods in 2010.
Liquidity and Capital Resources
To date, the Company has not generated sufficient revenue to cover its operating costs and continues to operate with negative cash flow from operations. The Company's cash balance of 4,123 at December 31, 2010 was insufficient to cover the 2,369,337 of net cash used in operations for the nine-months ended September 30, 2011. During the nine-months ended September 30, 2011, the Company used the following private offerings to raise the capital needed to fund operations:
· In March 2011, the Company initiated an offering to raise funds to repay approximately 1,960,000 of debt obligations that were due in 2011 (the "Targeted Notes"). Investors in the offering were given the option to either purchase a portion of the Targeted Notes and convert it immediately to ABHD common stock, or buy new convertible notes from ABHD that would convert to ABHD common stock upon confirmation by AbTech that the proceeds had been used by AbTech to repay the intended Targeted Notes. The intended objective was to complete the transactions with the same net effect as if all the Targeted Notes converted by their terms to ABHD common stock. The Company raised 1,722,100 in this offering, of which approximately 1,351,200 was used to repay, or purchase and then convert, Targeted Notes. The balance of the offering proceeds was used to fund operations.
· In July 2011, the Company raised 700,000 in a private offering of convertible promissory notes and warrants. See Note 7 to the Unaudited Condensed Consolidated Financial Statements included in Part 1 of this report on Form 10-Q.
· In September 2011, the Company raised 1,325,000 in a private offering of Secured Convertible Promissory Notes and warrants. See Note 7 to the Unaudited Condensed Consolidated Financial Statements included in Part 1 of this report on Form 10-Q
The Company's balance sheet at September 30, 2011 shows an inventory level of 566,676. This relatively large amount of inventory, as compared to net revenues, will mitigate somewhat the working capital funding that will be required in the event the Company successfully increases sales revenue in the future. However, the Company anticipates that it may still need to make significant purchases of inventory in the near term in order to ensure availability of the right product mix on a timely basis.
At September 30, 2011, the Company had received customer deposits of 193,614 as prepayments by certain distributors for future product orders. Future sales to these distributors will not generate positive cash flow until the prepayments are depleted. Of this amount, approximately 154,000 will be forfeited by the distributor if not used by December 31, 2011. The Company also intends to reduce the relatively large balance of accounts payable (774,951 at September 30, 2011) which would also have a negative effect on cash flow.
The Company had no significant capital expenditures for the three or nine months ended September 30, 2011 or 2010. As of September 30, 2011, the Company had no commitments for any material future capital expenditures.
The Company has not yet established an ongoing source of revenues 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 additional equity funding, and long term financing, which will enable the Company to operate for the coming year though there can be no assurance that the Company's 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, 2010. The Unaudited Condensed Consolidated Financial Statements included in Part I of this report on Form 10-Q do not include any adjustments that might result from the outcome of these uncertainties.
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 Securities Exchange Act of 1934, as amended (the "Exchange Act"), we are not required to provide the information required by this item.
Nov 14, 2011
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