UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended: September 30, 2016

or

 

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ________________ to ________________

 

Commission file number 001-36843

 

 

BIOHITECH GLOBAL, INC.

(Exact name of registrant as specified in its charter)

 

Delaware		46-2336496
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
80 Red Schoolhouse Road, Suite 101 Chestnut Ridge, New York		10977
(Address of principal executive offices)		(Zip Code)

 

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

 

Large accelerated filer  ¨

Accelerated filer  ¨

 

Non-accelerated filer  ¨

(Do not check if a smaller reporting company)

Smaller reporting company  x

  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨    No  x

 

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

 

Class		Outstanding as of November 10, 2016
Common Stock, $0.0001 par value per share		8,229,712 shares

 

 

BioHiTech Global, Inc. and Subsidiaries

 

TABLE OF CONTENTS

 

			Page
	PART I - FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements.		3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.		20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.		32
Item 4.	Controls and Procedures.		32
	PART II - OTHER INFORMATION
Item 1.	Legal Proceedings.		33
Item 1A.	Risk Factors.		33
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.		33
Item 3.	Defaults Upon Senior Securities.		34
Item 4.	Mine Safety Disclosures.		34
Item 5.	Other Information.		34
Item 6.	Exhibits.		34
SIGNATURES			35

  

 

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

 

BioHiTech Global, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations and Comprehensive Loss (UNAUDITED)

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2016				2015				2016				2015
Revenue
Rental, service and parts		$	358,625			$	270,369			$	996,179			$	726,111
Equipment sales			264,953				65,345				541,407				137,516
Other			-				-				-				74,980
Total revenue			623,578				335,714				1,537,586				938,607
Cost of revenue
Rental, service and parts			256,107				213,003				761,834				649,431
Equipment sales			176,511				68,530				380,684				164,578
Other			-				-				-				34,938
Total Cost of revenue			432,618				281,533				1,142,518				848,947
Gross profit			190,960				54,181				395,068				89,660
Operating expenses
Selling, general and administrative			983,725				702,847				3,171,973				1,750,184
Research and development			242,435				171,502				661,529				490,980
Professional fees			356,652				450,025				894,386				730,791
Loss (Gain) on sale of QTags			-				35,550				-				(191,805	)
Depreciation and amortization			29,174				30,668				84,122				110,715
Total operating expenses			1,611,986				1,390,592				4,812,010				2,890,865
Loss from operations			(1,421,026	)			(1,336,411	)			(4,416,942	)			(2,801,205	)
Other expense (income)
Interest income			-				(4,696	)			(3,068	)			(4,696	)
Interest expense			222,142				131,023				556,867				359,185
Change in fair value of warrant liability			-				-				-				(1,462	)
Total other expense			222,142				126,327				553,799				353,027
Net loss			(1,643,168	)			(1,462,738	)			(4,970,741	)			(3,154,232	)
Other comprehensive income (loss)
Foreign currency translation adjustment			4,098				(290	)			10,498				(290	)
Comprehensive loss		$	(1,639,070	)		$	(1,463,028	)		$	(4,960,243	)		$	(3,154,522	)
Net loss per share - basic and diluted		$	(0.20	)		$	(0.20	)		$	(0.60	)		$	(0.45	)
Weighted average number of common shares outstanding - basic and diluted			8,229,712				7,288,859				8,229,712				7,080,769

 

See accompanying notes to unaudited interim condensed consolidated financial statements.

 

 

BioHiTech Global, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets 

 

		September 30, 2016				December 31, 2015
		(UNAUDITED)
Assets
Current Assets
Cash		$	176,103			$	39,195
Accounts and note receivable, net			148,600				316,299
Inventory			586,043				274,304
Prepaid expenses and other current assets			39,868				67,136
Total Current Assets			950,614				696,934
Equipment on operating leases, net			964,915				844,494
Equipment, fixtures and vehicles, net			54,889				61,688
Intangible assets, net			291,541				365,038
Other assets			13,500				51,600
Total Assets		$	2,275,459			$	2,019,754
Liabilities and Stockholders' Deficit
Current Liabilities:
Line of credit		$	2,463,736			$	2,488,753
Accounts payable			1,587,758				1,222,167
Accrued interest payable			284,140				287,888
Accrued expenses			546,637				548,522
Deferred revenue			95,778				48,103
Notes payable			100,000				100,000
Notes payable - related party			100,000				300,000
Advance from related party			913,027				710,000
Customer deposits			88,136				29,657
Long-term debt, current portion			8,458				8,260
Total Current Liabilities			6,187,670				5,743,350
Promissory note - related party			2,500,000				1,710,000
Long term accrued interest			160,833				-
Unsecured subordinated convertible notes, including related parties of $2,250,000, net of deferred financing costs of $110,154			3,314,846				-
Long-term debt, net of current portion			13,204				19,573
Total Liabilities			12,176,553				7,472,923
Commitments and Contingencies
Stockholders' Deficit
Preferred stock, $0.0001 par value; 10,000,000 shares authorized; none issued			-				-
Common stock, $0.0001 par value, 20,000,000 shares authorized; 8,229,712 shares issued and outstanding as of September 30, 2016 and December 31, 2015, respectively			823				823
Additional paid in capital			9,392,907				8,880,589
Accumulated deficit			(19,297,521	)			(14,326,780	)
Accumulated other comprehensive gain (loss)			2,697				(7,801	)
Total Stockholders' Deficit			(9,901,094	)			(5,453,169	)
Total Liabilities and Stockholders' Deficit		$	2,275,459			$	2,019,754

 

See accompanying notes to unaudited interim condensed consolidated financial statements. 

 

 

BioHiTech Global, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (UNAUDITED)

 

		For the nine months ended September 30,
		2016				2015
Cash flows from operating activities:
Net loss:		$	(4,970,741	)		$	(3,154,232	)
Adjustments to reconcile net loss to net cash used in operations:
Depreciation and amortization			331,807				269,701
Provision for (recovery of) bad debts			70,467				(17,082	)
Stock based compensation			512,318				-
Interest resulting from amortization of financing costs			55,076				-
Gain on sale of QTags			-				(191,805	)
Change in fair value of warrant liability			-				(1,462	)
Changes in operating assets and liabilities			343,326				858,863
Net cash used in operations			(3,657,747	)			(2,236,017	)
Cash flow from investing activities:
Proceeds from sale of QTags			-				75,000
Cash acquired from Swift Start			-				18
Capitalization of website development costs			-				4,273
Purchases of equipment, fixtures and vehicles			(3,825	)			(114,790	)
Net cash used in investing activities			(3,825	)			(35,499	)
Cash flows from financing activities:
Net change in line of credit			(25,017	)			(748	)
Proceeds from promissory notes			-				100,000
Proceeds from convertible notes			3,400,000				600,000
Convertible notes deferred financing costs			(165,230	)			-
Proceeds from long-term debt			-				25,080
Repayments of long-term debt			(6,170	)			(5,577	)
Related party:
Increases of advances			203,027				455,000
Proceeds from promissory notes			526,973				405,000
Proceeds from convertible notes			-				500,000
Proceeds from senior convertible notes			-				200,000
Repayment of promissory notes			(200,000	)			-
Net cash provided by financing activities			3,733,583				2,278,755
Effect of exchange rate on cash			64,897				(290	)
Net change in cash			136,908				6,949
Cash - beginning of period			39,195				40,207
Cash - end of period		$	176,103			$	47,156

 

Note 16 includes supplemental cash flow information, non-cash investing and financing activities and changes in operating assets and liabilities.

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

BioHiTech Global, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

September 30, 2016 and 2015, and the three and nine months then ended (UNAUDITED)

 

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, BioHiTech Europe Limited and 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 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”). All intercompany transactions have been eliminated in consolidation.

 

On January 20, 2016 the Company formed a wholly owned subsidiary, Entsorga North America, LLC (“ENA”). On February 29, 2016, through an amended limited liability agreement, ENA became a 31% equity owner of Apple Valley Waste Conversions, LLC (“AVWC”); an entity which has not previously had any business activities and was also 20.9% owned by the Chief Executive Officer of the Company, which combined represent a 51.9% controlling interest in ENA. Additionally, effective March 1, 2016, Entsorgafin, S.p.A, an Italian company with intellectual property rights related to large scale mechanical biological treatment (“MBT”) of municipal or regional waste, granted rights to the MBT intellectual property to AVWC for distribution 11 north and mid-Atlantic eastern states. Entsorgafin through a subsidiary, owns 6.2% of AVWC.

 

The accompanying condensed consolidated financial statements have been prepared in accordance with 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, 2015, which contains the audited financial statements and notes thereto, for the years ended December 31, 2015 and 2014 and are included within the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 29, 2016. The financial information as of December 31, 2015 presented herein is derived from the audited consolidated financial statements presented in the Company’s audited consolidated financial statements for the year ended December 31, 2015. The interim results for the three and nine months ended September 30, 2016 are not necessarily indicative of the results to be expected for the year ending December 31, 2016 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, 2016 and the year ended December 31, 2015, the Company had a net loss of $4,970,741 and $5,001,452, respectively, incurred a consolidated loss from operations of $4,416,942 and $4,545,646, respectively and used net cash in consolidated operating activities of $3,657,747 and $3,170,427, respectively. At September 30, 2016, consolidated stockholders’ deficit amounted to $9,901,094 and the Company had a consolidated working capital deficit of $5,237,056. 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 condensed 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 condensed 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 plans, which include further implementation of its business plan and continuing to raise funds through debt and/or equity raises.

 

 

BioHiTech Global, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

September 30, 2016 and 2015, and the three and nine months then ended (UNAUDITED)

 

The Company is presently in the process of raising additional non-registered convertible debt and capital for general operations, as well as for investment in several strategic initiatives. 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, 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, including environmental consulting, is recognized as services are performed.

 

Lease Revenue Recognition - The Company recognizes revenue from the rental of the Company’s Eco-Safe 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 Eco Safe Digester units qualify as operating leases, for which the Company is the operating lessor.

 

Deferred Financing Costs - Financing costs related to the issuance of long-term debt are deferred and included in prepaid expenses and other current assets or in non-current assets prior to the issuance of such debt. Deferred financing costs relating to issued debt are included as a reduction to the applicable debt and amortized as interest expense over the term of the related debt instruments.

 

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.

 

Comprehensive Income (Loss) - Comprehensive income (loss) for the Company consists of net earnings (loss) and foreign currency translation.

 

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.

 

For the nine and three months ended September 30, 2016, the Company’s effective rate, before valuations, was 36.7% 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%.

 

 

BioHiTech Global, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

September 30, 2016 and 2015, and the three and nine months then ended (UNAUDITED)

 

Income Taxes - Pro Forma C Corporation Presentation - As a result of the Swift Start Reverse Merger (Note 3), the Company’s results of operations are taxed as a C Corporation. Prior to the merger, the Company’s operations were taxed as a limited liability company, whereby the Company elected to be taxed as a partnership and income or loss was required to be reported by each respective member on their separate income tax returns. Therefore, no provision for income taxes has been provided in the accompanying financial statements for periods prior to August 6, 2015.

 

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 as expense 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 in the accompanying consolidated statements of operations based upon the classification of the underlying employees with a corresponding increase to additional paid in capital.

 

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.

 

Note 3. Acquisitions and Disposals

Swift Start Reverse Merger - On August 6, 2015, the Company (formerly known as Swift Start Corp.) executed an Agreement of Merger and Plan of Reorganization with BioHiTech America, LLC (“BHTA”) and BioHiTech Global, Inc., a wholly-owned subsidiary of the Company (“Acquisition”), pursuant to which Acquisition merged with and into BHTA in a reverse merger (the “Merger”), with BHTA surviving as a wholly-owned subsidiary of the Company. As consideration for the Merger, the Company issued the interest holders of BHTA an aggregate of 6,975,000 shares of its common stock, par value $0.0001 per share (the “Common Stock”), in accordance with their pro rata ownership of BHTA’s membership interests. In connection with the Merger, the Company’s interest holders retired and canceled an aggregate of 8,515,000 shares of its common stock. Following the consummation of the Merger, the issuance of the 6,975,000 shares of common stock to BHTA’s interest holders and the retirement of the 8,515,000 shares of common stock, the Company had 7,500,000 shares of common stock issued and outstanding, with the former BHTA interest holders beneficially owning approximately 93% of such issued and outstanding shares of common stock. The Company also amended its Certificate of Incorporation to (i) change its name to BioHiTech Global, Inc. and (ii) to amend the number of its authorized shares of capital stock from 200,000,000 to 30,000,000 shares, of which 20,000,000 shares were designated common stock, par value $0.0001 per share and 10,000,000 shares were designated “blank check” preferred stock, par value $0.0001 per share.

 

The Merger was accounted for as a reverse business combination. Under this method of accounting, the Company was treated as the acquiring company for financial reporting purposes. The net liabilities of Swift Start are stated at fair value, while the assets and liabilities of the Company are recognized at their historical basis. Pursuant to the reverse business combination, the Company has restated its consolidated statements of stockholders’ deficiency on a recapitalization basis, so that all accounts are now presented as if the reverse business combination had occurred at the beginning of the earliest period presented. The operating results for Swift Start are included in the consolidated financial statements from the effective date of the reverse business combination of August 6, 2015 and have not have a material impact on the financial statements. The $10,500 of net assets and fair value of Swift Start were immaterial as of the merger and in addition to recognizing $18 of cash acquired, $10,482 was initially recognized as goodwill based upon historical stock acquisition prices of Swift Start. As part of management’s evaluation of goodwill as of December 31, 2015, it was determined that the goodwill did not have a continuing value to the Company and it was written off as an impairment charge. Supplemental pro forma information has not been presented because the effect of the acquisition was deminimus to the Company’s consolidated financial results.

 

 

BioHiTech Global, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

September 30, 2016 and 2015, and the three and nine months then ended (UNAUDITED)

 

Sale of QTags Operations - On May 29, 2015, the Company consummated the sale of its QTags operations to CBI Mobile (Bahamas) Ltd. (“CBI Mobile”) for an aggregate sales price of $290,000 plus certain accounts receivable, less certain deferred revenue. CBI Mobile also acquired the developed technology, customer and client contracts and customer lists associated with QTags. CBI Mobile paid the Company $75,000 cash at closing and the balance of $215,000 in the form of a promissory note (“Secured Promissory Note”). The Secured Promissory Note originally bore interest at 9.5% per annum and had a maturity of May 29, 2016. CBI Mobile defaulted on the Secured Promissory Note and subsequently entered into a forbearance agreement extending the maturity date to November 29, 2016, increasing the interest rate to 15%, and requiring monthly principal repayments. As of September 30, 2016 and December 31, 2015, the balance outstanding on the Secured Promissory Note amounted to $58,550 and $110,011, respectively, has been included as a component of Accounts and Note Receivable and has been considered by the Company in establishing its allowance for doubtful accounts.

 

Note 4. Accounts and Note Receivable, net

Accounts receivable consists of the following:

 

		September 30, 2016				December 31, 2015
Accounts receivable		$	192,685			$	271,862
Note receivable (Note 3)			58,550				110,011
Less: allowance for doubtful accounts and note receivable			(102,635	)			(65,574	)
		$	148,600			$	316,299

 

Note 5. Inventory

Inventory, comprised of finished goods and parts or assemblies, which are carried at the lower of cost or market based upon the Company’s perpetual inventory system, consists of the following:

 

		September 30, 2016				December 31, 2015
Equipment		$	263,411			$	194,791
Parts and assemblies			322,632				79,513
		$	586,043			$	274,304

 

Note 6. Equipment on Operating Leases, net

Equipment on operating leases consist of the following:

 

		September 30, 2016				December 31, 2015
Leased equipment		$	1,716,616			$	1,601,005
Less: accumulated depreciation			(751,701	)			(756,511	)
		$	964,915			$	844,494

 

During the three and nine months ended September 30, 2016, depreciation expense included in cost of revenue, amounted to $97,356 and $247,685, respectively. During the three and nine months ended September 30, 2015, depreciation expense included in cost of revenue, amounted to $55,097 and $158,986, respectively.

 

The Company is a lessor of Eco Safe digester units under non-cancellable operating lease agreements expiring through December 2021. During the three and nine months ended September 30, 2016, revenue under the agreements, which is included in rental, service and parts revenue, amounted to $182,715 and $505,877, respectively. During the three and nine months ended September 30, 2015, revenue under the agreements, which is included in rental, service and parts revenue, amounted to $122,938 and $345,795, respectively.

 

 

BioHiTech Global, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

September 30, 2016 and 2015, and the three and nine months then ended (UNAUDITED)

 

The minimum future estimated contractual payments to be received under these leases as of September 30, 2016 is as follows:

 

Year Ending December 31,
2016, remaining period		$	177,914
2017			609,421
2018			464,466
2019			337,145
2020 and thereafter			252,338
Total minimum lease income		$	1,841,284

 

Note 7. Equipment, Fixtures and Vehicles, net

Equipment, fixtures and vehicles consist of the following:

 

		September 30, 2016				December 31, 2015
Computer software and hardware		$	89,223			$	85,397
Furniture and fixtures			48,196				48,196
Vehicles			69,253				69,253
			206,672				202,846
Less: accumulated depreciation and amortization			(151,783	)			(141,158	)
		$	54,889			$	61,688

 

During the three and nine months ended September 30, 2016, depreciation expense amounted to $4,675 and $10,625, respectively. During the three and nine months ended September 30, 2015, depreciation expense amounted to $6,169 and $17,912, respectively.

 

Note 8. Intangibles Assets, net

Intangible assets consist of the following:

 

		Useful Lives (Years)		Gross Carrying Amount				Accumulated Amortization				Net Carrying Amount
September 30, 2016:
Distribution agreements		10		$	902,000			$	(615,117	)		$	286,883
Website		3			23,388				(18,730	)			4,658
Intangible assets, net				$	925,388			$	(633,847	)		$	291,541
December 31, 2015:
Distribution agreements		10		$	902,000			$	(547,467	)		$	354,533
Website		3			23,388				(12,883	)			10,505
Intangible assets, net				$	925,388			$	(560,350	)		$	365,038

 

During the three and nine months ended September 30, 2016, amortization expense, included in depreciation and amortization of operating expenses, amounted to $24,499 and $73,497, respectively. During the three and nine months ended September 30, 2015, amortization expense, included in depreciation and amortization of operating expenses, amounted to $24,499 and $92,803, respectively.

 

 

BioHiTech Global, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

September 30, 2016 and 2015, and the three and nine months then ended (UNAUDITED)

 

Note 9. Risk Concentrations

Credit risk - Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and accounts receivable.

 

Major customers - During the three months ended September 30, 2016, two customers represented at least 10% of revenues, each accounting for 11% of revenues. During the nine months ended September 30, 2016 no customers represented at least 10% of revenues. During the three months ended September 30, 2015, two customers represented at least 10% of revenues, accounting for 15% and 13% of revenues. During the nine months ended September 30, 2015 one customer represented at least 10% of revenues, accounting for 16% of revenues.

 

As of September 30, 2016 one customer represented at least 10% of accounts receivable, accounting for 20% of accounts receivable, respectively. As of December 31, 2015 four customers represented at least 10% of accounts receivable, accounting for 17%, 15%, 11% and 10% of accounts receivable. 

 

Vendor concentration - 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 related party) and 11% of the combined cost of revenues and change in inventory, respectively. During the nine months ended September 30, 2016, three vendors represented at least 10% of costs of revenue, accounting for 43% (BioHiTech International, a related party), 19% and 10% of the combined cost of revenues and change in inventory. During the three months ended September 30, 2015, two vendors represented at least 10% of costs of revenue, accounting for 50% (BioHiTech International, a related party) and 22% of cost of revenues. During the nine months ended September 30, 2015, two vendors represented at least 10% of costs of revenue, accounting for 58% (BioHiTech International, a related party) and 13% of cost of revenues, respectively. 

 

As of September 30, 2016, two vendors represented at least 10% of accounts payable, accounting for 35% (BioHiTech International, a related party) and 15% of accounts payable. As of December 31, 2015, two vendors represented at least 10% of accounts payable, accounting for 37% (BioHiTech International, a related party) and 12% of accounts payable, respectively.

 

Note 10. 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. Compensation and related costs for employees of the Company are excluded from the table below.

 

				September 30, 2016				December 31, 2015
Assets:
Intangible assets, net		(a)		$	286,883			$	354,533
Liabilities:
Accounts payable					586,093				470,490
Accrued interest payable					266,616				275,517
Long term accrued interest					120,000				-
Notes payable					100,000				300,000
Advance from related party		(b)			913,027				710,000
Promissory note - related parties		(c)			2,500,000				1,710,000
Series A - Unsecured subordinated convertible notes		(d)			2,250,000				-
Other:
Line of credit guarantee		(e)			2,463,736				2,488,753

 

 

BioHiTech Global, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

September 30, 2016 and 2015, and the three and nine months then ended (UNAUDITED)

 

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.

 

				Three months ended September 30,								Nine months ended September 30,
				2016				2015				2016				2015
S, G & A - Rent expense		(f)		$	13,050			$	14,350			$	39,150			$	40,150
Cost of  revenues – Rent expense		(f)			10,650				3,550				31,950				3,550
S, G & A - Consulting expense		(a)			50,000				50,000				150,000				150,000
Interest expense					144,072				68,501				380,481				188,930
Cost of revenue, inventory or equipment on operating leases acquired		(a)			4,552				77,743				447,952				572,121

 

There were no revenues earned from related parties during the nine and three month periods ended September 30, 2016 and 2015.

 

(a)

Distribution Agreement - BioHiTech has an exclusive license and distribution agreement (the “License Agreement”) with BioHiTech International (“BHT-I”), a company owned by Chun-Il Koh, a BioHiTech shareholder and other unrelated parties. The License Agreement provides distribution rights to the Eco-Safe Digester through December 31, 2023 (unless extended by mutual agreement) and for annual payments to Mr. Koh in the amount of $200,000 for the term of the License Agreement and a 2.5% additional commission on all sales closed by Mr. Koh.

(b)

Advance from Related Party - The Company’s Chief Executive Officer has advanced the Company funds for operating and capital purposes. The advances bear interest at 13% and are unsecured and due on demand. There are no financial covenants related to this advance and there are no formal commitments to extend any further advances.

(c)

Promissory Note - Related Party - On June 25, 2014, the Company initially entered into a secured promissory note with the Company’s Chief Executive Officer in the aggregate amount of $1,000,000 (the “Promissory Note”). This note has been amended effective July 31, 2015 and January 1, 2016. The amended note provides for up to $2,500,000 in borrowings, an interest rate of 13% per annum, which is subject to prospective reduction to 10% upon the Company’s completion of raising $6,000,000 in connection with an offering of unsecured subordinated convertible notes and warrants and is due on the earlier of (a) a change of control, (b) an event of non-payment default, (c) the two-year anniversary of the Promissory Note, or (d) a Qualified Financing. For purposes of the Promissory Note, a Qualified Financing was defined as the first issuance of debt or equity by the Company through which the Company received gross proceeds of a minimum of $5,000,000 from one or more financial institutions or accredited investors. In connection with the January 1, 2016 amendment, $263,027 of accrued interest was added to the outstanding balance of the note.

(d)

Unsecured Subordinated Convertible Notes and Warrants - In connection with the Company’s issuance of unsecured subordinated convertible notes and warrants in 2016, as further disclosed in Note 11, certain related parties participated in such offering.

(e)

Line of Credit - Under the terms of the line of credit, several related parties have personally guaranteed the line and are contingently liable should the Company not meet its obligations under the line.

(f)

Facility Lease - The Company leases its corporate headquarters and warehouse space from BioHiTech Realty LLC, a company owned by two stockholders of the Company, one of whom is the Chief Executive Officer. The lease expires in 2020, with a renewal option for an additional five-year period. Minimum lease payments as of September 30, 2016 under these operating leases are:

 

Year Ending December 31,
2016, remaining period		$	24,056
2017			97,066
2018			98,524
2019			100,003
2020			41,926
Total		$	361,575

 

 

BioHiTech Global, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

September 30, 2016 and 2015, and the three and nine months then ended (UNAUDITED)

 

Note 11. Line of Credit, Notes Payable, Advance, Promissory Note, Convertible Promissory Notes and Long Term Debt

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

 

		September 30, 2016								December 31, 2015
		Total				Related Party				Total				Related Party
Line of credit		$	2,463,736			$	-			$	2,488,753			$	-
Unsecured subordinated convertible notes:											-				-
Series A			3,289,846				2,250,000
Series V			25,000				-
Promissory note - related party			2,500,000				2,500,000				1,710,000				1,710,000
Notes payable			200,000				100,000				400,000				300,000
Advances			913,027				913,027				710,000				710,000
Long term debt - other, current and long term portion			21,662				-				27,833				-

 

Line of Credit - The Company has a revolving line of credit with a bank which provides for aggregate borrowings of up to $2,500,000. The line of credit is due on demand and bears interest at the prime rate plus 3% (4.0% at September 30, 2016 and December 31, 2015), which is recorded as a component of interest expense. The line of credit is secured by the Company's assets, is personally guaranteed by certain stockholders of the Company and does not contain any financial covenants. The line of credit also provides for letters of credit aggregating $250,000. During the nine months ended September 30, 2016 there were no outstanding letters of credit.

 

Notes Payable - During the year ended December 31, 2015, the Company entered into two unsecured promissory notes, which do not contain any financial covenants. As of September 30, 2016, each of the notes have a remaining balance outstanding of $100,000 with interest at the rate of 10.0% and maturite in July and September 2017, respectively.

 

Series A Unsecured Subordinated Convertible Promissory Notes – During 2016, 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 $3,400,000, of which $2,250,000 was with related parties.

 

Each Unit is comprised of a convertible promissory note and warrants to purchase shares of the Company’s common stock. Each note bears interest at the rate of 8% per annum and is due on the earlier of: (i) 24 months (February 10, 2018); (ii) the date the common stock is listed on The Nasdaq stock market or NYSE MKT; or (iii) a “Change of Control” of the Company, which is defined as a liquidation, dissolution, winding up, change in voting control or sale of all or substantially all of the Company’s assets. Each note sold 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 Company’s securities; (iv) the per share price in a change of control transaction; or (v) $3.75 per share. 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 shares of Common Stock at a conversion price equal to $3.75 per share.

 

The warrants 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.

 

As of September 30, 2016, the balance of the outstanding notes amounted to $3,400,000 and is presented net of unamortized deferred offering costs of $110,154, resulting from deferred offering costs of $165,230 less $55,076 of accumulated amortization. These costs are being amortized as a component of interest expenses over the original 24-month terms of the notes, unless there is an early maturity. Interest expense on the notes is due at the maturity of the notes and has been presented as a non-current liability.

 

 

BioHiTech Global, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

September 30, 2016 and 2015, and the three and nine months then ended (UNAUDITED)

 

Series V Subordinated Convertible Promissory Note – During 2016, the Company entered into a series of convertible promissory notes. Each note bears interest at the rate of 8% per annum and is due on the earlier of: (i) 24 months (February 10, 2018); (ii) the date the common stock is listed on The Nasdaq stock market or NYSE MKT; or (iii) a “Change of Control” of the Company, which is defined as a liquidation, dissolution, winding up, change in voting control or sale of all or substantially all of the Company’s assets. Each note sold 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) $3.75 per share. 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 shares of common stock at a conversion price equal to $3.75 per share.

 

Long term debt - Represents two loans collateralized by vehicles with interest ranging from 1.9% to 4.98%. Amortizing principal payment requirements as of September 30, 2016 are as follow:

 

Year Ending December 31,
2016, remaining period		$	2,089
2017			8,525
2018			5,410
2019			5,200
2020			438
Total		$	21,662

 

Interest Expense - All interest on the Company’s various debts are recognized as interest expense in the accompanying condensed consolidated financial statements.

 

Note 12. Equity Transactions

Maxim Warrants - In connection with the issuance of the Units described in Note 11, 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.

 

The unsecured subordinated convertible promissory notes contain conversion features that are required to be measured when the contingency is resolved. The terms of the conversion feature in the notes, and hence the Maxim Warrants, do not permit the Company to compute the number of common shares that the note holders will receive upon conversion. Accordingly, the Company must wait until the contingent event occurs to compute the number of shares that may be issued pursuant to the warrants.

 

Barksdale Warrants - In connection with an Offering of BHTA in October 2013 of Class B Common Interests BHTA agreed to issue Barksdale Global Holdings, LLC (“Barksdale”) warrants to purchase a number of Class B Common Interests of BHTA, as now converted into Common Stock of the Company. The warrants were subsequently issued on June 30, 2015, whereby Barksdale was issued a warrant to purchase up to $140,000 of BHTA’s Class B Common Interests on or before the expiration date of June 30, 2020. The warrant is exercisable during the period commencing upon the consummation of the Company’s next successive equity raise in which the Company receives gross proceeds of a minimum of $5.0 million (“Qualified Financing”). If the Company does not consummate a Qualified Financing prior to the expiration date, the warrant shall never be exercisable. Notwithstanding the forgoing, Barksdale may not exercise the warrant within 12 months of the consummation date of the Merger.

 

The Company estimated the fair value of the warrant on the measurement date to be $14,182 (or $10,744 per warrant) using a Black-Scholes option-pricing model with the following assumptions: (1) expected volatility of 50.24%, (2) risk-free interest rate of 1.42% and (3) expected life of five years. During 2015, as a result of the issuance of the warrants, the Company reclassified the warrant liability to stockholders’ deficit.

 

 

BioHiTech Global, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

September 30, 2016 and 2015, and the three and nine months then ended (UNAUDITED)

 

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 process of $5,000,000 or more from one or more financial institutions or “accredited investors,” as defined by the Securities Act of 1933. Should the Company not consummate such an issuance of equity by the expiration of the warrants, the warrants shall never be exercisable

 

Strategic Consulting Agreement – During 2016, the Company entered into a strategic consulting agreement with Tusk Ventures LLC for a twelve-month term, with a sixty-day termination option by either party, at any time. In the event of a termination, fees are due through the last day of services following the termination notice. The contract includes issuing convertible debt in the amount of $25,000 per month that is on substantially the same terms as the Series A Unsecured Subordinated Convertible Promissory Notes. Following a mandatory conversion event, the agreement provides for issuing Common Stock amounting to $25,000 per month based on a thirty-day trailing average price.

 

Note 13. 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 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, 2016, there were 31,250 shares available under the Plan for future grants.

 

Stock Options - The fair value of options is estimated on the date of grant using the Black-Scholes option pricing model. The valuation determined by the Black-Scholes pricing model is affected by the Company’s stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors. The risk free rate is based on the U.S. Treasury rate for the expected life at the time of grant, volatility is based on the average long-term implied volatilities of peer companies, the expected life is based on the estimated average of the life of options using the simplified method, and forfeitures are estimated on the date of grant based on certain historical data. The Company utilizes the simplified method to determine the expected life of its options due to insufficient exercise activity during recent years as a basis from which to estimate future exercise patterns. The expected dividend assumption is based on the Company’s history and expectation of dividend payouts.

 

Forfeitures are required to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

 

On March 1, 2016, the Company granted 371,250 stock options to employees and directors for future services. These options had a fair value of $520,210 using the Black-Scholes option pricing model with the following assumptions:

 

Risk-free interest rate			1.3 - 1.5	%
Expected dividend yield			0.00	%
Expected volatility			28.8 - 30.3	%
Expected term in years			5.0 - 6.0

 

The options vest over four years. During the three months and nine months ended September 30, 2016, compensation expense related to the stock options amounted to $34,790 and $209,655, respectively.

 

The weighted-average grant date fair value of options granted on March 1, 2016 was $520,210. Total unrecognized compensation expense related to unvested stock options at September 30, 2016 amounts to $295,375 and is expected to be recognized over a weighted average period of 2.5 years.

 

 

BioHiTech Global, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

September 30, 2016 and 2015, and the three and nine months then ended (UNAUDITED)

 

The following table summarizes the Company’s stock option activity for the nine months ended September 30, 2016:

 

		Number of Options				Weighted Average Exercise Price				Weighted Average Remaining Contractual Life (in Years)				Aggregate Intrinsic Value
Outstanding - December 31, 2015			-				-				-				-
Granted			371,250			$	3.75				9.4				-
Exercised			-				-				-				-
Forfeited or Canceled			(7,500	)			3.75				9.4				-
Outstanding - September 30, 2016			363,750			$	3.75				9.4			$	-
Exercisable - September 30, 2016			90,418			$	3.75				9.4			$	-

 

The following table summarizes the Company’s stock option activity for non-vested options for the nine months ended September 30, 2016:

 

		Number of Options				Weighted Average Grant Date Fair Value
Balance at December 31, 2015
Granted			371,250			$	3.75
Vested			(90,418	)			(3.75	)
Forfeited or Canceled			(7,500	)			(3.75	)
Balance at September 30, 2016			273,332			$	3.75

 

Restricted Stock Units – On April 15, 2016, the Company granted 347,500 restricted stock units (“RSU”) to certain employees. 15,833 of the RSUs vested immediately and the remaining units vest over a three-year period, subject to continued service on each applicable vesting date. The RSUs have no voting or dividend rights. The fair value of the common stock on the date of the grant was $4.05 per share based upon the quoted closing price of the Company’s common stock on the grant date. The aggregate grant date fair value of the award amounts to $1,408,167 which will be recognized as compensation expense over the vesting period. As of September 30, 2016, the aggregate intrinsic value of the unvested RSUs was $1,061,334.

 

During the three months and nine months ended September 30, 2016, compensation expense related to the RSUs amounted to $126,895 and 302,663, respectively.

 

Total unrecognized compensation expense related to the unvested RSUs at September 30, 2016 amounts to $1,105,504 and is expected to be recognized over a weighted average period of 2.5 years.

 

The following table summarizes the Company’s RSU activity for the nine months ended September 30, 2016:

 

		Number of Shares
Unvested balance at December 31, 2015			-
Granted			347,500
Vested			(15,833	)
Forfeited or Canceled			-
Unvested balance at September 30, 2016			331,667

 

Note 14. Commitments and Contingencies

From time to time, the Company is involved in legal matters arising in the ordinary course of business. While the Company believes that 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.

 

 

BioHiTech Global, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

September 30, 2016 and 2015, and the three and nine months then ended (UNAUDITED)

 

Note 15. Operating Leases

The Company rents its headquarters and attached warehousing space from a related party (see Note 10) 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 all of these leases as of September 30, 2016 are as follow:

 

Year Ending December 31,
2016, remaining period		$	29,618
2017			119,480
2018			115,710
2019			100,003
2020			41,926
Total		$	406,737

 

Note 16. Supplemental Consolidated Statement of Cash Flows Information

Changes in non-cash operating assets and liabilities, as well as other supplemental cash flow disclosures, are as follows:

 

		Nine Months Ended September 30,
		2016				2015
Changes in operating assets and liabilities:
Accounts and note receivable		$	96,768			$	(18,149	)
Inventory			(714,298	)			(120,447	)
Note receivable			-				51,843
Advances to vendors			-				(2,500	)
Prepaid expenses and other assets			24,938				4,821
Accounts payable			367,478				362,179
Accrued interest payable			420,113				290,466
Accrued expenses			28,483				261,096
Deferred revenue			58,077				31,654
Customer deposits			61,767				(2,100	)
Net change in operating assets and liabilities		$	343,326			$	858,863
Supplementary cash flow information:
Cash paid during the year for:
Interest		$	81,206			$	68,718
Income taxes			-				-
Supplementary Disclosure of Non-Cash Investing and Financing Activities:
Transfer of inventory to leased equipment		$	373,891			$	48,888
Series V Notes issued for consulting services			25,000				-
Accrued interest added to principle of promissory note - related party			263,027				-
Warrants issued in connection with advisory services			-				139,359
Advances to vendors applied to inventory			-				44,700
Conversion of advances from related party to promissory note			-				505,000
Goodwill recognized in connection with Swift Start acquisition			-				10,482

 

Note 17. Recent Accounting Pronouncements

 

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 amendments in this update are effective for annual periods beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption of ASU 2016-15 to have a material impact on its consolidated financial statements.

 

 

BioHiTech Global, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

September 30, 2016 and 2015, and the three and nine months then ended (UNAUDITED)

 

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.

 

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. For public business entities, the amendments in this ASU are effective for financial statements issued for annual periods beginning after December 15, 2016, including interim periods within those annual periods. The Company will evaluate the effects, if any, that adoption of this ASU will have on its consolidated financial position or results of operations.

 

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.

 

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 ASU is effective prospectively for fiscal years beginning after December 15, 2016 and their related interim periods. Early application is permitted. The Company does not anticipate that the adoption 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

September 30, 2016 and 2015, and the three and nine months then ended (UNAUDITED)

 

Note 18. 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.

 

Issuance of Additional Series V Subordinated Convertible Promissory Notes – Subsequent to September 30, 2016, the Company issued an additional $50,000 in Series V Subordinated Convertible Promissory Notes (Note 11) in connection with a strategic consulting agreement (Note 12). The Company also issued a $300,000 Series V Subordinated Convertible Promissory Note to BioHiTech International, a company owned by Chun-Il Koh, a BioHiTech shareholder, in payment of previously incurred and accrued invoices for services and inventory.

  

Advance from Related Parties – Subsequent to September 30, 2016, the Chief Executive Officer advanced the Company additional working capital funds of $300,000 which are due on demand and carry an interest rate of 13%.

 

Note Payable – Related Party – Subsequent to September 30, 2016 a related party increased their $100,000 note payable from the Company by an advance of $175,000, which was added to the balance, bears interest at 10% and is due in September 2017.

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The following discussion and analysis should be read in conjunction with our 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 29, 2016.

 

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 inception the Company has primarily focused on its on-going Eco-Safe Digester business. During 2016, the Company has commenced strategic initiatives in the area of Mechanical Biological Treatment (“MBT”) facilities that process waste at the municipal or regional level convert a significant portion of intake into an US EPA recognized alternative commodity fuel.

 

Eco-Safe Digester Business

 

BioHiTech provides a simple, environmentally friendly, and cost effective solution for food waste disposal.  BioHiTech has a global distribution license to sell, lease, use, distribute, and manufacture the product currently known as the Eco-Safe Digester. 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 Eco-Safe Digester is currently installed in 37 states throughout the United States as well as 15 foreign countries.

 

BioHiTech has over 300 units installed worldwide with over eight years of operating experience. With units in the field for over eight years, BioHiTech’s products have proven to have at least a reasonably long-term life expectancy comparable to the products sold by its competitors.

 

BioHiTech hopes to leverage its existing technology, including the Eco-Safe Digester’s on-board weighing system, by collecting, accumulating and providing empirical data which we hope will improve the efficiency of the upstream supply chain. By streaming data from the digesters, collecting information from system users and integrating business application data, we expect BioHiTech’s internet enabled system known as the BioHiTech Cloud^TM to provide necessary data that we expect will help customers reshape 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 pay for the Eco-Safe Digester based on savings on to traditional waste charges as well as improved 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.

 

BioHiTech 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.

 

BioHiTech believes its digester products remove organic waste from the overcrowded and costly landfills of the world and provide significant benefits to both business organizations and the community including:

 

•

Eliminating the transportation of organic waste,

•

Reducing carbon emissions associated with landfilling and truck transportation,

•

Complying with municipal laws banning organic waste from landfills,

•

Contributing to corporate and regulatory targets for diverting waste from landfills,

•

Extending the lifespan of the country’s disposal facilities,

•

Reducing groundwater and soil contamination at landfills,

•

Reducing harmful greenhouse gases that contribute to global climate change, and

•

Recycling food waste into renewable resources (clean water, biogas, bio-solids).

 

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

 

The Company’s cloud-based dashboard, the BioHiTech Cloud gives real-time visibility to the status of the digester and provides insight to the efficiencies of the operations of food preparation and consumption of the user. BioHiTech currently has a provisional patent pending on this technology.

 

Early in 2016, the Company released its first mobile application called BioHiTech Cirrus™. The new application should allow customers more immediate access to analytical data provided by the Eco-Safe Digester and more efficient monitoring across a number of network connected devices. The mobile application is available free to existing BioHiTech Cloud customers and is available through the iTunes Store, as well as Google Play.

 

During September 2016, the Company released Alto^TM, which is a key new component of BioHiTech's comprehensive food waste solution that uses data and analytics to help drive smarter business decisions. The Alto software is designed to enhance the productivity of the Company's Eco-Safe Digester by enabling easy to understand, real-time interactive communication to improve unit performance levels, processing statistics, and maintenance routines via a secured internet connection on any standard computer or mobile device. In addition to enhancing the productivity of its own equipment, the platform can easily be expanded to provide a whole new way for people to intelligently communicate actionable information with any internet-enabled industrial equipment in order to achieve significant performance optimization.

 

Mechanical Biological Treatment

 

On January 20, 2016, the Company formed 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. Mr. Celli intends to assign his voting rights to ENA so that, collectively, ENA would have voting control of over 51% of AVWC. AVWC currently holds the exclusive license for the construction, operation, and/or sub-licensing of the technology known as High Efficiency Biological Treatment (“HEBioT”), which is owned by Entsorgafin, S.p.A. 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 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.

 

 

ENA, as the controlling member of AVWC, will be charged with new project development throughout 11 northeast U.S. states and the District of Columbia. This project development may consist of construction, ownership and operation of actual facilities or possible sub-licenses to third parties to utilize the technology. ENA may realize revenue’s in various ways:

 

· Construction and operation of actual facilities, in which case ENA would identify an opportunity to develop a plant, facilitate its permitting and construction and ultimately operate the facility. In this case ENA will realize all revenue and costs associated with the development of the project and will pay to AVWC a license fee.

· Charged services to AVWC for projects that it brings to fruition where AVWC receives annual license fees. In this case, along with the charged services, ENA would receive its pro-rata share of the license fees paid to AVWC.

 

ENA will be responsible for marketing the HEBioT technology in the 11 northeast U.S. states and the District of Columbia.

 

The license agreement between Entsorgafin (the technology owner) and AVWC is perpetual in nature, with certain performance standards during the initial five years of the agreement.

 

The Company believes it will be successful in the development of the ENA plants under one of the two proposed revenue scenarios over the next 24 to 36 months. The deployment of this technology is consistent with the Company’s vision of providing disruptive technologies to the traditional waste industry. With the ability to accept up to 25% of each plant’s capacity in the form of pure food waste, the Company adds an option of municipal level solutions in the food waste industry that it does not currently possess.

 

In addition, the Company has the opportunity to acquire up to approximately a 40% interest in Entsorga West Virginia LLC (“EWV”) from the original investors at the original purchase price of $60,000 for each 1% of interest in EWV. The EWV bond financing agreements provide that any investor may sell or transfer membership interests to a third party at any time, so long as it does not trigger a change of control. The investment by the Company, even if made in the maximum amount, would not trigger a change in control. In order to secure financing for the facility, the EWV investors contributed approximately $6,000,000 in equity to the project. As a result of an unforeseen change in business direction of one of the original investors, the other investors provided additional equity as “bridge capital” to facilitate EMV's bond financing.

 

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.

 

EWV has entered into a 30-year initial term land lease with a municipal authority for industrial property adjacent to its previously closed landfill site. EWV has entered into numerous contracts, including: the engineering, procurement and commissioning of the plant; a 10 year solid waste delivery agreement for the delivery of 70,000 tons per year of municipal solid waste to the plant; a 10 year contract for the sale and delivery of SRF manufactured at the plant, and a 10 year professional services agreement that provides managerial services for general plant oversight, certain logistical services, and financial administration. While EWV will be responsible for its own costs of operations, plant oversight and administration will be performed under the agreement.

 

EWV held its groundbreaking ceremony in January 2016 and subsequently closed on the issuance of Tax Exempt Industrial Development Bonds issued by the West Virginia Economic Development Authority in the amount of $25,000,000 (the “Bonds”). The facility is currently under construction and is expected to begin commercial operations in the summer of 2017.

 

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.

 

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 accounting principles generally accepted in the United States, 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, 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.

 

The Company recognizes revenue from multiple-element arrangements when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the fee is fixed or determinable, and (iv) collectability of the sale is reasonably assured. The Company’s arrangements do not contain general rights of return.

 

Multiple-element arrangements require the delivery or performance of multiple products, services and/or rights to use assets. To qualify as a separate unit of accounting, the delivered item must have value to the customer on a standalone basis and revenue is allocated to each deliverable in the arrangement based on the relative fair value of the respective deliverable. The Company’s product sales and installation services have standalone value as these products and services are sold separately by the Company, and the Company has established “vendor specific objective evidence” (“VSOE”) of fair value for determining the fair value of each element.

 

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 Eco Safe 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:

 

·

Transfer of ownership of the digester unit,

·

Bargain purchase option at the end of the term of the lease,

·

Lease term is greater than 75% of the economic life of the digester unit, or

·

Present value of minimum lease payments exceed 90% of the fair value of the digester unit at inception of the lease.

 

In addition, the Company also considers the following:

 

·

Collectability of the minimum lease payments is reasonably predictable, and,

·

No important uncertainties surround the amount of unreimbursable costs yet to be incurred by the Company under the lease.

 

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.

 

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. 

 

Results of Operations

 

Prior to 2013, BioHiTech’s strategic focus had been directed to the sales and service of the Eco-Safe Digester. During 2013, BioHiTech started a process of redirecting the business toward an expanded customer relationship based on recurring long term contracts in the form of leasing and bundled services. BioHiTech also initiated the creation of a research and development group to explore and exploit how it could incorporate “big data” and the “internet of things” to its environmental technology, converting its units to network connected devices.  At that time, BioHiTech also commenced a process of assembling a broader team that had the depth and skill set required to achieve disruptive change in the organic waste industry. As further discussed in Item 2 – Company Overview, during 2016, the Company started strategic initiatives in the area of Mechanical Biological Treatment (“MBT”) facilities that process waste at the municipal or regional level converting a significant portion of intake into an US EPA recognized alternative commodity fuel. As of September 30, 2016 and for nine months then ended, the initiatives of the Company in the MBT area do not have a significant impact on its operations or financial position.

 

Results of operation for the three months ended September 30, 2016

compared to the three months ended September 30, 2015

 

Summary Results

 

		Three Months Ended September, 30
		2016								2015
Revenue		$	623,578				100.0	%		$	335,714				100.0	%
Cost of revenue			432,618				69.4				281,533				83.9
Gross profit			190,960				30.6				54,181				16.1
Operating expenses			1,611,986				258.5				1,390,592				414.2
Loss from operations			(1,421,026	)			(227.9	)			(1,336,411	)			(398.1	)
Other expenses			222,142				35.6				126,327				37.6
Net loss		$	(1,643,168	)			(263.5	)%		$	(1,462,738	)			(435.7	)%

 

For the three months ended September, 2016 total revenue increased by 86% over the comparable 2015 period. This increase was driven by a 33% increase in rental, services and parts and a 305% increase in equipment sales, which was driven by international and domestic reseller activity that continues to be predominantly sales based.

 

Gross margin improved from 16% overall for the three months ended September 30, 2015 to 31% for the comparable 2016 period with improvements in both product and service revenues.

 

Operating expenses increased by 16% to $1,611,986 for the three months ended September 30, 2016, which reflect the higher level of personnel to support the Company’s strategic focus and to support its reporting and capital activities as a public entity.

 

 

Revenue by Type

 

The following table breaks down revenue by type:

 

		Three Months Ended September 30,
		2016								2015
Rental, service and parts		$	358,625				57.5	%		$	270,369				80.5	%
Equipment sales			264,953				42.5				65,345				19.5
		$	623,578				100.0	%		$	335,714				100.0	%

 

Total revenue increased by $287,864, or 86%, from the three months ended September 30, 2015 to the three months ended September 30, 2016. Within revenue, continuing on the strategy shift that started in 2013, the Company continued to promote rental, services and parts over equipment sales with rental, service and parts increasing by 33% from the three months ended September 30, 2015 to the three months ended September 30, 2016. As a percentage of total revenue, rental, service and parts decreased to 58% of revenue for the three months ended September 30, 2016, as compared to 81% for the same period in 2015, while equipment sales as a percentage of revenue increased to 42% from 19%, respectively. This increase in equipment sales was primarily attributable to an increase in international reseller activity in areas where the rental market is not as well recognized as the retail sales model.

 

Rental, service and parts revenue increased by $88,256, or 33%, from the three months ended September 30, 2015 to the three months ended September 30, 2016. This increase is primarily driven by a greater number of rented units.

 

Equipment sales increased by $199,608, or 305%, from the three months ended September 30, 2015 to the three months ended September 30, 2016. This increase was due to a 167% increase in unit sales that was comprised almost entirely of direct retail sales.

  

Cost of Revenue

 

The following table breaks down cost of revenue by type:

 

		Three Months Ended September 30,
		2016								2015
Rental, service and parts		$	256,107				59.2	%		$	213,003				75.7	%
Equipment sales			176,511				40.8				68,530				24.3
		$	432,618				100.0	%		$	281,533				100.0	%

 

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 $151,085, or 54%, from the three months ended September 30, 2015 to the three months ended September 30, 2016 primarily due to the change in mix of revenue between equipment sales and rental, service and parts and improved margins in both lines of business.

 

Rental, service and parts costs of revenue increased by $43,104, or 20% (as compared to a 33% increase in rental, service and parts revenue) from the three months ended September 30, 2015 to the three months ended September 30, 2016.

 

		Three Months Ended September 30,
		2016								2015
Labor related costs		$	36,128				14.1	%		$	53,099				24.9	%
Depreciation			97,356				38.0				55,096				25.9
Contracted services			49,501				19.3				31,824				14.9
Parts and maintenance supplies			73,122				28.6				72,984				34.3
		$	256,107				100.0	%		$	213,003				100.0	%

 

Labor related costs decreased by $16,971 or 32% from the three months ended September 30, 2015 to the three months ended September 30, 2016, due to redeploying staff and improving efficiencies in directing services. Contracted services increased by $17,677 or 56% from the three months ended September 30, 2015 to the three months ended September 30, 2016, due to the mix of geographic locations that are covered by contracted services. Depreciation increased by $42,260 or 77% from the three months ended September 30, 2015 to the three months ended September 30, 2016, due to a prospective change in the future estimated economic lives for a pool of machines, an increase in the cost of equipment leased, as well as the timing of when the equipment became leased.

 

 

Equipment sales cost of revenue increased by $107,981 or 158% from the three months ended September 30, 2015 to the three months ended September 30, 2016 due to increased sales, which increased by 305% over the same period.

 

Gross Profit

 

The following table breaks down gross profit by type: 

 

		Three Months Ended September 30,
		2016								2015
Rental, service and parts		$	102,518				53.7	%		$	57,366				105.9	%
Equipment sales			88,442				46.3				(3,185	)			(5.9	)
		$	190,960				100.0	%		$	54,181				100.0	%

 

The following table breaks down gross margin by type:

 

		Three Months Ended September 30,
		2016				2015
Rental, service and parts			28.6	%			21.2	%
Equipment sales			33.4				(4.9	)
Total			30.6	%			16.1	%

 

Rental, service and parts gross margin Increased to 28.6% for the three months ended September 30, 2016 primarily due to higher volumes of covered equipment and by changes in the personnel and contracted services.

 

Equipment sales gross margin increased from a negative 4.9%, which was due to non-contractual sales of equipment at the end of several leases at prices less than cost during the three months ended September 30, 2015, to 33.4% during the three months ended September 30, 2016, which is reflective of the higher level of retail sales over reseller sales.

  

Operating expenses

 

The following table breaks down operating expenses by type:

 

		Three Months Ended September 30,
		2016								2015
Selling, general and administrative		$	983,725				61.0	%		$	702,847				50.5	%
Research and development			242,435				15.1				171,502				12.3
Professional fees			356,652				22.1				450,025				32.4
Loss (Gain) on sale of QTags			-				-				35,550				2.6
Depreciation and amortization			29,174				1.8				30,668				2.2
Total		$	1,611,986				100.0	%		$	1,390,592				100.0	%

 

Selling, general and administrative expenses increased by $280,878, or 40% from the three months ended September 30, 2015 to the three months ended September 30, 2016. The following table breaks down the major categories of selling, general and administrative expenses:

 

		Three Months Ended September 30,
		2016								2015
Personnel		$	786,446				80.0	%		$	463,829				66.0	%
Facility and office costs			82,684				8.4				80,941				11.5
Sales and marketing			74,471				7.6				85,195				12.1
Other			40,124				4.0				72,882				10.4
Total		$	983,725				100.0	%		$	702,847				100.0	%

 

 

Personnel related expenses increased by $322,617 or 70% from the three months ended September 30, 2015 to the three months ended September 30, 2016. This increase was driven by adding staff to drive the strategic repositioning of the Company and to support geographic expansion. In addition, stock based compensation amounting to $119,490 was included during the three months ended September 30, 2016 (37% of change in personnel) as compared to none in 2015. Other expenses decreased by $32,758 or 45% from the three months ended September 30, 2015 to the three months ended September 30, 2016. This decrease was primarily due to reductions in refurbishment and freight costs.

 

Research and development expenses increased by $70,933, or 41% from the three months ended September 30, 2015 to the three months ended September 30, 2016. This increase was primarily driven increased personnel expenses, which included stock based compensation amounting to $42,217 for the three months ended September 30, 2016. There was no stock based compensation in 2015.

 

Professional fees decreased by $93,373, or 21% from the three months ended September 30, 2015 to the three months ended September 30, 2016. The following table breaks down the major categories of professional fees:

 

		Three Months Ended September 30,
		2016								2015
Legal		$	48,197				13.5	%		$	100,988				22.4	%
Marketing and communications			52,487				14.7				32,176				7.2
Investment banking			45,500				12.8				175,000				38.9
Strategic consulting			152,660				42.8				-				-
Audit and accounting services			57,808				16.2				141,861				31.5
Total		$	356,652				100.0	%		$	450,025				100.0	%

 

Professional fees expense decreased primarily due to a reduction in costs relating to the 2015 merger with Swift and the costs related to being a public company actively involved in additional fund raising. During 2016, the Company engaged a strategic consulting firm that is providing services related to both the digester and MBT business lines which increased professional fees by $152,660.

 

Results of operation for the nine months ended September 30, 2016

compared to the nine months ended September 30, 2015

 

Summary Results

 

		Nine Months Ended September 30,
		2016								2015
Revenue		$	1,537,586				100.0	%		$	938,607				100.0	%
Cost of revenue			1,142,518				74.3				848,947				90.4
Gross profit			395,068				25.7				89,660				9.6
Operating expenses			4,812,010				313.0				2,890,865				308.0
Loss from operations			(4,416,942	)			(287.3	)			(2,801,205	)			(298.4	)
Other expenses			553,799				36.0				353,027				37.6
Net loss		$	(4,970,741	)			(323.3	)%		$	(3,154,232	)			(336.0	)%

 

For the nine months ended September 30, 2016 total revenue increased by 64% over the comparable 2015 period. This increase was driven by a 37% increase in rental, services and parts (45% of the total increase in revenue) and a 294% increase in equipment sales (67% of the total increase in revenue), which was driven by international and domestic reseller activity that continues to be predominantly sales based. Revenue in 2015 also includes revenues related to QTags, which was sold in 2015. Through September 30, 2016, QTags accounted for 8% of revenue and a negative 13% of the change between the nine months ended September 30, 2016 and 2015.

 

Gross margin improved from 10% overall for the nine months ended September 30, 2015 to 26% for the nine months ended September 30, 2016 with improvements in both product and service revenues.

 

Operating expenses increased by 66% to $4,812,010 for the nine months ended September 30, 2016, which reflect the higher level of personnel to support the Company’s strategic focus and to support its reporting and capital activities as a public entity.

 

 

Revenue by Type

 

The following table breaks down revenue by type:

 

		Nine Months Ended September 30,
		2016								2015
Rental, service and parts		$	996,179				64.8	%		$	726,111				77.4	%
Equipment sales			541,407				35.2				137,516				14.6
Other revenue			-				-				74,980				8.0
		$	1,537,586				100.0	%		$	938,607				100.0	%

 

Total revenue increased by $598,979, or 64%, from the nine months ended September 30, 2015 to the nine months ended September 30, 2016 Within revenue, continuing on the strategy shift that started in 2013, the Company continued to promote rental, services and parts over equipment sales with rental, service and parts increasing by 37% from the nine months ended September 30, 2015 to the nine months ended September 30, 2016. As a percentage of total revenue, rental, service and parts decreased to 65% of revenue for the nine months ended September 30, 2016, as compared to 77% for the same period in 2015, while equipment sales as a percentage of revenue increased to 35% from 15%, respectively. This increase in equipment sales was primarily attributable to an increase in international reseller activity in areas where the rental market is not as well recognized as the retail sales model. Other revenue in 2015 includes revenues relating to the QTags business line that was sold in May 2015. Excluding the revenues relating to the sold business line from 2015, the nine-month to nine-month increase in revenue would have been $673,959, or 78%

 

Rental, service and parts revenue increased by $270,068 or 37%, from the nine months ended September 30, 2015 to the nine months ended September 30, 2016. This increase is primarily driven by a greater number of rented units.

 

Equipment sales increased by $403,891, or 294%, from the nine months ended September 30, 2015 to the nine months ended September 30, 2016. This increase was due to a 113% increase in unit sales and a change in unit size mix toward larger machines.

 

Other revenue decreased by $74,980 to $ —, from the nine months ended September 30, 2015 to the nine months ended September 30, 2016. Other revenue in 2015 was primarily comprised of revenues relating to the QTags business.

 

Cost of Revenue

 

The following table breaks down cost of revenue by type:

 

		Nine Months Ended September 30,
		2016								2015
Rental, service and parts		$	761,834				66.7	%		$	649,431				76.5	%
Equipment sales			380,684				33.3				164,578				19.4
Other revenue			-				-				34,938				4.1
		$	1,142,518				100.0	%		$	848,947				100.0	%

 

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 (excluding QTags) increased by $328,509, or 40%, from the nine months ended September 30, 2015 to the nine months ended September 30, 2016 primarily due to the change in mix of revenue between equipment sales and rental, service and parts and improved margins.

 

Rental, service and parts costs of revenue increased by $112,403, or 17% (as compared to a 37% increase in rental, service and parts revenue) from the nine months ended September 30, 2015 to the nine months ended September 30, 2016.

 

		Nine Months Ended September 30,
		2016								2015
Labor related costs		$	108,555				14.2	%		$	226,937				34.9	%
Depreciation			247,680				32.5				158,985				24.5
Contracted services			149,944				19.7				75,755				11.7
Parts and maintenance supplies			255,655				33.6				187,754				28.9
		$	761,834				100.0	%		$	649,431				100.0	%

 

 

Labor and contracted services on a combined basis decreased by $44,193 or 15% from the nine months ended September 30, 2015 to the nine months ended September 30, 2016, due to improved utilization of existing resources. Depreciation increased by $88,695 or 56% from the nine months ended September 30, 2015 to the nine months ended September 30, 2016, due to a prospective change in the future estimated economic lives for a pool of machines, an increase in the cost of equipment leased, as well as the timing of when the equipment became leased. Parts and maintenance supplies increased by $67,901 or 36% from the nine months ended September 30, 2015 to the nine months ended September 30, 2016 due to higher demand.

 

Equipment sales cost of revenue increased by $216,106 or 131% from the nine months ended September 30, 2015 to the nine months ended September 30, 2016 due to increased sales.

 

Gross Profit

 

The following table breaks down gross profit by type:

 

		Nine Months Ended September 30,
		2016								2015
Rental, service and parts		$	234,345				59.3	%		$	76,680				85.5	%
Equipment sales			160,723				40.7				(27,062	)			(30.2	)
Other revenue			-				-				40,042				44.7
		$	395,068				100.0	%		$	89,660				100.0	%

 

The following table breaks down gross margin by type:

 

		Nine Months Ended September 30,
		2016				2015
Rental, service and parts			23.5	%			10.6	%
Equipment sales			29.7				(19.7	)
Other revenue			-				53.4
Total			25.7	%			9.6	%

 

Rental, service and parts gross margin increased by 12.9% from the nine months ended September 30, 2015 to the nine months ended September 30, 2016, a 121.7% increase. This improvement was the result of increases in revenues, changes in the mix of services and improved utilization of existing resources.

 

Equipment sales gross margin increased from a negative 19.7%, which was due to non-contractual sales of equipment at the end of several leases at prices less than carrying costs during the nine months ended September 30, 2015, to 29.7% during the nine months ended September 30, 2016, which is reflective of the higher level of unit sales and a shift in unit size mix.

  

Operating expenses

 

The following table breaks down operating expenses by type:

 

		Nine Months Ended September 30,
		2016								2015
Selling, general and administrative		$	3,171,973				65.9	%		$	1,750,184				60.5	%
Research and development			661,529				13.7				490,980				17.0
Professional fees			894,386				18.6				730,791				25.3
Gain on sale of QTags			-				-				(191,805	)			(6.6	)
Depreciation and amortization			84,122				1.8				110,715				3.8
Total		$	4,812,010				100.0	%		$	2,890,865				100.0	%

 

 

Selling, general and administrative expenses increased by $1,421,789 or 81% from the nine months ended September 30, 2015 to the nine months ended September 30, 2016. The following table breaks down the major categories of selling, general and administrative expenses:

 

		Nine Months Ended September 30,
		2016								2015
Personnel		$	2,478,722				78.2	%		$	1,239,051				70.8	%
Facility and office costs			260,405				8.2				211,847				12.1
Sales and marketing			247,785				7.8				176,791				10.1
Other			185,061				5.8				122,495				7.0
Total		$	3,171,973				100.0	%		$	1,750,184				100.0	%

 

Personnel related expenses increased by $1,239,671 or 100% from the nine months ended September 30, 2015 to the nine months ended September 30, 2016. This increase was driven by adding staff to drive the strategic repositioning of the company and to support geographic expansion. Personnel related expenses in 2016 also included $397,118 in stock based compensation, while there was none in 2015. Facility and office costs increased by $48,558 or 23% from the nine months ended September 30, 2015 to the nine months ended September 30, 2016 due to new office space and general growth in operations. Sales and marketing increased by 70,994 or 40% from the nine months ended September 30, 2015 to the nine months ended September 30, 2016 due to increases in travel and website related expenses. Other increased by $62,566 or 51% primarily due to bad debt provisions of $70,467 for the nine months ended September 30, 2016, as compared to a net recovery of $17,082 during the nine months ended September 30, 2015.

 

Research and development expenses increased by $170,549, or 35% from the nine months ended September 30, 2015 to the nine months ended September 30, 2016. This change includes $105,548 of stock based compensation in 2016.

 

Professional fees increased by $163,595, or 22% from the nine months ended September 30, 2015 to the nine months ended September 30, 2016. The following table breaks down the major categories of professional fees:

 

		Nine Months Ended September 30,
		2016								2015
Legal		$	191,759				21.4	%		$	321,789				44.0	%
Marketing and communications			116,389				13.0				93,761				12.8
Investment banking			174,459				19.5				175,000				24.0
Strategic consulting			152,660				17.1				-				-
Audit and accounting services			259,119				29.0				140,241				19.2
Total		$	894,386				100.0	%		$	730,791				100.0	%

 

Within professional fees, legal expense decreased $130,030 or 40% from the nine months ended September 30, 2015 to the nine months ended September 30, 2016 primarily as a result of costs incurred in 2015 relating to the Swift acquisition. Audit and accounting services expense increased $118,878 or 85% primarily due to services costs relating to being a newly public company. During 2016, the Company engaged a strategic consulting firm that is providing services related to both the digester and MBT business lines, which increased professional fees by $152,660.

 

Liquidity and Capital Resources

 

Since inception, the Company has sustained substantial losses. The Company has an accumulated deficit of $19,297,521 at September 30, 2016.

 

The cash on hand is insufficient for us to continue our operations through December 31, 2016. During the nine months ended September 30, 2016, the Company issued $3,400,000 in unsecured convertible debt as part of a private placement offering, primarily to management of the Company. While the Company continues to seek investors under private placement offerings, 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.

 

 

There 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. We are exploring a number of options to provide working capital including seeking equity and/or debt financings. We cannot assure you that we will consummate a financing that will enable us to meet our working capital needs. Future efforts to raise additional funds may not be successful or they may not be available on acceptable terms, if at all.

 

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 Company is presently in the process of raising additional non-registered convertible debt and capital for general operations, as well as for investment in several strategic initiatives. 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.

 

Cash and Cash Equivalents

 

As of September 30, 2016 and December 31, 2015, the Company had cash balances of $176,103 and $39,195, respectively.

 

The table below presents borrowings, debts and advances as of September 30, 2016, along with their stated maturities. The line of credit, with an outstanding balance of $2,463,736 has an additional $36,264 available under its $2,500,000 facility.

 

						Due in (From December 31, 2015):
		Total				One Year				Two Years				Three Years				Thereafter
September 30, 2016:
Secured line of credit, prime plus 3%*		$	2,463,736			$	2,463,736				-				-				-
Unsecured subordinated convertible notes, 8%			3,314,846				-				-			$	3,314,846				-
Promissory note, unsecured, 13%			2,500,000				-				-			$	2,500,000				-
Promissory notes, unsecured, 10%			200,000				-			$	200,000				-				-
Unsecured demand advances at 13%			913,027				913,027				-				-				-
Other notes, secured, 1.9 to 4.98%			21,662				2,089				8,525			$	5,410			$	5,638
Total – September 30, 2016		$	9,413,271			$	3,378,852			$	208,525			$	5,820,256			$	5,638
Related party included above		$	5,763,027			$	913,027			$	100,000			$	4,750,000			$	-
Total - December, 31, 2015		$	5,336,586			$	3,607,013			$	1,718,525			$	5,410			$	5,638

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

 

Cash Flows

 

Cash Flows from Operating Activities

 

We used $3,657,747 of cash in operating activities during the nine months ended September 30, 2016, an increase of $1,421,730 from cash used in operating activities during the nine months ended September 30, 2015. Our net loss during the nine months ended September 30, 2016 of $4,970,741 was impacted by $512,318 of stock based compensation and $331,807 of depreciation and amortization. Changes in operating assets and liabilities provided $343,326 of cash during the nine months ended September 30, 2016, while they provided $858,863 of cash during the nine months ended September 30, 2015.

 

Cash Flows from Investing Activities

 

Cash used in investing activities amounted to $3,825 for the nine months ended September 30, 2016, compared to cash used investing activities of $35,499 for the nine months ended September 30, 2015, a change of $31,674, comprised of lower acquisitions of computer software and equipment in 2016 and the 2015 QTAG proceeds.

 

Equipment added to equipment on operating leases is initially treated as an increase inventory (an operating activity) and then presented as a non-cash transfer into equipment upon leasing. During the nine months ended September 30, 2016 the total of such transfers was $373,891, as compared to $48,888 for the nine months ended September 30, 2015

 

 

Cash Flows from Financing Activities

 

Cash provided by financing activities amounted to $3,733,583 the nine months ended September 30, 2016, compared to $2,278,755 for the nine months ended September 30, 2015, a change of $1,454,828. During the nine months ended September 30, 2016, the Company received $4,130,000 of proceeds on borrowings, which was offset, in part, by $206,170 in repayments on debt.

 

Off Balance Sheet Arrangements

 

We have not entered into any off-balance sheet arrangements during the nine-month period ended September 30, 2016.

 

Recent Accounting Pronouncements

 

See Note 17 to our unaudited interim condensed consolidated financial statements regarding recent accounting pronouncements.

  

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

 

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.

 

Item 4.

Controls and Procedures.

 

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

 

Item 1.

Legal Proceedings.

 

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 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.

 

Item 1A.

Risk Factors.

 

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.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

 

On February 10, 2016, April 14, 2016, May 27, 2016 and September 29, 2016, BioHiTech Global, Inc. (the “Registrant”) entered into a series of Securities Purchase Agreements (the “Purchase Agreement”) with certain accredited investors (the “Investors”), pursuant to which the Registrant 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 $2,500,000, $550,000, $200,000 and $150,000, respectively. Each Unit, in the minimum subscription amount of $25,000 is comprised of a Convertible Promissory Note (the “Note”) and warrants (the “Warrants”) to purchase shares of the Registrant’s common stock, par value $0.001 per share (the “Common Stock”). Each Note bears interest at the rate of 8% per annum and is due on the earlier of: (i) February 10, 2018; (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. Each Note sold 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) $3.75 per share. 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 $3.75 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 the Notes are convertible at an exercise price equal to 120% of the Conversion Price.

 

On July 19, 2016, BioHiTech Global, Inc. (the “Company”) entered into a Consulting Service Agreement (the “Agreement”) with Tusk Ventures LLC (“Tusk”) effective August 1, 2016 (the “Effective Date”). Tusk will provide strategic political, regulatory and communications consulting services to the Company, for a term of 12 months from the Effective Date (subject to a 60-day notice of termination by either party). In consideration for the services, the Company will pay Tusk a monthly cash fee of $50,000, which the Company may defer payment on for no longer than four months, at which time all deferred payments shall be due. The Company is required to pay Tusk an equity fee equal to $25,000 per month, which initially will take the form of convertible notes and then, upon the mandatory conversion of certain of the Company’s other convertible notes, the monthly equity fee shall be paid in shares of the Company’s Common Stock based upon the trailing month’s average price per share. As of November 1, 2016 the Company had issued three notes, each of $25,000 to Tusk under this Agreement. Each Note bears interest at the rate of 8% per annum and is due on the earlier of: (i) February 10, 2018; (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. Each Note sold 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) $3.75 per share. 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 $3.75 per share.

 

On October 1, 2016, BioHiTech Global, Inc. issued a convertible note in the amount of $300,000 to Bio Hitech International, Inc., an entity controlled by Chun-Il Koh, a BioHiTech shareholder, for payment of amounts due by the Company for previously purchased equipment. The note contains terms and requirements that are substantially similar to the Tusk note described in the preceding paragraph.

 

 

The Company relied on the exemptions from registration under Section 4(2) of the Securities Act of 1933, as amended, and Rule 506 promulgated thereunder. The Purchase Agreements and the Agreement contain representations to support the Company’s reasonable belief that the investors had access to information concerning the Company’s operations and financial condition, the investors acquired the securities for their own account and not with a view to the distribution thereof in the absence of an effective registration statement or an applicable exemption from registration, and that the investors are sophisticated within the meaning of Section 4(2) of the Securities Act and are “accredited investors” (as defined by Rule 501 under the Securities Act). In addition, the sale of securities did not involve a public offering; the Company made no solicitation in connection with the sale other than communications with the investors; the Company obtained representations from the investors regarding their investment intent, experience and sophistication; and the investors either received or had access to adequate information about the Company in order to make an informed investment decision.

 

Item 3.

Defaults Upon Senior Securities.

 

None.

 

Item 4.

Mine Safety Disclosures.

 

Not Applicable.

 

Item 5.

Other Information.

 

None.

 

Item 6.

Exhibits.

 

See the exhibits listed in the accompanying “Index to Exhibits.”

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

		BioHiTech Global, Inc.
November 14, 2016	By:	/s/ Frank E. Celli
	Name:	Frank E. Celli
	Title:	Chief Executive Officer
		(Principal Executive Officer)
	By:	/s/ Brian C. Essman
	Name:	Brian C. Essman
	Title:	Chief Financial Officer and Treasurer
		(Principal Financial Officer)

 

 

INDEX TO EXHIBITS

 

Exhibit				Incorporated by Reference						Filed or Furnished
No.		Exhibit Description		Form		Date		Number		Herewith
31.1		Certification of Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as amended								Filed
31.2		Certification of Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as amended								Filed
32.1		Certification of Chief Executive Officer required by Rule 13a-14(b) or Rule 15d-14(b) under the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.								Furnished*
32.2		Certification of Chief Financial Officer required by Rule 13a-14(b) or Rule 15d-14(b) under the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.								Furnished*
101.INS		XBRL Instance Document								Filed
101.SCH		XBRL Taxonomy Extension Schema Document								Filed
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document								Filed
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document								Filed
101.LAB		XBRL Taxonomy Extension Label Linkbase Document								Filed
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document								Filed

 

* This exhibit is being furnished rather than filed and shall not be deemed incorporated by reference into any filing, in accordance with Item 601 of Regulation S-X.

 

Copies of this report (including the financial statements) and any of the exhibits referred to above will be furnished at no cost to our shareholders who make a written request to our Corporate Secretary at 80 Red Schoolhouse Road, Chestnut Ridge, New York 10977.