RENOVARE ENVIRONMENTAL, INC. - Quarter Report: 2017 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended: September 30, 2017

or

For the transition period from ________________ to ________________

Commission file number 001-36843

BIOHITECH GLOBAL, INC.

(Exact name of registrant as specified in its charter)

(845) 262-1081

(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 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, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   ¨

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. 

BioHiTech Global, Inc. and Subsidiaries

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION

BioHiTech Global, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited)

See accompanying notes to unaudited interim condensed consolidated financial statements.

BioHiTech Global, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets (Unaudited) 

See accompanying notes to unaudited interim condensed consolidated financial statements.

BioHiTech Global, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)

Note 17 includes supplemental cash flow information, non-cash investing and financing activities and changes in operating assets and liabilities.

See accompanying notes to unaudited interim condensed consolidated financial statements.

BioHiTech Global, Inc. and Subsidiaries

Condensed Consolidated Statement of Stockholders’ Deficit (Unaudited)

See accompanying notes to unaudited interim condensed consolidated financial statements.

BioHiTech Global, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Nine Months Ended September 30, 2017 and 2016, and as of September 30, 2017 and December 31, 2016

Note 1. Basis of Presentation and Going Concern

Nature of Operations -BioHiTech Global, Inc. (the “Company” or “BioHiTech”) through its wholly-owned subsidiaries, BioHiTech America, LLC, BHT Financial LLC, BioHiTech Europe Limited and E.N.A. Renewables LLC (formerly Entsorga North America, LLC) (collectively “subsidiaries”) offers its customers cost-effective and technologically innovative advancements integrating technological, biological and mechanical engineering solutions for the control, reduction and / or reuse of organic and municipal waste.

Basis of Presentation — The accompanying condensed consolidated financial statements include the accounts of the Company and its subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. Certain information or footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. Accordingly, they do not include all the information and footnotes necessary for a comprehensive presentation of financial position, results of operations, or cash flows. It is management’s opinion, however, that the accompanying condensed consolidated financial statements include all adjustments, consisting of a normal recurring nature, which are necessary for a fair presentation of the financial position, operating results and cash flows for the periods presented.

The accompanying condensed consolidated financial statements should be read in conjunction with the Company’s financial statements for the year ended December 31, 2016, which contains the audited financial statements and notes thereto, for the years ended December 31, 2016 and 2015 included within the Company’s Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 30, 2017. The financial information as of December 31, 2016 presented hereto is derived from the audited consolidated financial statements presented in the Company’s audited consolidated financial statements for the year ended December 31, 2016. The interim results for the three and nine months ended September 30, 2017 are not necessarily indicative of the results to be expected for the year ending December 31, 2017 or for any future interim periods.

Reclassifications to certain prior period amounts have been made to conform to current period presentation. These reclassifications have no effect on previously reported net loss.

Going Concern — For the nine months ended September 30, 2017, the Company had a net loss of $6,214,925, incurred a consolidated loss from operations of $5,002,761 and used net cash in consolidated operating activities of $3,836,030. For the year ended December 31, 2016, the Company had a net loss of $6,745,386, incurred a consolidated loss from operations of $5,924,667 and used net cash in consolidated operating activities of $5,181,400. At September 30, 2017, consolidated stockholders’ deficit amounted to $16,140,210 and the Company had a consolidated working capital deficit of $5,651,550. The Company does not yet have a history of financial stability. Historically the principal source of liquidity has been the issuance of debt and equity securities. These factors raise substantial doubt about the Company’s ability to continue as a going concern.

The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. These consolidated financial statements do not include any adjustments relating to the recovery of the recorded assets or the classification of the liabilities that might be necessary should the Company be unable to continue as a going concern. The ability of the Company to continue as a going concern is dependent on management's further implementation of the Company’s on-going and strategic plans, which include continuing to raise funds through debt and/or equity raises. Should the Company be unable to raise adequate funds, certain aspects of the on-going and strategic plans may require modification.

The Company is presently in the process of raising additional non-registered preferred stock, senior debt, convertible debt and capital for general operations and for investment in several strategic initiatives, as well as commercial debt to support its leasing activities. There is no assurance that the Company will be able to raise sufficient debt or capital to sustain operations or to pursue other strategic initiatives.

Note 2. Summary of Significant Accounting Policies

Use of Estimates — The preparation of consolidated financial statements, in conformity with GAAP requires the extensive use of management’s estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from these estimates. Estimates are used when accounting for items and matters including, but not limited to, allowance for uncollectible accounts receivable, obsolete, slow moving and excess inventory, asset valuations, including goodwill and intangibles, and useful lives, employee benefits, taxes and other provisions and contingencies.

BioHiTech Global, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Nine Months Ended September 30, 2017 and 2016, and as of September 30, 2017 and December 31, 2016

Product and Services Revenue Recognition — The Company recognizes revenue for the majority of its products sold upon transfer of title and the passage of the risk of ownership, which is generally upon shipment to the customer. Revenue from services is recognized as services are performed.

Lease Revenue Recognition — The Company recognizes revenue from the rental of the digester units ratably on a monthly basis over the term of the lease, as it has determined that the rental agreements entered into in connection with its digester units qualify as operating leases, for which the Company is the operating lessor.

Fair Value Measurements — Certain assets and liabilities are required to be recorded at fair value on a recurring basis. Fair value is determined based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. Assets measured at fair value on a nonrecurring basis include long-lived assets held and used, long-lived assets held for sale, goodwill and other intangible assets. The fair value of cash and cash equivalents, accounts receivable, short-term debt and accounts payable approximate their carrying values. The three-tier value hierarchy, which prioritizes valuation methodologies based on the reliability of the inputs, is:

Level 1 — Valuations based on quoted prices for identical assets and liabilities in active markets.

Level 2 — Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

Level 3 — Valuations based on unobservable inputs reflecting the Company’s own assumptions, consistent with reasonably available assumptions made by other market participants.

Equity Method Based Investments — The Company utilizes the equity method of accounting for investments in companies if the investment provides the ability to exercise significant influence, but not control, over operating and financial policies of the investee. The Company’s proportionate share of net income or loss is included in the Company’s consolidated operations as earning or loss from unconsolidated equity basis investments.

Income Taxes — Deferred income taxes are determined based on the estimated future tax effects of differences between the financial statement and tax bases of assets and liabilities given provisions of enacted laws. Deferred income tax provisions and benefits are based on changes to the asset or liabilities from year to year. In providing for deferred taxes, the Company considers tax regulations of the jurisdictions in which it operates, estimates the future taxable income and available tax planning strategies. If tax regulations, operating results or the ability to implement tax planning and strategies vary, adjustments to the carrying value of deferred tax assets and liabilities may be required. Valuation allowances are recorded related to deferred tax assets based on the “more than likely” criteria.

For the nine and three months ended September 30, 2017 and 2016, the Company’s effective rate, before valuations, was 39.8% and 36.7%, respectively, and would have resulted in net deferred tax assets for federal and state tax purposes arising primarily from net operating losses; A full valuation allowance, due to the level of uncertainty relative to the realization of the deferred tax assets, has been provided resulting in an effective tax rate of 0.0%.

Loss per Share — The Company computes basic loss per share using the weighted-average number of shares of common stock outstanding and diluted loss per share, while the diluted loss per share also includes the effects of dilutive instruments using the “treasury method.”

The Company’s potential dilutive instruments include options, convertible debt and warrants. These instruments have not been considered in the calculation of diluted loss per share as they are anti-dilutive for the reported periods.

BioHiTech Global, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Nine Months Ended September 30, 2017 and 2016, and as of September 30, 2017 and December 31, 2016

Note 3. Accounts Receivable, net

Accounts receivable consists of the following:

Note 4. Inventory

Inventory, comprised of finished goods and parts or assemblies, consist of the following:

Note 5. Equipment on Operating Leases, net

Equipment on operating leases consist of the following:

During the three months ended September 30, 2017 and 2016, depreciation expense included in cost of revenue, amounted to $69,312 and $97,356, respectively. During the nine months ended September 30, 2017 and 2016, depreciation expense included in cost of revenue, amounted to $213,268 and $247,685, respectively.

The Company is a lessor of Revolution and Eco Safe Series digester units under non-cancellable operating lease agreements expiring through December 2022. During the three months ended September 30, 2017 and 2016, revenue under the agreements, which is included in rental, service and maintenance revenue, amounted to $224,828 and $182,715, respectively. During the nine months ended September 30, 2017 and 2016, revenue under the agreements, which is included in rental, service and maintenance revenue, amounted to $636,406 and $505,877, respectively.

The minimum future estimated contractual payments to be received under these leases as of September 30, 2017 is as follows:

BioHiTech Global, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Nine Months Ended September 30, 2017 and 2016, and as of September 30, 2017 and December 31, 2016

Note 6. Equipment, Fixtures and Vehicles, net

Equipment, fixtures and vehicles consist of the following:

During the three months ended September 30, 2017 and 2016, depreciation expense amounted to $5,124 and $4,675, respectively. During the nine months ended September 30, 2017 and 2016, depreciation expense amounted to $15,422 and $10,625, respectively.

Note 7. Investment in Entsorga West Virginia LLC (“EWV”)

Effective January 1, 2017, the Company executed several agreements to acquire up to approximately a 40% interest in EWV from the original investors at their original purchase price of $60,000 for each 1% of interest in EWV. The agreement provides for a required investment of $1,034,028, representing a 17.2% interest, with the remaining 23.1% being at the option of the Company. The agreement was subject to the approval of the EWV bond trustee, which was granted on March 20, 2017. On March 21, 2017, the Company completed the required investment acquisition of $1,034,028 for a 17.2% interest, which is recognized utilizing the equity method of accounting.

Summarized financial information for EWV is as follows:

EWV has financed the development and construction of the facility through $25,000,000 in Solid Waste Disposal Revenue Bonds issued by the West Virginia Economic Development Authority (the “Bonds”). In connection with the Bonds, each member has been required to pledge their membership interest in EWV to the Bond trustee as collateral of the Bonds.

BioHiTech Global, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Nine Months Ended September 30, 2017 and 2016, and as of September 30, 2017 and December 31, 2016

Note 8. MBT Facility Development Costs

On March 1, 2017 the Town Counsel of New Windsor, NY approved, subject to a 30 day petition period during which certain voters could object to the sale of 12 acres of property to the Company for the development of a Mechanical Biological Treatment (“MBT”) facility. On April 3, 2017, the Town Clerk of New Windsor certified that there had not been any objections raised and the agreement was executed on April 10, 2017. The purchase price of the property is $1,092,000, subject to reduction for option payments made by the Company in the monthly amount of $3,500 for the first 12 months and $6,000 per month for the following 12 months, until the closing. The purchase of the property is contingent upon the Company obtaining: necessary permits to allow construction of a Mechanical Biological Treatment (“MBT”) facility; approvals from state and local authorities; financing for the construction of the MBT facility; contracts for offtake of Solid Recovered Fuel; and the satisfaction of the Company’s due diligence investigation of the property. The contract also contains customary representations warranties and covenants of the parties for like transactions.

As of September 30, 2017, the consolidated financial statements include capitalized costs related to the New Windsor, NY site, including those related to the land option payments, legal costs and survey/engineering costs of $42,000, $10,372 and $86,941, respectively.

Note 9. Intangibles Assets, net

Intangible assets consist of the following:

During the three months ended September 30, 2017 and 2016, amortization expense, included in depreciation and amortization of operating expenses, amounted to $22,550 and $24,499, respectively. During the nine months ended September 30, 2017 and 2016, amortization expense, included in depreciation and amortization of operating expenses, amounted to $70,359 and $73,497, respectively.

At September 30, 2017, future annual estimated amortization expense is summarized as follows:

BioHiTech Global, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Nine Months Ended September 30, 2017 and 2016, and as of September 30, 2017 and December 31, 2016

Note 10. Risk Concentrations

The Company operates as a single segment on a worldwide basis through its subsidiaries, resellers and independent sales agents. Gross revenues and net non-current tangible assets on a domestic and international basis is as follows:

Major customers - During the three months ended September 30, 2017, two customers represented at least 10% of revenues, each accounting for 12% of revenues. During the three months ended September 30, 2016, two customers accounted for at least 10% of revenues, each accounting for 11% of revenues. During the nine months ended September 30, 2017, and 2016, no customers represented at least 10% of revenues.

As of September 30, 2017, one customer represented at least 10% of accounts receivable, accounting for 11% of accounts receivable. As of December 31, 2016, two customers represented at least 10% of accounts receivable, accounting for 22% and 10% of accounts receivable.

Vendor concentrations - During the three months ended September 30, 2017, two vendors represented at least 10% of costs of revenue, accounting for 23% (a 1.9% shareholder) and 11% of the combined cost of revenues and change in inventory. During the nine months ended September 30, 2017, two vendors represented at least 10% of costs of revenue, accounting for 18% (a 1.9% shareholder) and 11% of the combined cost of revenues and change in inventory. During the three months ended September 30, 2016, three vendors represented at least 10% of costs of revenue, accounting for 26%, 16% (BioHiTech International, a 10% shareholder) and 11% of the combined cost of revenues and change in inventory. During the nine months ended September 30, 2016, three vendors represented at least 10% of costs of revenue, accounting for 43% (BioHiTech International, a 10% shareholder), 19% and 10% of the combined cost of revenues and change in inventory. 

As of September 30, 2017, two vendors represented at least 10% of accounts payable, accounting for 27% and 19% (BioHiTech International, a 10% shareholder) of accounts payable. As of December 31, 2016, two vendors represented at least 10% of accounts payable, accounting for 32% (a 1.9% shareholder) and 21% of accounts payable.

BioHiTech Global, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Nine Months Ended September 30, 2017 and 2016, and as of September 30, 2017 and December 31, 2016

Note 11. Related Party Transactions

Related parties include Directors, Senior Management Officers, and shareholders, plus their immediate family, who own a 5% or greater ownership interest at the time of a transaction. The table below presents direct related party assets and liabilities and other transactions or conditions as of or during the periods indicated.

The table below presents direct related party expenses or transactions for the periods indicated. Compensation and related costs for employees of the Company are excluded from the table below.

BioHiTech Global, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Nine Months Ended September 30, 2017 and 2016, and as of September 30, 2017 and December 31, 2016

Note 11. Related Party Transactions, continued

Note 12. Debt

Notes, lines, advances and long term debts are comprised of the following:

*Related party debt is presented at mature face value.

BioHiTech Global, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Nine Months Ended September 30, 2017 and 2016, and as of September 30, 2017 and December 31, 2016

Note 12. Debt, continued

Series B Unsecured Subordinated Convertible Promissory Notes – During the fourth quarter of 2016 and the first quarter of 2017, the Company entered into a series of Securities Purchase Agreements (the “Purchase Agreement”) with certain accredited investors (the “Investors”), pursuant to which the Company agreed to sell and the Investors agreed to purchase in a private placement offering (the “Private Placement”) units (the “Units”) in the aggregate offering amount of $650,000, including $500,000 who were also shareholders and officers of the Company.

Convertible Note – Effective March 30, 2017 the Company entered into a Securities Purchase Agreement, a Convertible Note with a maximum funding amount of $550,000 and Warrants with Vista Capital Investments LLC (“Vista”). As of March 31, 2017, in exchange for $100,000, Vista received a $110,000 face value note, which included a beneficial conversion feature valued at $4,014, a warrant for 24,750 shares of common stock valued at $16,043 utilizing the Black–Scholes–Merton model utilizing a stock price of $2.954 on the date of the grant, an exercise price of $4.00, a standard deviation (volatility) of 31.43%, a risk-free interest rate of 2.88% with a term of 5 years. As of June 26, 2017, in exchange for an additional $100,000, the face value note outstanding was $220,000; this additional $100,000 funding also included a beneficial conversion feature valued at $1,930, a warrant for 24,750 shares of common stock valued at $16,360 utilizing the Black–Scholes–Merton model utilizing a stock price of $2.98 on the date of the grant, an exercise price of $4.00, a standard deviation (volatility) of 31.43%, a risk-free interest rate of 2.88% with a term of 5 years.

The note allows for fundings representing up to $550,000 in original principal amount notes with interest at 9.5%, of which $220,000 is outstanding as of September 30, 2017. Each funding matures in seven months from the time of the funding, accordingly the funding of March 31, 2017 matures on October 31, 2017 and the funding of June 26, 2017 matures January 26, 2018. The note is convertible into common shares of the Company at $2.85 per share at any time there is an outstanding balance. In the event that the note is in default, the conversion price will equal 65% of the lowest closing price occurring during 25 consecutive trading days immediately preceding the conversion date. Events of default include: failure to pay the holder of the note any amount outstanding, a failure to convert shares exercised, any bankruptcy or bankruptcy-like actions against the Company, defaults on other obligations, a suspension of trading of the Company’s common stock, loss of DTC eligible status, delinquent Securities & Exchange Commission (“SEC”) filings, failure to reserve and keep available up to four times the full number of shares into which the note is convertible and the inability of the Company top comply with the provisions of SEC Rule 144.

During the third quarter of 2017, the holder exercised 24,750 warrants in a cashless exercise, resulting in the issuance of 14,093 shares of common stock. As of September 30, 2017 the holder has warrants outstanding that provide for the acquisition of up to 24,750 share of common stock at $4.00 per share and expire in five years from the date of issuance.

Series C Convertible Notes and Warrants - From May 24, 2017 through August 11, 2017, the Company entered into a series of Securities Purchase Agreements (the “Purchase Agreement”) with certain accredited investors (the “Investors”), pursuant to which the Company agreed to sell and the Investors agreed to purchase units (the “Units”) in the aggregate offering amount of $1,250,000. The aggregate offering amount included $640,000 from the Company’s Chief Executive Officer, of which, in the third quarter, $190,000 were assigned to a third party at their original cost. Each Unit, in the minimum subscription amount of $100,000 is comprised of an Original Issue Discount Convertible Promissory Note (the “Note,” collectively, the “Notes”) and warrants (the “Warrants”) to purchase shares of the Registrant’s common stock, par value $0.0001 per share (the “Common Stock”). Each Note bears interest at the rate of 3.5 % per annum, has been issued with an original issue discount of 10% and is due on May 24, 2018 (the “Maturity Date”). The Notes are secured by any proceeds received by the Registrant from its investments in Entsorga West Virginia, LLC and Apple Valley Waste Conversions, LLC, (“AVWC”) and the membership interests in AVWC. The Notes are convertible at the option of the Investors, at any time up to and including the Maturity Date, into shares of Common Stock equal to the outstanding principal amount under the Note, plus any accrued and unpaid interest, divided by a conversion price (the “Conversion Price”) equal to $3.00 per share. The Warrants are exercisable for a period of five years into a number of shares of Common Stock equal to 50% of the number of shares of Common Stock into which the Notes are convertible at an exercise price equal to $3.75 per share. The Purchase Agreement also provides the Investors the right to participate in up to 20% of the future external financing for the Registrant’s equity investment in up to six future High Efficiency Biological Treatment (HEBioT) facilities. The Purchase Agreement contains customary representations, warranties and covenants of the Registrant and the Investors for like transactions.

BioHiTech Global, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Nine Months Ended September 30, 2017 and 2016, and as of September 30, 2017 and December 31, 2016

Note 12. Debt, continued

As of September 30, 2017, the Notes reflect: face amount of $1,250,000, net of original issue discount of $125,000, bifurcated warrants of $151,584, bifurcated beneficial conversion feature of $138,240, net of amortization of discounts of $104,010. The warrants for 208,334 shares of common stock were valued utilizing the Monte Carlo modelling technique utilizing stock prices of $3.05 to $7.50 on the dates of the grant, an exercise price of $3.75, a standard deviation (volatility) of 31.1% to 33.2% based on the date of issue, a risk-free interest rate of 2.62% to 2.79% based on the date of issue with a term of 5 years. The model includes subjective input assumptions that can materially affect the fair value estimates. Conversion options are recorded as debt discounts and are amortized as interest expense over the life of the underlying debt instrument.

Series D Convertible Notes and Warrants – During the third quarter of 2017, the Company entered into a series of Securities Purchase Agreements (the “Purchase Agreement”) with twenty one accredited investors (the “Investors”), pursuant to which the Company agreed to sell and the Investors agreed to purchase units (the “Units”) in the aggregate offering amount of $2,000,000, including $140,000 of payment in kind. Units aggregating $325,000 were with related parties. Each Unit is comprised of a mandatorily Convertible Promissory Note (the “Note”) and Warrants (the “Warrants”) to purchase shares of the Registrant’s common stock, par value $0.0001 per share (the “Common Stock”). Prior to maturity, an Investor may elect, at its option and in its sole discretion, to convert all or a portion of the outstanding principal amount under the Note, plus any accrued and unpaid interest, into a number of shares of Common Stock at a conversion price equal to $2.75 per share. Each Note bears interest at the rate of 8% per annum and is due on the earlier of: (i) July 6, 2019; (ii) the date the Common Stock is listed on The Nasdaq Stock Market or NYSE MKT (the “Listing”); or (iii) a “Change of Control” of the Registrant which is defined as a liquidation, dissolution, winding up, change in voting control, or sale of all or substantially all of the Registrant’s assets (the “Maturity”). At Maturity, each Note is convertible into shares of Common Stock equal to the outstanding principal amount under the Note, plus any accrued and unpaid interest, divided by a conversion price (the “Conversion Price”) equal to the lowest of: (i) the trading price on the date of the Listing; (ii) the price per share paid by investors in a subsequent underwritten public offering in connection with the Listing; (iii) the lowest price paid by investors in a subsequent offering of the Registrant’s securities; (iv) the per share price in a Change of Control transaction; or (v) $2.75 per share. The Warrants are exercisable for a period of five years into a number of shares of Common Stock equal to the number of shares of Common Stock into which such Investor’s Note is convertible at an exercise price equal to 120% of the Conversion Price.

The embedded conversion feature and warrants issued in the transaction are not indexed to the Company’s common stock. However, the embedded conversion feature and warrants did not meet the definition of a derivative and therefore such conversion feature was not bifurcated from the underlying note payable and the warrants were not recorded as a derivative liability.

Maturities of Promissory Notes, Convertible Notes, Long Term Debt and Unsecured Subordinated Convertible Notes – as of September 30, 2017, excluding discounts and deferred finance costs, which are being amortized as interest expense, are as follow:

* Certain non-amortizing notes are subject to earlier event based maturities. The table above presents all non-amortizing notes at their time period based maturity condition.

Interest Expense - All interest on the Company’s various debts, including coupon and amortization of discounts and deferred financing costs are recognized as interest expense in the accompanying consolidated financial statements.

BioHiTech Global, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Nine Months Ended September 30, 2017 and 2016, and as of September 30, 2017 and December 31, 2016

Note 13. Equity Transactions

Shareholder Information and Marketing Agreement – During 2016, the Company entered into a service agreement for an initial three-month term, subject to a termination option after the initial 30-day period. In addition to monthly cash fees, the Company will issue 8,000 shares of restricted common stock that will vest over the three-month period. During the three months ended March 31, 2017, 3,200 shares were earned at a cost of $8,053. During 2016, 4,800 shares were earned with a related cost of $12,952. The costs reflect the vesting of such shares based upon the daily closing prices of the Company’s common stock and reflected as professional fees and an increase to additional paid in capital. The 8,000 shares were issued in the second quarter of 2017.

Shareholder Awareness Consulting Agreement – During 2017, the Company entered into a ninety-day consulting agreement for shareholder awareness. The contract provided for 100,000 shares of the Company’s restricted common stock that will vest over the ninety-day period. During the three months ended March 31, 2017 and three months ended June 30, 2017, 89,063 shares were earned at a cost of $267,094, and 10,937 shares were earned at a cost of $35,274, respectively. The Contract also provided for the granting of a warrant for 100,000 shares of common stock. The warrant was initially valued at $105,188 utilizing the Black–Scholes–Merton model utilizing a stock price of $3.00 on the date of the initial estimation of the liability in the second quarter of 2017 utilizing the Black–Scholes–Merton model utilizing, an exercise price of $2.75, a standard deviation (volatility) of 31.11%, a risk-free interest rate of 2.75% with a term of 5 years. The costs reflect the vesting of such shares based upon the daily closing prices of the Company’s common stock and the estimated valuation of the warrant, which are reflected as professional fees and an increase to additional paid in capital. During the second quarter of 2017, the warrant was issued and the valuation at the time of issuance resulted in a $1,999 change in the fair value of the warrant, which has been expensed as a non-operational expense.

During the third quarter of 2017, the Company and the consultant agreed to new terms to extend the contract through December 31, 2017. Under the terms of the extension, in addition to cash fees, the Company agreed to grant the consultant an additional 75,000 shares that will be earned over the term of the contract, from the date that the initial contract expired. During the second quarter of 2017, the consultant has earned 34,884 shares with a cost of $102,670, which has been reflected as professional fees and an increase to additional paid in capital. During the third quarter of 2017, the consultant has earned 40,116 shares with a cost of $233,508, which has been reflected as professional fees and an increase to additional paid in capital.

During the second quarter of 2017, the Company issued 100,000 share of earned common stock in connection with the agreements. During the third quarter of 2017, the Consultant exercised 100,000 warrants in a cashless exercise, resulting in the issuance of 70,044 shares of common stock.

Series A and B Warrants – In connection with the issuance of Series A, B and D units, which included convertible debt and warrants that are exercisable for a period of five years into shares of common stock equal to the number of shares of common stock into which the notes are convertible at an exercise price equal to 120% of the conversion price of the notes. The embedded conversion feature and warrants issued in the transaction are not indexed to the Company’s common stock. However, the embedded conversion feature and warrants did not meet the definition of a derivative and therefore such conversion feature was not bifurcated from the underlying note payable and the warrants were not recorded as a derivative liability.

Maxim Warrants - In connection with the issuance of the Series A Units, the Company agreed to issue warrants to Maxim Group LLC, the placement agent, that are exercisable into 10% of the total number of shares of common stock that the notes are convertible under the notes at an exercise price of $3.75 per share. The warrants expire 5 years from the date of issuance of the underlying notes. As the number of shares that the note holders will receive upon conversion is unknown, the number of shares into which the warrants apply is also unknown.

Barksdale Warrants - In connection with an Offering in October 2013 the Company agreed to issue Barksdale Global Holdings, LLC (“Barksdale”) warrants. These warrants were issued on June 30, 2015 to purchase up to $140,000 of Common Interests (as converted to common stock) on or before the expiration date of June 30, 2020. The warrant is exercisable following the completion of an equity raise with financial institutions or accredited investors in which the Company receives gross proceeds of a minimum of $5.0 million. If the Company does not consummate a Qualified Financing prior to the expiration date, the warrant shall never be exercisable.

Other Warrants - In connection with prior debt offerings that have been converted into equity, warrants expiring between May and July of 2020 representing an $80,000 purchase equity interest remain outstanding. The warrants allow the holders to acquire up to $80,000 of the Company’s common stock at a price of 120% of the closing price of the Company’s first issuance of equity in one, or a series of related transactions, through which the Company receives gross proceeds of $5.0 million or more from one or more financial institutions or accredited investors. If the Company does not consummate a Qualified Financing prior to the expiration date, the warrant shall never be exercisable.

BioHiTech Global, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Nine Months Ended September 30, 2017 and 2016, and as of September 30, 2017 and December 31, 2016

Note 14. Equity Incentive Plans

During 2015, the Company established the BioHiTech Global, Inc. 2015 Equity Incentive Plan, which is available to eligible employees, directors, consultants and advisors of the Company and its affiliates. The plan allows for the granting of incentive stock options, nonqualified stock options, reload options, stock appreciation rights, and restricted stock representing up to 750,000 shares. The Plan is administered by the compensation committee of the board of directors. Effective March 1, 2016, the Company granted nonqualified options for 371,250 shares. Effective April 15, 2016, the Company granted 347,500 restricted stock units. As of September 30, 2017, there were 86,596 shares available under the Plan for future grants. There have been no grant awards made during the nine months ended September 30, 2017. Compensation expense related to the options and restricted stock units was:

The following table summarizes the Company’s stock option activity for the nine months ended September 30, 2017:

The following table summarizes the Company’s restricted stock unit activity for the nine months ended September 30, 2017:

At the Annual Shareholders Meeting on June 7, 2017 the shareholders approved the 2017 Executive Incentive Plan that allows for the granting of awards for up to 1,000,000 shares of the Company’s common stock. No grants under the plan have been made as of September 30, 2017.

BioHiTech Global, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Nine Months Ended September 30, 2017 and 2016, and as of September 30, 2017 and December 31, 2016

Note 15. Commitments and Contingencies

From time to time, the Company is involved in legal matters arising in the ordinary course of business, including matters that relate to items for which the Company has accrued their contractual obligations, but are disputing payment for. The Company has one such matter relating to a professional services agreement in litigation that it believes does not present a material risk to the Company. While the Company believes that these such matters are currently not material, there can be no assurance that matters arising in the ordinary course of business for which the Company is, or could be, involved in litigation, will not have a material adverse effect on its business, financial condition or results of operations.

Note 16. Operating Leases

The Company rents its headquarters and attached warehousing space from a related party (see Note 11) and their research and development office from an unrelated party under operating leases. The research and development office lease commenced in October 2015 and will expire in 2018, subject to one renewal option for an additional one-year period. The total future minimum lease payments under these leases as of September 30, 2017 is:

Total rent expense under all operating leases amounted to $39,921 and $31,645 for the three months ended September 30, 2017 and 2016, respectively. Total rent expense under all operating leases amounted to $105,702 and $101,078 for the nine months ended September 30, 2017 and 2016, respectively.

Note 17. Supplemental Consolidated Statement of Cash Flows Information

Cash flows of non-cash operating assets and liabilities, as well as other supplemental disclosures, are as follows:

BioHiTech Global, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Nine Months Ended September 30, 2017 and 2016, and as of September 30, 2017 and December 31, 2016

Note 18. Recent Accounting Pronouncements

During the nine months ended September 30, 2017, the Company implemented the following recent accounting pronouncements:

Stock Compensation - In March 2016, FASB issued ASU No. 2016-09, “Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting” (Topic 718). The amendments in this ASU is to significantly reduce the complexity and cost of accounting for excess tax benefits and tax deficiencies related to employee share-based payment transactions, which include restricted stock and stock options. Also, ASU No. 2016-09 requires an entity to run excess tax benefits and deficiencies through its income statement, which in effect eliminates the concept of additional paid-in capital. This new guidance was implemented during the first quarter of 2017 and its implementation did not have a material impact on the financial statements.

Inventory - In July 2015, the FASB issued ASU No. 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory” (“ASU 2015-11”). ASU 2015-11 requires inventory measured using any method other than last-in, first out (“LIFO”) or the retail inventory method to be subsequently measured at the lower of cost or net realizable value, rather than at the lower of cost or market. This new guidance was implemented during the first quarter of 2017 and its implementation did not have a material impact on the financial statements.

Statement of Cash Flows – In August 2016, the FASB issued Accounting Standards Update No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). The update amends the guidance in Accounting Standards Codification 230, Statement of Cash Flows, and clarifies how entities should classify certain cash receipts and cash payments on the statement of cash flows with the objective of reducing the existing diversity in practice related to eight specific cash flow issues. The Company elected to early adopt this new guidance during the first quarter of 2017 and its implementation did not have a material impact on the financial statements.

Accounting for Certain Financial Instruments with Down Round Features - In July 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-11—Earnings Per Share (Topic 260), Distinguishing Liabilities From Equity (Topic 480), and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features and II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. ASU 2017-11 eliminates the requirement that a down round feature precludes equity classification when assessing whether an instrument is indexed to an entity’s own stock. A freestanding equity-linked financial instrument no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. The effective date for ASU 2017-11 is for annual or any interim periods beginning after December 15, 2018. Early adoption is permitted. The Company implemented this ASU on a retrospectively basis as of January 1, 2017 and April 1, 2017. Since there was no reduction of the conversion price and exercise price of the warrants associated with the Notes, there is no impact upon implementation of ASU 2017-11 to the condensed consolidated financial statements.

The Company has not yet implemented the following recent accounting pronouncements:

Revenue from Contracts with Customers - In April 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-10, “Revenue from Contracts with Customers - Identifying Performance Obligations and Licensing” (Topic 606). The amendments clarify two aspects of ASU No. 2014-09, “Revenue from Contracts with Customers,” by providing (1) guidance for identifying performance obligations and (2) licensing implementation guidance. Public business entities should apply the guidance similar to Update 2014-09 to annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) ASU No. 2014-09, “Revenue from Contracts with Customers” (ASU 2014-09). ASU 2014-09 provides guidance for revenue recognition and affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets and supersedes the revenue recognition requirements in Topic 605, “Revenue Recognition,” and most industry-specific guidance. The core principle of ASU 2014-09 is the recognition of revenue when a company transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. ASU 2014-09 defines a five-step process to achieve this core principle and, in doing so, companies will need to use more judgment and make more estimates than under the current guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU 2014-09, as amended, is effective for fiscal years beginning after December 15, 2017 and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). The Company does not anticipate that the adoption, by means of a retrospective approach with a cumulative effect, if any, will have a material effect on its consolidated financial position or results of operations.

BioHiTech Global, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Nine Months Ended September 30, 2017 and 2016, and as of September 30, 2017 and December 31, 2016

Leases - In February 2016, the FASB issued new lease accounting guidance (ASU No. 2016-02, Leases). Under the new guidance, at the commencement date, lessees will be required to recognize a lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. The new guidance is not applicable for leases with a term of 12 months or less. Lessor accounting is largely unchanged. Public business entities should apply the amendments in ASU 2016-02 for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The Company will evaluate the effects, if any, that adoption of this ASU will have on its consolidated financial position or results of operations.

Note 19. Subsequent Events

The Company evaluates subsequent events and transactions that occur after the balance sheet date up to the date that the financial statements are available to be issued. Any material events that occur between the balance sheet date and the date that the financial statements were available for issuance are disclosed as subsequent events, while the financial statements are adjusted to reflect any conditions that existed at the balance sheet date. Based upon this review, except as discussed below, the Company did not identify any recognized or non-recognized subsequent events that would have required adjustment or disclosure in the financial statements.

Acquisition of Intellectual Property License for 165,000 ton MBT Facility in development – On November 1, 2017, BioHiTech Global, Inc. and its wholly-owned subsidiary E.N.A. Renewables LLC, entered into a Technology License Agreement (the “License Agreement”) with Entsorgafin S.p.A. (“Entsorga”) whereby the Company acquired a license for the design, development construction, installation and operation of a High Efficiency Biological Treatment (“HEBioT”) renewable waste facility with a capacity of 165,000 tons per year. The patented HEBioT technology converts mixed municipal and organic waste to a US Environmental Protection Agency recognized alternative fuel source.

The royalty payment for the license amounted to $6,019,200, which was comprised of 1,035,905 shares (the “Shares”) of the Company’s common stock, par value $0.0001 per share and cash in an amount up to $839,678.40 for payment of Entsorga’s withholding taxes in the Unites States and Italy.

The Company also entered into a Registration Rights Agreement with Entsorga whereby the Company granted Entsorga certain piggy-back and demand registration rights with respect to the Shares.

Series A Preferred Stock – On October 30, 2017, the Company entered into a Securities Purchase Agreements (the “Purchase Agreement”) with a single, accredited investor (the “Investor”), pursuant to which the Company agreed to sell and the Investor agreed to purchase up to an aggregate of 333,401 shares of the Company’s newly created Series A Convertible Preferred Stock, par value $0.0001 per share (the “Series A Shares”) for an aggregate investment of up to $1,667,000 for the aggregate purchase price up to $1,500,300. In addition, the Company agreed to issue warrants (the “Warrants”) to purchase up to 333,401 shares of the Company’s common stock, par value $0.0001 per share (the “Common Stock”) at the exercise price of $5.00 per share. At the first closing, consummated on October 31, 2017 (the “First Closing”) the Investor purchased 133,334 shares of Series A Shares and Warrants to purchase an additional 133,334 shares of Common Stock for a purchase price of $600,000. The Company, assuming its satisfaction of certain conditions, has the option to sell to the Investor an additional 200,067 Series A Shares and Warrants to purchase 200,067 shares of Common Stock for the purchase price of $900,300, thirty days after the First Closing.

The Series A Shares are convertible into share of Common Stock at the rate of one share of Common Stock for $5.00 of stated value of Series A Shares converted (effectively, on a 1 for 1 basis). The conversion rate is subject to adjustment for stock splits, reclassification and issuance of certain Securities at a purchase price per share below the conversion price. The Series A Shares will automatically convert into Common Stock if the Company (i) receives gross proceeds of $6,000,000 or (ii) receives gross proceeds sufficient to qualify for listing on a natural securities exchange. If the Company completes a financing at a price per share of less than $5.00, one-half of the Series A Shares will convert at a conversion price equal to the purchase price of such financing. The Series A Shares are entitled to receive dividends, payable quarterly commencing December 31, 2017, at the rate of five percent (5%) during the first year of issuance, and increasing two percent (2%) per month thereafter. The Series A Shares rank senior to the Company’s Common Stock with respect to dividends, distributions and payments on liquidation. The Registrant also has the right to redeem the Series A Shares one year after the First Closing for 120% of the stated value plus any unpaid dividends. Commencing on June 1, 2019, the Investor will have the right to require the Company to redeem the Series A Shares for 115% of the Conversion Amount, under certain circumstances.

BioHiTech Global, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Nine Months Ended September 30, 2017 and 2016, and as of September 30, 2017 and December 31, 2016

Note 19. Subsequent Events, continued

The Company also granted the Investor certain piggy-back registration rights with respect to the shares of Common Stock underlying the conversion of the Series A Shares and the exercise of the Warrants.

Conversion of Debt into Common Stock – During October 2017, Vista Capital Investments LLC converted $110,000 of the Company’s convertible notes, plus accrued interest, into 40,454 shares of common stock.

Investor Awareness Contract – Effective October 2, 2017 the Company entered into a new shareholder awareness consulting agreement with its existing consultant. This agreement has a term of 90 days and includes cash fees of $90,000, the issuance of the 35,000 shares of common stock and warrants to purchase 10,000 shares of common stock at $5.00 per share.

The following discussion and analysis should be read in conjunction with our unaudited interim condensed consolidated financial statements and related notes appearing elsewhere in this report on Form 10-Q. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including but not limited to those set forth under “Risk Factors” in our Form 10K, as filed with the United States Securities and Exchange Commission, or the SEC, on March 30, 2017.

Cautionary Note Regarding Forward-Looking Statements

The information in this report contains forward-looking statements. All statements other than statements of historical fact made in this report are forward looking. In particular, the statements herein regarding industry prospects and future results of operations or financial position are forward-looking statements. These forward-looking statements can be identified by the use of words such as “believes,” “estimates,” “intends”, “plans”, “could,” “possibly,” “probably,” anticipates,” “projects,” “expects,” “may,” “will,” or “should,” “designed to,” “designed for,” or other variations or similar words or language. No assurances can be given that the future results anticipated by the forward-looking statements will be achieved. Forward-looking statements reflect management’s current expectations and are inherently uncertain. Our actual results may differ significantly from management’s expectations.

Although these forward-looking statements reflect the good faith judgment of our management, such statements can only be based upon facts and factors currently known to us. Forward-looking statements are inherently subject to risks and uncertainties, many of which are beyond our control. As a result, our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth below under the caption “Risk Factors.” For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. You should not unduly rely on these forward-looking statements, which speak only as of the date on which they were made. They give our expectations regarding the future but are not guarantees. We undertake no obligation to update publicly or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law.

Company Overview

Since its inception, the Company had primarily focused on its on-going Eco-Safe Digester business. During 2014 and 2015 the Company expanded its offering through the development of technologies that transformed the digester market from just food waste diversion to one that provides information that can allow customers to reduce and eliminate or minimize their food waste through improved supply chain management and other efficiencies.

In 2016, the Company initiated development of its Revolution Series of Digesters. During 2017, the Seed and Sprout models became commercially available. Through September 30, 2017, a total of 14 Revolution Series Digesters had been shipped; during the month of October 2017, an additional 27 units were shipped.

Also during 2016, the Company expanded from its technology-digester single product line by starting strategic initiatives in Mechanical Biological Treatment (“MBT”) facilities that rely upon High Efficiency Biological Treatment (“HEBioT”) to process waste at the municipal or regional level converting a significant portion of intake into a United States EPA recognized alternative commodity fuel.

On November 1, 2017, BioHiTech Global, Inc. and its wholly-owned subsidiary E.N.A. Renewables LLC, entered into a Technology License Agreement (the “License Agreement”) with Entsorgafin S.p.A. (“Entsorga”) whereby the Company acquired a license for the design, development construction, installation and operation of a High Efficiency Biological Treatment (“HEBioT”) renewable waste facility with a capacity of up to 165,000 tons per year, with its initial targeted facility being in New York State.

During April 2017, the Company executed an agreement to acquire a site for the country’s second HEBioT facility to be located in New Windsor, New York. This agreement provides for a purchase price of the property of $1,092,000, subject to reduction for option payments made by the Company in the monthly amount of $3,500 for the first 12 months and $6,000 per month for the following 12 months, until the closing. The purchase of the property is contingent upon the Company obtaining: necessary permits to allow construction of a Mechanical Biological Treatment (“MBT”) facility; approvals from state and local authorities; financing for the construction of the MBT facility; contracts for offtake of Solid Recovered Fuel; and the satisfaction of the Company’s due diligence investigation of the property. The contract also contains customary representations warranties and covenants of the parties for like transactions.

During March 2017, the Company consummated its 17.2% investment in Entsorga West Virginia, LLC, the first HEBioT plant in the United States, which is presently under construction and anticipated to become operational during 2018.

The combination of the on-site digester and the facility based patented HEBioT technology results in a unique offering that provides a turn-key alternative for customers looking for a comprehensive solution to achieving zero waste. The Company envisions use of its digesters for disposal of food waste at certain retail customers’ locations, with regional disposal contracts being directed to the Company MBT facilities. The combination provides a cost-effective solution with less than 20% of post-consumer waste being directed to landfills, hence resulting in a near-zero footprint.

Digester Based Products and Services

Revolution Series Digester ®

The Revolution Series Digester®, which became commercially available in March 2017, is the Company's new sustainable food waste disposal solution designed for lower volume food waste generators. Our Revolution Series of Digesters may be used by full and quick service restaurants, coffee shops, hospitality companies and other specialty food service establishments that generate lesser volumes of waste than those that the Eco-Safe Digester is more suitable for. This sub-segment of the food services industry is estimated to have more than 1.5 million locations.

The Revolution Series Digesters leverages the success of the underlying technologies of our current line of Eco-Safe Digesters designed for the mid-to-large volume waste generators. This new line has a compact design, operates on standard 115 Volt power and is easily connected to existing plumbing, while providing all the user technology, including the Cloud^TM, Cirrus^TM, Mobile Application and Alto^TM applications associated with the larger digesters.

Eco-Safe Digester®

The Company provides a simple, environmentally friendly, and cost effective solution for food waste disposal. The Eco-Safe Digester® is a data-driven, network-based mechanical/biological technology which transforms food waste into nutrient-neutral water that can safely be disposed of via conventional sanitary sewer systems.  The Eco-Safe Digester reduces greenhouse gas emissions by reducing the volume of food waste being disposed of in landfills and eliminating the corresponding transportation of this waste. In addition, the technology saves users money by avoiding disposal costs (“tip fees”) and transportation charges.  This process allows waste producing organizations to actively contribute to environmental sustainability and the preservation of resources in a cost-effective manner.  The Eco-Safe Digester may be used by businesses in food service, hospitality, healthcare, government, conference centers, education centers, or stadiums that generate a high volume of waste. It is estimated that the US addressable market is in excess of 250,000 locations that could qualify for digesters and an additional 250,000 internationally.

The BioHiTech BioBrain^TM, Cloud^TM, Cirrus^TM Mobile Application and Alto^TM Application

The Company leverages its existing technology, including our digester’s on-board weighing system, by collecting, accumulating and providing empirical data that can aid in improving the efficiency of the upstream supply chain. By streaming data from the digesters, collecting information from system users and integrating business application data, BioHiTech’s internet enabled system known as the BioHiTech Cloud^TM can provide necessary data to aid customers in reshaping their purchasing decisions and positively affect employee behavior. In its simplest form, the BioHiTech Cloud quantifies food waste in a fashion that has historically not been available. It enables users to understand food waste generation habits and to improve operational efficiencies.

The BioHiTech Cloud data is used to help educate customers as to where, when and how waste is being created. Tracking and analyzing waste based on creation time, food type, preparation stage, origin of waste or other key metrics may provide a clear picture of the food waste lifecycle. While the Eco-Safe Digester already provides significant economic savings and decreases in carbon footprint, the addition of the BioHiTech Cloud increases that impact by helping the customer to more accurately manage inventory, preparation practices and staff efficiencies.

The Company believes that its combined offering of technology and its Eco-Safe Digester provide customers with information that has not been readily available to consumers in the past that has the potential for improved management and reduction of waste at the point of generation on a real-time basis.

Mechanical Biological Treatment

In 2016, the Company formed E.N.A Renewables LLC, formerly known as Entsorga North America, LLC (“ENA”) as a wholly owned subsidiary. ENA owns a 31% interest in Apple Valley Waste Conversions, LLC (“AVWC”). Frank E. Celli, the Company’s CEO also owns a 20.9% interest in AVWC. In March 2017, Mr. Celli assigned his voting rights in AVWC so that, collectively, ENA would have voting control of over 51% of AVWC. AVWC currently holds the exclusive license for the development throughout 11 northeast U.S. states and the District of Columbia of the technology known as High Efficiency Biological Treatment (“HEBioT”), which is owned by Entsorgafin, an Italian company that provides cost effective environmental technologies throughout the world. HEBioT is a proprietary form of Mechanical Biological Treatment (“MBT”) that is used widely throughout Europe.

The patented HEBioT technology converts mixed municipal and organic waste to a US Environmental Protection Agency (the “US EPA”) recognized alternative fuel source. By utilizing a combination of mechanical and biological processes to accelerate the decomposition of the organic fraction of waste, the end-product produced, known as solid recovered fuel (“SRF”) has a carbon value equivalent to approximately 75-80% of traditional coal and can be used as a replacement and/or supplement to coal. After receipt and processing of waste at the facility, approximately 80% of the incoming waste is reduced, recycled or converted into the approved alternative fuel, with the remaining 20% of the incoming waste being disposed of via traditional methods.

The US EPA has issued a “comfort letter” stating that any fuel produced utilizing the HEBioT technology is deemed an engineered fuel and can be marketed as a commodity.

Entsorga West Virginia, LLC.

On January 1, 2017, the Company executed several agreements to acquire up to approximately a 40% interest in EWV from the original investors at their original purchase price of $60,000 for each 1% of interest in EWV. The agreements provide for a required investment of $1,034,028, representing a 17.2% interest, with the remaining 23.1% being at the option of the Company. The agreement was subject to the approval of the EWV bond trustee, which was granted on March 20, 2017. On March 21, 2017, the Company completed the required investment acquisition of $1,034,028 for a 17.2% interest

EWV represents the first deployment of the Entsorga HEBioT technology in the United States. Such deployment is currently underway in Martinsburg, WV. EWV has its own intellectual property agreement with Entsorgafin S.p.A. which is not part of the agreement that AVWC has with Entsorgafin S.p.A. The EWV plant has received its necessary permits and EWV has closed on its financing to construct the facility. We anticipate the facility will be able to accept up to 110,000 tons per year of municipal solid waste delivered from the surrounding areas. The facility will consist of a 54,000 square foot industrial building located on approximately 12 acres of leased property. The facility will include a plant which will be equipped with HEBioT technology and will ultimately be able to produce approximately 50,000 tons per year of EPA recognized renewable fuel.

This first operational plant utilizing the patented HEBioT technology in the United States will serve as the Company’s “showplace” to help expedite future deployments.

New Windsor, NY Development

On March 1, 2017, the Town Counsel of New Windsor, NY approved, subject to a 30 day petition period during which certain voters could objection, the sale of 12 acres of property to the Company for the development of a Mechanical Biological Treatment (“MBT”) facility. On April 3, 2017, the Town Clerk of New Windsor certified that there had not been any objections raised and the agreement was executed on April 10, 2017. The purchase price of the property is $1,092,000, subject to reduction for option payments made by the Company in the monthly amount of $3,500 for the first 12 months and $6,000 per month for the following 12 months, until the closing. The purchase of the property is contingent upon the Company obtaining: necessary permits to allow construction of a MBT facility; approvals from state and local authorities; financing for the construction of the MBT facility; contracts for offtake of Solid Recovered Fuel; and the satisfaction of the Company’s due diligence investigation of the property. The contract also contains customary representations warranties and covenants of the parties for like transactions.

Corporate Headquarters

Our corporate headquarters are located at 80 Red Schoolhouse Road, Suite 101, Chestnut Ridge, New York 10977 and our phone number is (845) 262-1081. Our website can be found at www.biohitech.com . The information on our website is not incorporated in this report.

Critical Accounting Policies and Estimates

Use of Estimates — The preparation of consolidated financial statements, in conformity with GAAP requires the extensive use of management’s estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from these estimates. Estimates are used when accounting for items and matters including, but not limited to, allowance for uncollectible accounts receivable, obsolete, slow moving and excess inventory, asset valuations, including goodwill and intangibles, and useful lives, employee benefits, taxes and other provisions and contingencies.

Product and Services Revenue Recognition - The Company recognizes revenue for the majority of its products sold upon transfer of title and the passage of the risk of ownership, which is generally upon shipment to the customer. Revenue from services is recognized as services are performed.

Lease Revenue Recognition - The Company recognizes revenue from the rental of the digester units ratably on a monthly basis over the term of the lease, as it has determined that the rental agreements entered into in connection with its digester units qualify as operating leases, for which the Company is the operating lessor. In order to determine lease classification as operating, the Company evaluates the terms of the rental agreement to determine if the lease includes any of the following provisions which would indicate capital lease treatment:

In addition, the Company also considers the following:

Long-Lived Assets - The Company assesses potential impairments to its long-lived assets if events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Indefinite-lived intangible assets are reviewed annually for impairment, or more frequently if events or changes in circumstances indicate that the carrying value may not be recoverable. An impaired asset is written down to its estimated fair value based upon the most recent information available. Estimated fair market value is generally measured by discounting estimated future cash flows.

Financial Instruments, Convertible Instruments, Warrants and Derivatives - The Company reviews its convertible instruments for the existence of embedded conversion features which may require bifurcation, if certain criteria are met, the bifurcated derivative financial instrument is required to be recorded at fair value and adjusted to market at each reporting period end date. The Company also reviews and re-assesses, at each reporting date, any common stock purchase warrants and other freestanding derivative financial instruments and classifies them on the consolidated balance sheet as equity, assets or liabilities based upon the nature of the instruments.

Fair Value Measurements - Certain assets and liabilities are required to be recorded at fair value on a recurring basis. Fair value is determined based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. Assets measured at fair value on a nonrecurring basis include long-lived assets held and used, long-lived assets held for sale, goodwill and other intangible assets. The fair value of cash and cash equivalents, accounts receivable, short-term debt and accounts payable approximate their carrying values. The three-tier value hierarchy, which prioritizes valuation methodologies based on the reliability of the inputs, is:

Level 1 — Valuations based on quoted prices for identical assets and liabilities in active markets.

Level 2 — Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

Level 3 — Valuations based on unobservable inputs reflecting the Company’s own assumptions, consistent with reasonably available assumptions made by other market participants.

Equity Method Based Investments - The Company utilizes the equity method of accounting for investments in companies if the investment provides the ability to exercise significant influence, but not control, over operating and financial policies of the investee. The Company’s proportionate share of net income or loss is included in the Company’s consolidated operations as earning or loss from unconsolidated equity basis investments.

Stock-Based Compensation - The Company accounts for stock-based compensation in accordance with ASC 718, “Compensation - Stock Compensation.” ASC 718 requires generally that all equity awards be accounted for at their “fair value.” This fair value is measured on the grant date for stock-settled awards. Fair value is equal to the underlying value of the stock for “full-value” awards such as restricted stock and performance shares, and is estimated using an option-pricing model with traditional inputs for “appreciation” awards such as stock options and stock appreciation rights.

Costs equal to these fair values are recognized ratably over the requisite service period based on the number of awards that are expected to vest, or in the period of grant for awards that vest immediately and have no future service condition. For awards that vest over time, cumulative adjustments in later periods are recorded to the extent actual forfeitures differ from the Company’s initial estimates: previously recognized compensation cost is reversed if the service or performance conditions are not satisfied and the award is forfeited. The expense resulting from share-based payments is recorded the accompanying consolidated statements of operations based upon the functional classification of the individual grantees.

Subsequent modifications to outstanding awards result in incremental cost if the fair value is increased as a result of the modification. Thus, a value-for-value stock option repricing or exchange of awards in conjunction with an equity restructuring does not result in additional compensation cost.

Income Taxes - Deferred income taxes are determined based on the estimated future tax effects of differences between the financial statement and tax bases of assets and liabilities given provisions of enacted laws. Deferred income tax provisions and benefits are based on changes to the asset or liabilities from year to year. In providing for deferred taxes, the Company considers tax regulations of the jurisdictions in which it operates, estimates the future taxable income and available tax planning strategies. If tax regulations, operating results or the ability to implement tax planning and strategies vary, adjustments to the carrying value of deferred tax assets and liabilities may be required. Valuation allowances are recorded related to deferred tax assets based on the “more than likely” criteria.

The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. 

Loss per Share - The Company computes basic loss per share using the weighted-average number of shares of common stock outstanding and diluted loss per share, while the diluted loss per share also includes the effects of dilutive instruments using the “treasury method.”

The Company’s potential dilutive instruments include options, convertible debt and warrants. These instruments have not been considered in the calculation of diluted loss per share as they are anti-dilutive for the reported periods.

Results of Operations

Summary Results

For the three months ended September 30, 2017 total revenue increased by 5.3% over the comparable 2016 period. This increase was driven by a 15.8% increase in rental, service and maintenance revenues and a 9.1% decrease in equipment sales.

Gross margin decreased to 23.7% overall for the three months ended September 30, 2017 from 30.6% for the comparable 2016 period due to a change in the product mix and a decrease in the gross margin of the rental, service and maintenance line of business primarily due to a higher level of contracted services involved in servicing equipment outside of the Company’s direct coverage area and numerous installations on a trial basis of our newly released Revolution Series of digesters with national accounts. 

Revenue by Type

The following table breaks down revenue by type:

Total revenue increased by $32,769, or 5.3%, from the three months ended September 30, 2016 to the three months ended September 30, 2017. Within revenue, services and maintenance increased by 15.8% from the three months ended September 30, 2016 to the three months ended September 30, 2017, while equipment sales decreased by 9.1%. As a percentage of total revenue, rental, service and maintenance increased to 63.3% of revenue for the three months ended September 30, 2016, as compared to 57.5% for the comparable 2016 period, while equipment sales as a percentage of revenue decreased to 36.7% from 42.5%, respectively. This decrease in equipment sales was primarily attributable to an decrease in international reseller activity in areas where the rental market is not as well recognized as the retail sales model.

Rental, service and maintenance revenue increased by $56,777, or 15.8%, from the three months ended September 30, 2016 to the three months ended September 30, 2017. This increase is primarily driven by a greater number of rented units.

Equipment sales decreased by $24,008, or 9.1%, from the three months ended September 30, 2016 to the three months ended September 30, 2017. This decrease was due to an decrease in unit sales to distributors and international customers.

Cost of Revenue

The following table breaks down cost of revenue by type:

Cost of revenue mainly consists of the cost of acquiring digester units that are sold, depreciation expense on rental units, warehousing, installation, maintenance, parts and shipping costs, as well as related salary and employee costs. Total costs of revenue increased by $68,242, or 15.8%, from the three months ended September 30, 2016 to the three months ended September 30, 2017, a period during which revenues increased by 5.3% primarily due to the change in mix of revenue between equipment sales and rental, service and maintenance, as well as a significant level of installation costs, partly due to the roll-out of the Revolution Series of digesters with trial periods with several large national chain stores.

Rental, service and maintenance costs of revenue increased by $92,755, or 36.2 % (as compared to a 15.8% increase in rental, service and maintenance revenue) from the three months ended September 30, 2016 to the three months ended September 30, 2017.

Labor related costs increased by $29,236, or 80.9% from the three months ended September 30, 2016 to the three months ended September 30, 2017, due to the addition of staff focused on proactive customer involvement in the use, care and maintenance of our digesters with the goal of improving our infrastructure to support significant growth. Contracted services increased by $93,316 or 188.5% from the three months ended September 30, 2016 to the three months ended September 30, 2017, due to a significant increase in the Company’s focus on national account development and installations of the new Revolution Series digesters on trials. Depreciation decreased by $28,044 or 28.8% from the three months ended September 30, 2016 to the three months ended September 30, 2017, due to a portion of the leasing pool no longer having depreciation charges. Parts and maintenance supplies decreased by $1,753 or 2.4% from the three months ended September 30, 2016 to the three months ended September 30, 2017, due to decreased overhead costs.

Equipment sales cost of revenue decreased by $24,513 from the three months ended September 30, 2016 to the three months ended September 30, 2017 due to a decrease in the number and mix of digesters sold.

Gross Profit

The following table breaks down gross profit by type: 

The following table breaks down gross margin by type:

Rental, service and maintenance gross margin Decreased by 12.6% to 16.0% for the three months ended September 30, 2017 primarily due to a higher level of contracted services involved in servicing equipment outside of the Company’s direct coverage area and numerous installations on a trial basis of our newly released Revolution Series of digesters.

Equipment sales gross margin increased by 3.5% to 36.9% for the three months ended September 30, 2017 primarily due to the majority of 2017 sales involving new machines, that generally have higher gross margin rates than used equipment.

Operating expenses

The following table breaks down operating expenses by type:

Selling, general and administrative expenses increased by $106,278, or 10.8% from the three months ended September 30, 2016 to the three months ended September 30, 2017. The following table breaks down the major categories of selling, general and administrative expenses:

Personnel related expenses increased by $60,744 or 7.7% from the three months ended September 30, 2016 to the three months ended September 30, 2017. This increase was the result of increased staffing in sales and customer support areas. Sales and Marketing increased by $19,519 or 26.2% primarily due to increased travel and trade show costs related to both the digesters and MBT lines of business.

Research and development expenses decreased by $35,177, or 14.5% from the three months ended September 30, 2016 to the three months ended September 30, 2017. This decrease was primarily driven a decrease in personnel expenses and external costs relating to the development of the Revolution Series of digesters.

Professional fees increased by $247,573, or 69.4% from the three months ended September 30, 2016 to the three months ended September 30, 2017. The following table breaks down the major categories of professional fees:

Professional fees increased primarily due investor relations and shareholder awareness services focused on improved liquidity of the Company’s common stock, offset in-part by a decrease in strategic consulting.

Summary Results

For the nine months ended September 30, 2017 total revenue increased by 16.8% over the comparable 2016 period. This increase was driven by a 14.5% increase in rental, service and maintenance revenue and a 21.1% increase in equipment sales, which was driven by reseller activity that continues to be predominantly sales based.

Gross margin improved from 25.7% overall for the nine months ended September 30, 2016 to 29.2% for the comparable 2017 period with improvements in both product revenues. 

Operating expenses increased by 13.3% to $5,527,294 for the nine months ended September 30, 2017, which reflect an increase in professional fees of $723,690 related to supporting shareholder awareness and other professional services.

Revenue by Type

The following table breaks down revenue by type:

Total revenue increased by $258,658 or 16.8%, from the nine months ended September 30, 2016 to the nine months ended September 30, 2017. Within revenue, services and maintenance increased by 14.5% from the nine months ended September 30, 2016 to the nine months ended September 30, 2017, while equipment sales increased by 21.1%. As a percentage of total revenue, rental, service and maintenance decreased to 63.5% of revenue for the nine months ended September 30, 2016, as compared to 64.8% for the comparable 2016 period, while equipment sales as a percentage of revenue increased to 36.5% from 35.2%, respectively.

Rental, service and maintenance revenue increased by $144,572, or 14.5%, from the nine months ended September 30, 2016 to the nine months ended September 30, 2017. This increase is primarily driven by a greater number of rented units.

Equipment sales increased by $114,086, or 21.1%, from the nine months ended September 30, 2016 to the nine months ended September 30, 2017. This increase was due to an increase in unit sales to distributors and international customers.

Cost of Revenue

The following table breaks down cost of revenue by type:

Cost of revenue mainly consists of the cost of acquiring digester units that are sold, depreciation expense on rental units, warehousing, installation, maintenance, parts and shipping costs, as well as related salary and employee costs. Total costs of revenue increased by $129,193, or 11.3%, from the from the nine months ended September 30, 2016 to the nine months ended September 30, 2017, primarily due to the change in mix of revenue between equipment sales and rental, service and parts and improved margins from product sales.

Rental, service and maintenance costs of revenue increased by $118,725, or 15.6% (as compared to a 14.5% increase in rental, service and maintenance revenue) from the nine months ended September 30, 2016 to the nine months ended September 30, 2017.

Labor related costs increased by $80,028, or 73.7% from the nine months ended September 30, 2016 to the nine months ended September 30, 2017, due to the addition of staff focused on proactive customer involvement in the use, care and maintenance of our digesters with the goal of improving our infrastructure to support significant growth. Contracted services increased by $71,721, or 47.8% from the nine months ended September 30, 2016 to the nine months ended September 30, 2017 due to an increase international activities and our on continuing focus on growing national accounts that are not in our direct service areas.

Equipment sales cost of revenue increased by only $10,468 or 2.8% from the nine months ended September 30, 2016 to the nine months ended September 30, 2017, while sales increased by 21.1%, due to a shift in sales mix that resulted in improved overall margins.

Gross Profit

The following table breaks down gross profit by type: 

The following table breaks down gross margin by type:

Rental, service and maintenance gross margin decreased by 0.7% to 22.8% for the nine months ended September 30, 2017 primarily due to higher levels of direct and contracted staff driven by an increased rental portfolio and the release of the new Revolution Series of digesters.

Equipment sales gross margin increased by 10.6% to 40.3% from 29.7% primarily due to primarily due to the majority of 2017 sales involving new machines, that generally have higher gross margin rates than used equipment.

Operating expenses

The following table breaks down operating expenses by type:

Selling, general and administrative expenses increased by $39,882, or 1.3% from the nine months ended September 30, 2016 to the nine months ended September 30, 2017. The following table breaks down the major categories of selling, general and administrative expenses, which accounted for 58.1% of operating expenses for the nine months ended September 30, 2017:

Sales and Marketing increased by $90,169 or 36.4% primarily due to increased travel and trade show costs related to both the digesters and MBT lines of business. Other expenses decreased by $117,229 or 63.3% from the nine months ended September 30, 2016 to the nine months ended September 30, 2017, which was the result a reversal of un-hedged foreign exchange losses that were incurred in 2016 incurred between the US companies and the United Kingdom operation of $128,323.

Research and development expenses decreased by $49,947, or 7.6% from the nine months ended September 30, 2016 to the nine months ended September 30, 2017. This decrease was primarily driven by a reduction in external costs that were associated with the final manufacturing development of the Revolution line in the first quarter of 2017.

Professional fees increased by $723,690, or 80.9% from the nine months ended September 30, 2016 to the nine months ended September 30, 2017. The following table breaks down the major categories of professional fees:

Professional fees increased primarily due investor relations and shareholder awareness services focused on improved liquidity of the Company’s common stock.

Liquidity and Capital Resources

Since inception, the Company has sustained substantial losses. The Company has an accumulated deficit of $27,287,091, a shareholders’ deficit of $16,140,210 and a working capital deficit of $5,651,550 as of September 30, 2017.

The cash on hand is insufficient for us to continue our operations through November 2018. While the Company continues to seek investors under the private offerings and other financing alternatives, if the Company is unable to obtain debt or equity financing to meet its cash needs, it may have to severely limit, its business plan by reducing the funds it hopes to expend on its business plan.

We do not yet have a sustained history of financial stability. Historically, our principal source of liquidity has been the issuance of debt and equity securities (including to related parties). These factors raise substantial doubt about the Company’s ability to continue as a going concern.

The Company is presently in the process of raising additional non-registered preferred stock, senior debt, convertible debt and capital for general operations and for investment in several strategic initiatives, as well as commercial debt to support its leasing activities. There is no assurance that the Company will be able to raise sufficient debt or capital to sustain operations or to pursue other strategic initiatives or that such debt or capital may not be available on acceptable terms, if at all. There also can be no assurance that the plans and actions proposed by management will be successful or that we will generate profitability and positive cash flows in the future.

The consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The consolidated financial statements do not include any adjustments relating to the recovery of the recorded assets or the classification of the liabilities that might be necessary should we be unable to continue as a going concern. The ability of the Company to continue as a going concern is dependent on management’s plans, which include further implementation of its business plan and continuing to raise capital.

The table below presents borrowings, debts and advances as of September 30, 2017, along with their stated maturities along with the amount due at maturity. The line of credit, with an outstanding balance of $2,463,736 has an additional $36,264 available under its $2,500,000 facility. Of the total $17,091,717 face amount, $7,725,000 is mandatorily converted into common stock at its maturity, $1,470,000 is convertible at the holders’ option and the remaining amount of $7,896,717, which is due in cash includes $5,319,777 due to related parties and $2,463,736 due to a bank, on demand, which is guaranteed by certain related parties, that the Company is presently negotiating an expansion of the facility and a maturity schedule for all balances due thereunder.

*      The line of credit, which does not have any operating financial covenants, is guaranteed by several related parties and is excluded from the related party amount included above, as the guarantee is secondary to the primary borrower.

Cash and Cash Equivalents

As of September 30, 2017 and December 31, 2016, the Company had cash balances of $480,329 and $325,987, respectively.

Cash Flows

Cash Flows from Operating Activities

We used $3,836,030 of cash in operating activities during the nine months ended September 30, 2017, an increase of $178,283 from $3,657,747 of cash used in operating activities during the nine months ended September 30, 2016. Our net loss during the nine months ended September of $6,214,925 reflected non-cash expenses totaling $1,873,245, including $1,247,039 in stock based employee compensation and fees paid in stock and warrants; $299,021 of depreciation and amortization and $223,718 of amortization of discounts on debt and deferred financing costs. Changes in operating assets and liabilities provided $505,650 of cash during the nine months ended September 30, 2017. Our net loss during the nine months ended September 30, 2016 of $4,970,741 was impacted by $331,807 of depreciation and amortization, $512,318 from stock based employee compensation and $55,076 of amortization of discounts on debt and deferred financing costs. Changes in operating assets and liabilities provided $343,326 of cash during the nine months ended September 30, 2016.

Cash Flows from Investing Activities

Cash used in investing activities amounted to $1,165,868 for the nine months ended September 30, 2017, compared to $3,825 for the nine months ended September 30, 2016, a change of $1,162,043, comprised primarily of our MBT investments, including in Entsorga West Virginia, LLC and project costs related to New Windsor, NY.

Cash Flows from Financing Activities

Cash provided by financing activities amounted to $5,137,360 the nine months ended September 30, 2017, compared to $3,733,583 the nine months ended September 30, 2016, an increase of $1,403,777. During the nine months ended September 30, 2017, we issued $4,120,000 in promissory and convertible notes (face amount), of which $1,465,000 was from related parties.

Off Balance Sheet Arrangements

We have not entered into any off-balance sheet arrangements during the nine month period ended September 30, 2017.

Recent Accounting Pronouncements

See Note 18 to our unaudited interim condensed consolidated financial statements regarding recent accounting pronouncements.

We are a smaller reporting company as defined by 17 C.F.R. 229 (10)(f)(i) and are not required to provide information under this item.

Evaluation of Disclosure Controls and Procedures

Our management carried out an evaluation, with the participation of our Principal Executive Officer and Principal Financial Officer, of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”).

Based on their evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this report to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in our reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Because of our limited operations we have a small number of employees which prohibits a segregation of duties. As we grow and expand our operations we will engage additional employees and experts as needed. However, there can be no assurance that our operations will expand.

Changes in Internal Controls Over Financial Reporting

There have not been any significant changes in our internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

On or about April 21, 2017, the Company was served with a Summons and Complaint in an action captioned Tusk Ventures LLC v. BioHiTech Global, Inc., in the Supreme Court of the State of New York, New York County. The Plaintiff alleges that it is owed $250,000 pursuant to a Consulting Services Agreement. While the Company has accrued all contractual amounts, it intends to defend the action vigorously.

From time to time, we are a party to, or otherwise involved in, legal proceedings arising in the normal and ordinary course of business. As of the date of this report, we are not aware of any other proceeding, threatened or pending, against us which, if determined adversely, would have a material effect on our business, results of operations, cash flows or financial position.

We are a smaller reporting company as defined by 17 C.F.R. 229 (10)(f)(i) and are not required to provide information under this item.