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 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 Rule 12b-2 under the Securities Exchange Act of 1934, as amended (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 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 Unaudited Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q.

Results of Operations

Comparison of the six months ended June 30, 2012 and 2011

Revenues for the first six months of 2012 increased by 233% compared to revenues in the same period of the prior year. The Company believes that these revenue figures reflect some improvement in the economic factors that affect sales of the Company's products as well as some initial results of expanded business development efforts by the Company. The sales increase for this period was due entirely to the volume of products sold. The Company continues to expect significant sales growth in the second half of 2012 asnew projects being pursued in stormwater, industrial and produced water markets begin to generate revenues. On June 6, 2012, Waste Management, Inc. ("WM"), a distributor of AbTech products, announced a program to provide a total stormwater management offering to U.S. municipalities in the form of public-private partnerships, collaborating with the Company and municipalities to design, build, operate and service stormwater infrastructure. The Company believes that this approach to the stormwater market could have a significant impact on future sales for the Company although the timing of such sales is difficult to project at this early stage.

The Company's gross margin on sales increased from a negative (40)% in the first half of 2011 to positive 35% in the same period of 2012. This improvement in gross margins is the direct result of increased levels of production in the first half of 2012 that spread fixed overhead cost over a broader base of products thus allowing the Company to achieve higher gross margins. The Company continues to have excess capacity and expects that gross margins will continue to improve as production increases to satisfy an expected increase in product sales.

Selling, general and administrative expenses increased by approximately $877,000 or 65% in the first half of 2012 as compared to the same period in 2011. These increases were due primarily to an expanded business development effort that involved the addition of several new employees. The Company is also experiencing the higher costs associated with being a public company such as legal, financial printing, public relations and investor relations costs. Research and development costs increased approximately 62% for the six-month period ended June 30, 2012 as compared to the same period of the prior year due to product development activities associated with lab and field testing of products in new applications and testing of new product designs.

Interest expense increased substantially for the six months ended June 30, 2012 as compared to the six months ended June 30, 2011 due primarily to four interest components present in 2012 but not present in 2011: (i) interest accrued during the six months ended June 30, 2012 on the convertible promissory notes issued by the Company from July 2011 through February 15, 2012, amounted to approximately $413,000; (ii) interest expense resulting from the amortization of the note discount created by the bifurcation of the warrant liability at the time the convertible promissory notes were issued amounted to approximately $777,000;
(iii) interest expense resulting from the amortization of the note discount created by the bifurcation of the beneficial conversion feature inherent in the convertible promissory notes issued in February 2012, amounted to approximately $426,000; and (iv) the amortization of the deferred financing costs related to the private offerings in which the convertible promissory notes were sold resulted in interest expense of approximately $600,000. Total interest expense for the six months ended June 30, 2012 was $2,226,835. Interest expense for the same period of 2011 was $1,654,837, of which, $1,620,955 was attributable to a non-recurring charge for imputed interest on promissory notes that were converted to common stock on beneficial conversion terms during the second quarter of 2011.

Comparison of the three months ended June 30, 2012 and 2011

Revenues for the three months ended June 30, 2012 increased by 139% compared to revenues in the same period of the prior year. As with year to date sales, these revenue figures reflect some improvement in the economic factors that affect sales of the Company's products as well as some initial results of expanded business development efforts by the Company. The sales increase for this period was due entirely to the volume of products sold.

The Company's gross margin on sales increased from a negative (20)% for the three months ended June 30, 2011 to positive 36% in the same period of 2012. This improvement in gross margins is the direct result of increased levels of production in 2012 that spread fixed overhead cost over a broader base of products thus allowing the Company to achieve higher gross margins.

Selling, general and administrative expenses increased by approximately $620,000 or 87% for the three months ended June 30, 2012 as compared to the same period in 2011. These increases were due primarily to an expanded business development effort that involved the addition of several new employees. The Company is also experiencing the higher costs associated with being a public company such as legal, financial printing, public relations and investor relations costs. Research and development costs increased approximately 106% for the three months ended June 30, 2012 as compared to the same period of the prior year due to product development activities associated with lab and field testing of products in new applications and testing of new product designs.

Interest expense increased substantially for the three months ended June 30, 2012 as compared to the three months ended June 30, 2011 due primarily to four interest components present in 2012 but not present in 2011: (i) interest accrued during the three months ended June 30, 2012 on the convertible promissory notes issued by the Company from July 2011 through February 15, 2012, amounted to approximately $226,000 (ii) interest expense resulting from the amortization of the note discount created by the bifurcation of the warrant liability at the time the convertible promissory notes were issued amounted to approximately $453,000; (iii) interest expense resulting from the amortization of the note discount created by the bifurcation of the beneficial conversion feature inherent in the convertible promissory notes issued in February 2012, amounted to approximately $312,000; and (iv) the amortization of the deferred financing costs related to the private offerings in which the convertible promissory notes were sold resulted in interest expense of approximately $339,000. Total interest expense for the three months ended June 30, 2012 was $1,342,414. Interest expense for the same period of 2011 was $1,621,651, of which, $1,620,955 was attributable to a non-recurring charge for imputed interest on promissory notes that were converted to common stock on beneficial conversion terms during the second quarter of 2011.

Liquidity and Capital Resources

Liquidity

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 may require additional capital to maintain current operations if sales growth does not occur as anticipated. In addition, rapid growth may require the Company to enter into working capital financing arrangements. The Company currently has no such financing commitments in place.

Comparison of cash flows for the six months ended June 30, 2012 and 2011

Operating Activities

The Company had negative cash flow from operations for the six months ended June 30, 2012 of approximately $2.3 million compared to negative cash flows from operations of $1.2 million in the same period of 2011. The increase in negative cash flow from operations is primarily the result of a $1,040,000 increase in operating expenses, a reduction in accounts payable of approximately $76,000 and an increase in accounts receivable of approximately $112,000. Accrued expenses increased by approximately $281,000 during the six month period ended June 30, 2012 due primarily to a $240,000 accrual for the cost of 300,000 shares of common stock the Company has committed to issue for public relations services rendered during the period. These shares were issued in July, 2012. Inventory decreased by approximately $93,000 during the six months ended June 30, 2012 due in part to an $18,500 increase in the estimated reserve for obsolescence recorded during the period for old or slow moving inventory items.

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. This transaction allowed the Company to maintain a cash balance of approximately $1.6 million at June 30, 2012 compared to $1.4 million at December 31, 2011, despite incurring negative cash flows from operations during the period. The cash balance at June 30, 2012 represents approximately 3.7 months of the average monthly operating expenses incurred during the six-months ended June 30, 2012 and approximately 4.2 months of the average monthly net cash used in operating activities for the same period.

The Company has $7.0 million (principal amount) of convertible promissory notes outstanding that all have original maturity dates in 2012. While each of these convertible promissory notes allows for extension periods beyond the original maturity date, such extensions, if applied, would result in both a higher interest rate and additional warrants being issued to the note holders (see Note 5 of Unaudited Condensed Consolidated Financial Statements). Prior to the original maturity dates of the notes, the Company intends to raise additional equity capital sufficient to repay any of the note holders that do not elect to convert the notes to common stock before their original maturity dates, however, there is no assurance that this will occur.

Investing Activities

The Company had approximately $24,500 of capital expenditures for the six months ended June 30, 2012. As of that date, 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 2012, it may need to expand its manufacturing capacity or outsource some of its manufacturing. The Company is currently considering both options for expanding manufacturing capacity or outsourcing some of its manufacturing. The Company estimates that it could double its current manufacturing capacity for approximately $250,000 and accommodate an annual sales rate of over $20 million.

Going Concern and Management's Plans

The accompanying condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles, 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. 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/or raise additional capital. The Company's ability to achieve these objectives cannot be determined at this time. However, the Company did complete the final closing of its private offering of the Secured Notes and warrants in February 2012, which provided gross proceeds of $2,600,000 to the Company. 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/or raise additional capital, there is a risk that the Company could default on debt maturing during 2012, and could be required to significantly reduce the scope of its operations if no other means of financing operations are available.

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

Our discussion and analysis of our financial condition and results of operations, including the discussion on liquidity and capital resources, are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, management re-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 consolidated financial statements. The SEC considers an entity's most critical accounting policies to be those policies that are both most important to the portrayal of the entity's financial condition and results of operations and those that require the entity's most difficult, subjective, or complex judgments, often as a result of the need to make estimates about matters that are inherently uncertain when estimated.

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

Fair value of warrant liability and note discount

The warrant liability shown on the Company's balance sheets at June 30, 2012 and December 31, 2011 represents the estimated value of warrants sold with promissory notes that met the characteristics of a derivative and were required to be bifurcated from the debt and reported as a liability at fair value. This bifurcation resulted in the establishment of the estimated value of the warrant liability and a corresponding note discount in the same amount. The warrant liability was originally valued and is revalued at each balance sheet date using the Black-Scholes valuation model because there is no market price available for the warrants. This model uses estimates of volatility, risk free interest rate and the expected term of the warrants, along with the current market price of the Company's common stock, to estimate the value of the outstanding warrants. The value of these warrants can change significantly as the market price of the underlying common stock changes. At each balance sheet date this could result in a gain or loss depending on the change in the market price of the stock, among other factors, from one valuation date to the next. The Company recognized such a gain of $242,052 for the year ended December 31, 2011 and a loss of $(678,755) for the six months ended June 30, 2012.

Inventory valuation

The Company has written-down its inventory to estimate the lesser of cost or market value of inventory in stock at the valuation date due to obsolescence, slow movement or defects. This estimate requires that management make certain judgments about the likelihood that specific inventory items may have minimal or no realizable value in the future. These judgments are based on the current quantity of the item on hand compared to historical sales volumes, potential alternative uses of the products and the age of the inventory item.

Revenue recognition and allowance for doubtful accounts

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

Stock-based compensation

The Company uses the Black-Scholes model to estimate the value of options and warrants issued to employees and consultants as compensation for services rendered to the Company. This model uses estimates of volatility, risk free interest rate and the expected term of the options or warrants, along with the current market price of the underlying stock, to estimate the value of the options and warrants on the date of grant. In addition, the calculation of compensation costs requires that the Company estimate the number of awards that will be forfeited during the vesting period. The fair value of the stock-based awards is amortized over the vesting period of the awards. For stock-based awards that vest based on performance conditions, expense is recognized when it is probable that the conditions will be met.

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 generally accepted accounting principles 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.