See accompanying notes to unaudited interim consolidated financial statements.

See accompanying notes to unaudited interim consolidated financial statements.

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

See accompanying notes to unaudited interim consolidated financial statements.

See accompanying notes to unaudited interim consolidated financial statements.

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, BHT Financial, LLC, E.N.A. Renewables LLC (formerly Entsorga North America, LLC) and New Windsor Resource Recovery LLC, (collectively “subsidiaries”) offers its customers cost-effective and technologically innovative advancements integrating technological, biological and mechanical engineering solutions for the control, reduction and / or reuse of organic and municipal waste.

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

The accompanying condensed consolidated financial statements should be read in conjunction with the Company’s financial statements for the year ended December 31, 2017, which contains the audited financial statements and notes thereto, for the years ended December 31, 2017 and 2016 included within the Company’s Form 10-K filed with the Securities and Exchange Commission (“SEC”) on April 2, 2018. The financial information as of December 31, 2017 presented hereto is derived from the audited consolidated financial statements presented in the Company’s audited consolidated financial statements for the year ended December 31, 2017. The interim results for the three and nine months ended September 30, 2018 are not necessarily indicative of the results to be expected for the year ending December 31, 2018 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 and Liquidity - For the nine months ended September 30, 2018, the Company had a net loss of $12,713,891, incurred a consolidated loss from operations of $3,735,835 and used net cash in consolidated operating activities of $4,386,230. For the year ended December 31, 2017, the Company had a net loss of $8,350,527, incurred a consolidated loss from operations of $6,564,070 and used net cash in consolidated operating activities of $4,772,950. At September 30, 2018, consolidated stockholders’ equity amounted to $2,981,820 and the Company had a consolidated working capital deficit of $1,389,422. The Company does not yet have a history of financial stability. Historically the principal source of liquidity has been the issuance of debt and equity securities. These factors raise substantial doubt about the Company’s ability to continue as a going concern.

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

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

Note 2. Summary of Significant Accounting Policies

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

Foreign Operations — Assets and liabilities denominated in foreign currencies are translated into U.S. dollars at the exchange rates existing at the respective balance sheet dates. Income and expense items are translated at the average rates during the respective periods. Translation adjustments resulting from fluctuations in exchange rates are recorded as a separate component of other comprehensive income (loss) while transaction gains and losses are recorded in net earnings (loss). Deferred taxes are not provided on cumulative foreign currency translation adjustments as the Company presently expects foreign earnings to be permanently reinvested.

The Company pays Value Added Tax (“VAT”) or similar taxes (“input VAT”) within the normal course of its business in in the United Kingdom on merchandise and/or services it acquires. The Company also collects VAT or similar taxes on behalf of the government (“output VAT”) for merchandise and/or services it sells. If the output VAT exceeds the input VAT, then the difference is remitted to the government, usually on a monthly basis. If the input VAT exceeds the output VAT, this creates a VAT receivable. The Company either requests a refund of this VAT receivable or applies the balance to expected future VAT payables.

Product and Services Revenue Recognition — The Company’s significant accounting policies are described in "Note 2: Summary of Significant Accounting Policies" of the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. The Company’s significant accounting policy relating to revenue recognition reflects the impact of the adoption of ASC 606, defined below, implemented on January 1, 2018. The Company records revenue based on a five-step model in accordance with Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers ("ASC 606"), which require that we:

1. Identify the contract with a customer;

2. Identify the performance obligations in the contract;

3. Determine the transaction price of the contract;

4. Allocate the transaction price to the performance obligations in the contract;

5. Recognize revenue when the performance obligations are met or delivered.

Product sales are on terms which transfer title and risk of loss at a specified location, which may be the Company’s warehouse, a destination designated by the customer, port of loading or port of discharge, depending on the final destination of the goods. Other than standard product warranty provisions, the Company’s sales arrangements provide for no other post-shipment obligations.

Rental, service and maintenance revenues relating to the Company’s rental agreements involve providing use of the Company’s digesters at customer locations, access to our software as a service and preventative maintenance over the term. The agreements generally provide for flat monthly payments that the Company believes are consistent with our costs and obligations underlying the agreements.

Management advisory fees are based upon the passage of time and do not have any measurable performance measures that would require the Company to recognize revenues and costs other than on a passage of time and as incurred basis.

The adoption of Topic 606 did not have a material impact on the timing or amounts of revenue recognized in the Company’s unaudited condensed consolidated financial statements and therefore did not have a material impact on our financial position, results of operations, equity or cash flows as of the adoption date or for the three and nine months ended September 30, 2018. Furthermore, the Company expects the impact of the adoption of the new standard to be immaterial to our revenue and gross profit on an ongoing basis. The Company did not recognize any cumulative-effect adjustment to retained earnings upon adoption as the impact was immaterial. Also, the comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.

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

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

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

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

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

Deferred Financing Costs — 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.

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 majority of the deferred tax assets, which have a 100% valuation allowance, relate to net operating loss carryforwards, which may be subject to limitation under Internal Revenue Code section 382 should there be greater than a 50% ownership change as determined under the regulations.

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

Loss per Share — The Company computes basic loss per share using the weighted-average number of shares of common stock outstanding and diluted loss per share, while the diluted loss per share also includes the effects of dilutive instruments using the “treasury method.” Dividend attributable to preferred stock, whether declared or accrued, are deducted from income attributable to common shareholders for purposes of earnings per share.

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

During the three months ended September 30, 2018 and 2017, depreciation expense included in cost of revenue, amounted to $94,967 and $69,312, respectively. During the nine months ended September 30, 2018 and 2017, depreciation expense included in cost of revenue, amounted to $267,229 and $213,268, respectively.

The Company is a lessor of Revolution and Eco Safe Series digester units under non-cancellable operating lease agreements expiring through September 2023. During the three months ended September 30, 2018 and 2017, revenue under the agreements, which is included in rental, service and maintenance revenue, amounted to $299,537 and $224,828, respectively. During the nine months ended September 30, 2018 and 2017, revenue under the agreements amounted to $852,675 and $636,406, respectively. The minimum future estimated contractual payments to be received under these leases as of September 30, 2018 is as follows:

During the three months ended September 30, 2018 and 2017, depreciation expense amounted to $5,747 and $5,124, respectively. During the nine months ended September 30, 2018 and 2017, depreciation expense amounted to $19,510 and $15,422, respectively.

Note 7. Investments in Unconsolidated Entities

Entsorga West Virginia LLC - Effective January 1, 2017, subject to approval by the EWV bond trustee, which was granted on March 20, 2017, the Company executed several agreements to acquire up to approximately a 40% interest in Entsorga West Virginia LLC (“EWV”) from the original investors at their original purchase price of $60,000 for each 1% of interest in EWV. The agreement provided for a required investment of $1,034,028, representing a 17.2% interest, with the remaining 23.1% being at the option of the Company. On March 21, 2017, the Company completed the required investment acquisition of $1,034,028 for a 17.2% interest, which is recognized utilizing the equity method of accounting due to its investment and its ability to control operations and activities of EWV.

Summarized financial information for EWV is as follows:

EWV has financed the development and construction of the facility through $25,000,000 in Solid Waste Disposal Revenue Bonds issued by the West Virginia Economic Development Authority (the “Bonds”). In connection with the Bonds, each member has been required to pledge their membership interest in EWV to the Bond trustee as collateral of the Bonds. While each member has pledged their membership interests to the Bond Trustee, there is no obligation that each member provide additional investment in the future or support any losses incurred.

Gold Medal Group, LLC – On January 25, 2018, the Company entered into a Membership Interest Purchase Agreement (the “Purchase Agreement”) to acquire 9.2% of the outstanding membership units (the “Units”) of Gold Medal Group, LLC (“GM Group”), which is the owner of a traditional waste management entity. Pursuant to the Purchase Agreement, the Company acquired the Units from two unrelated parties in consideration $2,250,000 paid through the issuance of 500,000 shares of the Company’s common stock, par value $0.0001 per share (the “Common Stock”). The Purchase Agreement contains customary provisions, including representations, warranties, indemnities and “piggyback” registration rights, and closed upon the satisfaction of customary closing conditions.

Also, on January 25, 2018, the Company entered into a Letter Agreement (the “Option Agreement”) with GM Group. Pursuant to the Option Agreement, ENA may purchase up to 5,000,000 additional Units of GM Group at an aggregate purchase price of $5,000,000, provided that the Company’s Common Stock, if it is still publicly traded, is listed on a national exchange, which occurred on April 9, 2018 with the Company’s listing on The Nasdaq Capital Market.

Additionally, on January 25, 2018, the Company entered into an Advisory Services Agreement (the “ASA”). Under the ASA, the Company provides services relating to corporate development, strategic planning, operational and sales oversight and other general administrative and support services in exchange for fees annually amounting to the greater of $750,000 or 10% of GM Group’s ordinary earnings before interest, taxes, depreciation and amortization. As a result of the investment and its ability to control operations and activities of GM Group, the Company is recognizing its investment utilizing the equity method of accounting.

On April 2, 2018 the co-investor with the Company in Gold Medal Group, Inc. funded a follow-on acquisition of a traditional waste management company that the Company did not participate in. This additional funding by the co-investor diluted the Company’s overall ownership interest to 3.1%. The acquired traditional waste management company will fall under the advisory services agreement between the Company and Gold Medal Holdings, Inc.

Summarized financial information for Gold Medal Group, Inc. is as follows:

The Company also entered into the Advisory Services Agreement (the “Advisory Agreement”) with Gold Medal Holdings, Inc. (“Holdings”). Pursuant to the Advisory Services Agreement, the Registrant will provide Holdings with advisory services relating to corporate development, strategic planning, operational and sales oversight and other general administrative and support services, as more particularly described within the Advisory Agreement. As consideration for providing these services, the Company, will be compensated with an annual advisory services fee equal to the greater of (i) $750,000 and (ii) 10% of Holdings’ annual ordinary earnings before interest, taxes, depreciation and amortization. The initial term of the Advisory Agreement is for one year. Fees relating to this contract are reported as revenue; related costs are included in operating expenses.

As a result of its investment in GM Group and the Advisory Agreement, the Company has determined that it has the ability to exercise significant influence, but not control, over operating and financial policies of the investee, accordingly, the investment is carried utilizing the equity method of accounting, which will be applied utilizing a three-month lag in reporting periods.

Note 8. MBT Facility Development and License Costs

MBT Facility Development Costs

On March 1, 2017, the Town Counsel of New Windsor, NY approved, the sale of 12 acres of property to the Company for the development of a Mechanical Biological Treatment (“MBT”) facility, for which the agreement was executed on April 10, 2017. The purchase price of the property is $1,092,000, subject to reduction for option payments made by the Company in the monthly amount of $3,500 for the first 12 months and $6,000 per month for the following 12 months, until the closing. The purchase of the property is contingent upon the Company obtaining: necessary permits to allow construction of a Mechanical Biological Treatment (“MBT”) facility; approvals from state and local authorities; financing for the construction of the MBT facility; contracts for offtake of solid recovered fuel; and the satisfaction of the Company’s due diligence investigation of the property. The contract also contains customary representations warranties and covenants of the parties for like transactions.

During 2018, the Company commenced initial development of a project in Rensselaer, NY. As of September 30, 2018, the Company is pursuing permits and other approvals required to continue development of the project.

The capitalized costs related project sites is as follows:

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

The royalty payment for the license amounted to $6,019,200, which was comprised of 1,035,905 shares of the Company’s common stock, par value $0.0001 per share and cash payments of $839,678. The Company also entered into a Registration Rights Agreement with Entsorga whereby the Company granted Entsorga certain piggy-back and demand registration rights with respect to the Shares. This Technology License Agreement can be utilized in the Company’s project at the New Windsor, NY site or any other site and will be amortized once the facility is in operation.

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

The Company minimizes credit risk associated with cash by periodically evaluating the credit quality of its primary financial institutions. At times, the Company’s cash may be uninsured or in deposit accounts that exceed the Federal Deposit Insurance Corporation (“FDIC”) in the USA and the Financial Conduct Authority (“FCA”) in the UK insurance limits. During the periods presented, the Company had not experienced losses on these accounts and management believes the Company is not exposed to significant risks on such accounts.

Major customers — During the three months ended September 30, 2018, two customers represented at least 10% of revenues, accounting for 31.3% (Gold Medal Holdings, Inc., an unconsolidated affiliate) and 10.1% of revenues. During the three months ended September 30, 2017, two customers represented at least 10% of revenues, each accounting for 12% of revenues. During the nine months ended September 30, 2018, one customer represented at least 10% of revenues, 38.0% (Gold Medal Holdings, Inc., an unconsolidated affiliate) of revenues. During the nine months ended September 30, 2017, no customers accounted for at least 10% of revenues.

As of September 30, 2018, three customers represented at least 10% of accounts receivable, accounting for 15.4% (Gold Medal Holdings, Inc., an unconsolidated affiliate), 13.8% and 11.0% of accounts receivable. As of December 31, 2017, no customers represented at least 10% of accounts receivable.

Vendor concentration — During the three months ended September 30, 2018, one vendor represented at least 10% of costs of revenue, accounting for 16.2% (a 1.4% shareholder) of the combined cost of revenues and change in inventory. During the nine months ended September 30, 2018, two vendors represented at least 10% of costs of revenue, accounting for 28.7% (a 1.4% shareholder) and 12.1% of the combined cost of revenues and change in inventory. During the three months ended September 30, 2017, two vendors represented at least 10% of costs of revenue, accounting for 23% (a 1.9% shareholder) and 11% of the combined cost of revenues and change in inventory. During the nine months ended September 30, 2017, two vendors represented at least 10% of costs of revenue, accounting for 18% (a 1.9% shareholder) and 11% of the combined cost of revenues and change in inventory.

As of September 30, 2018, two vendors represented at least 10% of accounts payable, accounting for 20.3% (a 1.4% shareholder) and 19.5% accounts payable. As of December 31, 2017, three vendors represented at least 10% of accounts payable, accounting for 19% (BioHiTech International, Inc., a related party), 19% and 18% (a 1.4% shareholder) of accounts payable.

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 the face amount of direct related party assets and liabilities and other transactions or conditions as of or during the periods indicated.

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

Line of Credit — In a series of transactions, on February 2, 2018, in connection with its $5,000,000 gross proceeds financing with Michaelson Capital Special Finance Fund II, L.P., the Company utilized a portion of the proceeds to pay off, in-full, and close out an existing line of credit with Comerica Bank (“Comerica”) that was payable and secured by the assets of the Company’s subsidiary, BioHiTech America, LLC. Also, in connection with and in accordance with the MCSFF financing, on February 2, 2018, the Company’s subsidiary, BHT Financial, LLC (“BHTF”) entered into a new Credit Agreement (the “Credit Agreement”) and a Master Revolving Note (the “Note”) with Comerica that provides for a facility of up to $1,000,000, secured by the assets of BHTF. The Note line does not have any financial covenants, carries interest at the rate of 3%, plus either the Comerica prime rate or a LIBOR-based rate, (6.11% as of September 30, 2018) and matures on January 1, 2020. The line of credit is secured by the assets of BHTF and is personally guaranteed by the Company’s Chief Executive Officer, Frank E. Celli and James C Chambers, a director.

As of September 30, 2018, the $1,000,000 balance outstanding is presented net of $26,000 in gross costs associated with the financing, net of $3,382 in amortization calculated on the effective interest method, which is included in interest expense.

Michaelson Senior Secured Term Promissory Financing – On February 2, 2018, the Company and several of the Company’s wholly-owned subsidiaries entered into and consummated a Note Purchase and Security Agreement (the “Purchase Agreement”) with Michaelson Capital Special Finance Fund II, L.P. (“ MCSFF ”) to issue a senior secured term promissory note in the principal amount of Five Million Dollars ($5,000,000) (the “Note”). The Note is not convertible and accrues interest at the rate of 10.25% per annum. The Note is to be repaid in eight, equal, quarterly installments of Six Hundred Twenty Five Thousand Dollars ($625,000) commencing on March 15, 2021 and ending February 2, 2023 (the “Maturity Date”). Additionally, the Note is secured by a general security interest in all of the Company’s assets as well all of the assets of the Company’s subsidiaries. Further, the Company’s Chief Executive Officer, guaranteed a portion of the Registrant’s obligations to MCSFF. In connection with the issuance of the Note, the Company issued MCSFF 320,000 shares of the Registrant’s common stock, par value $0.0001 per share. The Purchase Agreement contains customary provisions, including representations, warranties, indemnities and “piggyback” registration rights, and closed upon the satisfaction of customary closing conditions. As of September 30, 2018, the carrying balance of the note is comprised of $5,000,000 face, less $1,212,121 allocated to the common stock issued, less associated amortization of $160,931 on the stock discount, less deferred financing costs of $211,187, less $40,035 of associated deferred financing cost amortization. All amortization is computed on the interest method and included in interest expense.

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.

In accordance with the terms of the notes, on the maturity date of February 10, 2018, the entire $3,400,000 in notes were converted into shares of the Company’s common stock at a price per share of $2.75. At the time of issuance, the warrants did not meet the definition of a derivative and therefore the warrants were not recorded as a derivative liability. As a result of the mandatory conversion the number of warrant shares and exercise price became fixed. The warrants for 1,236,369 shares of common stock were valued utilizing the Black-Scholes modelling technique utilizing stock prices of $4.90 on the dates of the debt conversion, an exercise price of $3.30, a standard deviation (volatility) of 40.79%, a risk-free interest rate of 3.07% with a term equal to the remaining term of the initial 5-year warrants. The model includes subjective input assumptions that can materially affect the fair value estimates. The total value of the warrants amounted to $2,812,989, which has been recognized as other interest expense and as additional paid in capital. In addition to the 1,236,369 shares of common stock issued in the conversion, under the agreements, the Company exercised its rights to pay all $523,788 in accrued interest on the notes with shares of common stock based on the market price of the shares on the day prior to the conversion, which resulted in the issuance of 104,889 shares of common stock.

Series B Unsecured Subordinated Convertible Promissory Notes — During 2017 and 2016, the Company entered into a series of Securities Purchase Agreements (the “Purchase Agreement”) with certain accredited investors (the “Investors”), who were also shareholders of the Company, pursuant to which the Company agreed to sell and the Investors agreed to purchase in a private placement offering (the “Private Placement”) units (the “Units”) in the aggregate offering amount of $650,000 and $1,250,000, respectively.

In accordance with the terms of the notes, upon the Company’s uplisting to Nasdaq on April 9, 2018, the entire $1,900,000 in notes were converted into shares of the Company’s common stock at a price per share of $2.75. At the time of issuance, the warrants did not meet the definition of a derivative and therefore the warrants were not recorded as a derivative liability. As a result of the mandatory conversion the number of warrant shares and exercise price became fixed. The warrants for 690,914 shares of common stock were valued utilizing the Monte Carlo modelling technique utilizing stock prices of $4.55 on the dates of the debt conversion, an exercise price of $3.30, a standard deviation (volatility) of 49.2 to 51.2%, a risk-free interest rate of 2.6% with a term equal to the remaining term of the initial 5-year warrants. The model includes subjective input assumptions that can materially affect the fair value estimates. The total value of the warrants amounted to $1,611,133, which has been recognized as other interest expense and as additional paid in capital. In addition to the 690,914 shares of common stock issued in the conversion, under the agreements, the Company exercised its rights to pay all $199,383 in accrued interest on the notes with shares of common stock based on the market price of the shares on the day prior to the conversion, which resulted in the issuance of 46,372 shares of common stock. In connection with the conversion, the Company expensed the remaining $10,214 unamortized deferred financing costs as interest expense.

Series D Subordinated Convertible Promissory Notes — During the third quarter of 2017, the Company entered into a series of Securities Purchase Agreements (the “Purchase Agreement”) with accredited investors (the “Investors”), pursuant to which the Company agreed to sell and the Investors agreed to purchase units (the “Units”) in the aggregate offering amount of $2,000,000. Units aggregating $325,000 were with related parties.

In accordance with the terms of the notes, upon the Company’s uplisting to Nasdaq on April 9, 2018, the outstanding $1,800,000 in notes were converted into shares of the Company’s common stock at a price per share of $2.75. At the time of issuance, the warrants did not meet the definition of a derivative and therefore the warrants were not recorded as a derivative liability. As a result of the mandatory conversion the number of warrant shares and exercise price became fixed. The warrants for 654,553 shares of common stock were valued utilizing the Monte Carlo modelling technique utilizing stock prices of $4.55 on the dates of the debt conversion, an exercise price of $3.30, a standard deviation (volatility) of 47.5 to 48.0%, a risk-free interest rate of 2.6% with a term equal to the remaining term of the initial 5-year warrants. The model includes subjective input assumptions that can materially affect the fair value estimates. The total value of the warrants amounted to $1,520,224, which has been recognized as other interest expense and as additional paid in capital. In addition to the 654,553 shares of common stock issued in the conversion, under the agreements, the Company exercised its rights to pay all $105,289 in accrued interest on the notes with shares of common stock based on the market price of the shares on the day prior to the conversion, which resulted in the issuance of 24,493 shares of common stock.

Series V Subordinated Convertible Promissory Notes — During 2016, the Company entered into a series of convertible promissory notes. In accordance with the terms of the notes, upon the Company’s uplisting to Nasdaq on April 9, 2018, the outstanding $425,000 in notes were converted into shares of the Company’s common stock at a price per share of $2.75. In addition to the 154,546 shares of common stock issued in the conversion, under the agreements, the Company exercised its rights to pay all $51,017 in accrued interest on the notes with shares of common stock based on the market price of the shares on the day prior to the conversion, which resulted in the issuance of 11,868 shares of common stock.

Series C – Subordinated secured convertible notes — From May 24, 2017 through August 11, 2017, the Company entered into a series of Securities Purchase Agreements (the “Purchase Agreement”) with certain accredited investors (the “Investors”), pursuant to which the Company agreed to sell, and the Investors agreed to purchase units (the “Units”) in the aggregate offering amount of $1,250,000.

On February 2, 2018, in connection with and as a condition precedent to the closing of the MCSFF Financing, all of the holders of the Company’s Series C agreed to amend the Series C notes to change the maturity date from May 24, 2018 to May 24, 2019. The Series C notes were also amended to provide for a mandatory conversion of the outstanding and unpaid principal amount of the Series C notes upon the Company’s listing on the Nasdaq stock market or the NYSE American into shares of the Company’s common stock. In consideration for the amendment, the Registrant issued the Holders additional warrants (the “Warrants”) to purchase a number of shares of Common Stock equal to 10% of the number of shares such Series C Note is convertible into at an exercise price of $4.50 per share of Common Stock and expiring in five (5) years. The warrants for 45,459 shares of common stock were valued utilizing the Black-Scholes modelling technique utilizing stock prices of $4.95, an exercise price of $4.50, a standard deviation (volatility) of 40.5%, a risk-free interest rate of 2.95% with a term of 5 years. The resulting $96,446 value has been recognized as other interest expense and as additional paid in capital.

In accordance with the terms of the amended notes, upon the Company’s uplisting to Nasdaq on April 9, 2018, the outstanding $1,250,000 in notes were converted into shares of the Company’s common stock at a price per share of $2.75. In addition to the 454,549 shares of common stock issued in the conversion, under the agreements, the Company exercised its rights to pay all $36,223 in accrued interest on the notes with shares of common stock based on the market price of the shares on the day prior to the conversion, which resulted in the issuance of 8,428 shares of common stock. In connection with the conversion, the Company expensed the remaining $133,539 unamortized discounts as interest expense.

Convertible Note — Effective March 31, 2017 the Company entered into a Securities Purchase Agreement, a Convertible Note with a maximum funding amount of $550,000 and Warrants with Vista Capital Investments LLC (“Vista”), of which $220,000 was funded. The funding which would have matured on October 31, 2017 was converted prior to maturity. During the first quarter of 2018, the funding maturing on January 26, 2018 was converted prior to maturity.

During the third quarter of 2017, the holder exercised 24,750 warrants in a cashless exercise, resulting in the issuance of 14,093 shares of common stock.

As of September 30, 2018, the holder has warrants outstanding that provide for the acquisition of up to 24,750 shares of common stock at $4.00 per share and expire in five years from the date of issuance (June 26, 2022).

Notes Payable — During the year ended December 31, 2015, the Company entered into two unsecured promissory notes that have been amended during 2016 and 2017, which do not contain any financial covenants. As of December 31, 2017, the notes each had a remaining balance outstanding of $100,000 and $275,000 with interest at the rate of 10.0% and each mature on January 1, 2020.

On March 23, 2018, the Company entered into a Securities Exchange Agreement (the “Exchange Agreement”) with Frank J. Celli, the father of the Company’s Chief Executive Officer, whereby Celli exchanged $275,000 in a note receivable, above, for $275,000 of the Registrant’s Series C Convertible Preferred Stock, par value $0.0001 (the Series C Preferred Stock”). The Series C Preferred Stock has a stated value of $10.00 per share and is convertible, at the holder’s option, into the Registrant’s common stock, par $0.0001, at a conversion price of $4.75 per share. The Series C Preferred Stock is non-redeemable, has voting rights together with the common stock, par $0.0001, at the rate of 4 votes to 1 and accrues dividends at 10.25% of the stated value outstanding. In connection with this transaction, the Registrant also issued Celli warrants to purchase 28,948 shares of Common Stock, exercisable at $5.50 per share which expire in five (5) years. The warrants for 28,948 shares of common stock were valued utilizing the Black-Scholes modelling technique utilizing stock prices of $4.05, an exercise price of $5.50, a standard deviation (volatility) of 41.8%, a risk-free interest rate of 2.9% with a term of 5 years. The resulting $36,128 value has been recognized as additional paid in capital.

As of September 30, 2018, an unsecured note of $100,000 with an unrelated party remains outstanding. The note provides for interest at 10.0% and matures on January 1, 2020.

Long Term Debt — Represents two loans collateralized by vehicles with interest ranging from 1.9% to 4.99%, each with amortizing principal payment requirements through 2020 and 2022, respectively.

Maturities of Non-Current Promissory Note, Long Term Debt and Unsecured Subordinated Convertible Notes — as of September 30, 2018, excluding discounts and deferred finance costs, which are being amortized as interest expense, are as follow:

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

Note 12. Revision of Stockholders’ Equity in Financial Statements

During the preparation of the Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2018, the Company determined that it had incorrectly recorded beneficial conversion features associated with the Company’s Series A Redeemable Convertible Preferred Stock (the “Sr. A Preferred Stock”) as of December 31, 2017. The error resulted in an understatement of additional paid in capital and over statement of the Sr. A Preferred Stock. The Company assessed the materiality of the misstatement in accordance with Accounting Standards Codification (“ASC”) 250, Accounting Changes and Error Corrections, SEC Staff Accounting Bulletins No. 99, Materiality, and No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, and concluded that the misstatement was not material to the Company’s consolidated financial position for the prior periods and that amendments of previously filed reports were not required. However, the Company determined that the impact of the corrections would be too significant to record in the first quarter of fiscal 2018. As such, the revision for the correction is reflected in the balance sheet as of December 31, 2017 within the financial information in this Quarterly Report on Form 10-Q. Disclosure of the revised amounts will also be reflected in future filings containing the applicable periods.

The effect of the revision on line items within the Company’s condensed consolidated balance sheet as of December 31, 2017 was as follows:

The error did not have a material impact on the Company’s results of operations or cash flows in the prior period and, accordingly, no revision was made thereto.

Note 13. Equity Transactions

The Company has had the following equity related transactions during the nine months ended September 30, 2018:

Series A Redeemable Convertible Preferred Stock — Due to the existence of redemption features, the stock is accounted for as temporary equity (similar accounting treatment to debt). As of December 31, 2017, the Series A Preferred Stock reflect: stated amount of $1,666,999, net of original issue discount of $166,699, bifurcated warrants of $403,630, bifurcated beneficial conversion feature of $535,630, net of amortization of discounts of $86,658. In addition, as of December 31, 2017, the Series A Preferred Stock is presented net of deferred issuance costs of $30,000, net of amortization of $5,586, respectively. Amortization of discounts and deferred issuance costs are reflected as interest expense.

On March 30, 2018, the Company and holders of the Series A Convertible Preferred Stock (“Series A Preferred”) amended and restated to provide the holders with the option to redeem their shares anytime following the first anniversary if the Company consummates an equity financing in an amount equal to the stated value of the Series A Preferred, plus any and all accrued dividends. The holder’s option to redeem the Series A Preferred after January 1, 2019 was removed. In addition, the dividend on the Series A Preferred was amended to nine percent (9%), the first dividend payment date was amended to June 30, 2018 and the conversion price, by the terms of the Certificate of Designation, was set at $4.50 per share of the Company’s common stock. In addition, the Company agreed to issue the holders, within 5 business days after the first day of trading of the Company’s common stock on an Eligible Market, warrants to purchase up to 180,000 shares of Common Stock at an exercise price of $5.00 per share and expiring in four (4) years on a pro-rata basis to the holders of record of the Series A Preferred Shares at the time of such issuance. The warrants for 180,000 shares of common stock were valued utilizing the Black-Scholes modelling technique utilizing stock prices of $4.05, an exercise price of $5.00, a standard deviation (volatility) of 41.8%, a risk-free interest rate of 2.9% with a term of 4 years. The resulting $246,319 value has been recognized as other interest expense and additional paid in capital.

In connection with the amendment, the holder subsequently redeemed $317,000 in stated value shares at stated value, which resulted in the Company reflecting an additional interest expense of $157,455 to write off unamortized discounts and costs relating to the shares redeemed.

During June of 2018, the holder converted 40,000 shares with an aggregate stated value of $200,000 of stated value for 44,444 shares of common stock. In connection with the conversion the Company reflecting an additional interest expense of $73,461 to write off unamortized discounts and costs relating to the shares converted.

During August of 2018, the holder converted 46,689 shares with an aggregate stated value of $233,445 of stated value for 51,876 shares of common stock. In connection with the conversion the Company reflecting an additional interest expense of $47,767 to write off unamortized discounts and costs relating to the shares converted.

As of September 30, 2018, the net Series A Preferred Stock balance of $817,421 is comprised of 183,312 shares with a stated value of $916,560 less unamortized discounts of $99,139, which are being amortized as interest utilizing the interest method.

Series B Convertible Preferred Stock — From January 1, 2018 through March 31, 2018 the Company entered into a series of Purchase Agreements with certain accredited Investors, pursuant to which the Company agreed to sell and the Investors agreed to purchase, in the Offering, an aggregate of 268,333 shares of the Company’s Series B Convertible Preferred Stock, par value $0.0001 per share (the “Series B Preferred Shares”) at the price of $5.00 per Series B Preferred Share and warrants (the “Warrants”) that are exercisable for five years to purchase 149,074 shares of common stock, par value $0.0001 per share (the “Common Stock”) at an exercise price of $5.00 per share, for an aggregate offering amount of $1,341,665.

The warrants issued in 2018 for 149,074 shares of common stock were valued utilizing the Monte Carlo modelling technique utilizing stock prices of $4.05 to $4.31 on the dates of the grants, an exercise price of $5.00, a standard deviation (volatility) of from 41.1 to 41.8%, a risk-free interest rate of 2.91% to 3.14% based on the date of issue, with a term of 5 years. The model includes subjective input assumptions that can materially affect the fair value estimates. Conversion options are recorded as instrument discounts and are not being amortized due to the mandatory conversion features.

Due to the lack of redemption features and the presence of mandatory conversion features, the Series B Preferred stock has been presented as a component of shareholders’ equity.

In accordance with the terms of the stock, upon the Company’s uplisting to Nasdaq on April 9, 2018, all 428,333 outstanding shares were converted into shares of the Company’s common stock at a price per share of $4.50 In addition to the 475,935 shares of common stock issued in the conversion, under the agreements, the Company exercised its rights to pay all $17,733 in accumulated dividends on the preferred shares with shares of common stock based on the market price of the shares on the day prior to the conversion, which resulted in the issuance of 4,132 shares of common stock.

Series C Convertible Preferred Stock — The Series C Preferred Stock has a stated value of $10.00 per share and is convertible, at the holder’s option, into the Registrant’s common stock, par $0.0001, at a conversion price of $4.75 per share. The Series C Preferred Stock is non-redeemable, has voting rights together with the common stock, par $0.0001, at the rate of 4 votes to 1 and accrues dividends at 10.25% of the stated value outstanding. As of September 30, 2018, the Series C Preferred Stock is comprised of $4,275,000 face value, less $556,283 warrant valuation and beneficial conversion features of $668,575 reflected in additional paid in capital.

On February 2, 2018, in connection with and as a condition precedent to the closing of the MCSFF Note, the Company entered into a Securities Exchange and Note Purchase Agreement (the “Exchange Agreement”) with Frank E. Celli, the Company’s Chief Executive Officer, whereby Celli exchanged $4,500,000 in a note receivable and $544,777 in advances made to the Company for $4,000,000 of the Company’s Series C Preferred Stock and a junior promissory note (the “Junior Note”). The Junior Note, which is subordinated to the MCSFF Note, is not convertible, accrues interest at the rate of 10.25% per annum and matures on February 2, 2024. In connection with this transaction, the Registrant also issued Celli warrants to purchase 421,053 shares of Common Stock, exercisable at $5.50 per share which expire in five (5) years. The warrants for 421,053 shares of common stock were valued utilizing the Black Scholes modelling technique utilizing stock price of $4.95, an exercise price of $5.50, a standard deviation (volatility) of 40.48%, a risk-free interest rate of 2.95% based on the date of issue, with a term of 5 year.

On March 23, 2018, the Company entered into a Securities Exchange Agreement (the “Exchange Agreement”) with Frank J. Celli, the father of the Company’s Chief Executive Officer, whereby Frank J. Celli exchanged $275,000 in a note receivable from the Company for $275,000 of the Company’s Series C Preferred Stock. In connection with this transaction, the Registrant also issued Frank J. Celli warrants to purchase 28,948 shares of Common Stock, exercisable at $5.50 per share which expire in five (5) years. The warrants for 28,948 shares of common stock were valued utilizing the Black Scholes modelling technique utilizing stock price of $4.05, an exercise price of $5.50, a standard deviation (volatility) of 41.77%, a risk-free interest rate of 2.91% based on the date of issue, with a term of 5 year.

Maxim Warrants — In connection with the issuance of the Series A 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, which was February 10, 2016.

As a result of the maturity of the Series A unsecured subordinated convertible promissory notes on February 10, 2018, the contingency that had prevented the valuation of the warrants has been resolved, resulting in warrants to purchase 10,909 shares of common stock that have been valued at $25,133, which has been expensed as other interest during the first quarter of 2018 and credited to additional paid in capital

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 $5,000,000 (“Qualified Financing”). If the Company does not consummate a Qualified Financing prior to the expiration date, the warrant shall never be exercisable.

Series Debt and Series Preferred Stock Offerings — In connection with the various series debt and preferred stock offerings, warrants issued have been disclosed as part of the description of the debt and preferred stock offerings.

2014 and 2015 Debt Offerings — 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”. Should the Company not consummate such an issuance of equity by the expiration of the warrants, the warrants shall never be exercisable.

Note 14. Equity Incentive Plans

The Company has two equity incentive plans:

2015 Equity Incentive Plan — During 2015, the Company established the BioHiTech Global, Inc. 2015 Equity Incentive Plan, which is available to eligible employees, directors, consultants and advisors of the Company and its affiliates. The plan allows for the granting of incentive stock options, nonqualified stock options, reload options, stock appreciation rights, and restricted stock representing up to 750,000 shares. The Plan is administered by the Compensation Committee of the Board of Directors.

2017 Executive Incentive Plan — At the Annual Shareholders Meeting on June 7, 2017 the shareholders approved the 2017 Executive 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 1,000,000 shares. The Plan is administered by the Compensation Committee of the Board of Directors.

Compensation expense related to stock options and restricted units was:

The Company’s stock option activity for the nine months ended September 30, 2018 was:

During the third quarter of 2018, exercises of employee stock options totaled 16,527 shares at $3.75 per share, resulting in proceeds of $61,977.

The Company’s restricted stock unit activity for the nine months ended September 30, 2018 was:

Note 15. Commitments and Contingencies

From time to time, the Company is involved in legal matters arising in the ordinary course of business, including matters that relate to items for which the Company has accrued their contractual obligations, but are disputing payment for. The Company has one such matter relating to a consulting services agreement with Tusk Ventures LLC, in which they claim that it is owed $250,000 pursuant to an agreement. This matter was filed in the Supreme Court of the State of New York, New York County in April 2017 and while the Company has accrued all contractual amounts, it intends to defend the action vigorously. The Company and legal counsel believe this matter does not present a material risk to the Company. While the Company believes that these such matters are currently not material, there can be no assurance that matters arising in the ordinary course of business for which the Company is, or could be, involved in litigation, will not have a material adverse effect on its business, financial condition or results of operations.

Note 16. Operating Leases

The Company rents its headquarters and attached warehousing space from a related party (see Note 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 these leases as of September 30, 2018 is:

Total rent expense under all operating leases amounted to $37,874 and $39,921 for the three months ended September 30, 2018 and 2017, and $108,182 and $105,702 for the nine months ended September 30, 2018 and 2017, respectively.

Note 18. Recent Accounting Pronouncements

During the nine months ended September 30, 2018, the Company implemented the following recent accounting standards:

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.  This standard has an effective date of January 1, 2018, and the Company used the modified retrospective implementation method, whereby a cumulative effect adjustment would have been recorded to retained earnings as of the date of initial application, if needed. In the initial implementation, the Company evaluated the terms, conditions and performance obligations under our existing contracts with customers and determined that a cumulative adjustment to retained earnings was not necessary, and that the new standard has not had a material impact on its financial condition, results of operations or cash flows.

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

Leases — In February 2016, the FASB issued new lease accounting guidance (ASU No. 2016-02, Leases), which has subsequently been amended by ASU No. 2018-11, Leases in July 2018. 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. ASU 2018-11 provides that under certain instances lessors may not be required to separate the components of the contracts. The Company will evaluate the effects, if any, that adoption of these ASUs will have on its consolidated financial position or results of operations.