PINX:ZTHO Z-Trim Holdings Inc Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q
(Mark One)

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

For the quarterly period ended March 31, 2012

¨
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:  001-32134
Z Trim Holdings, Inc.
(Exact name of registrant as specified in its charter)
 
Illinois
36-4197173
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)

 
1011 Campus Drive, Mundelein, Illinois                                                                 60060
(Address of principal executive offices)                                                                 (Zip Code)
(847) 549-6002
(Registrant’s telephone number, including area code)
___________________________________________________
(Former name, former address and former fiscal year, if changed since last report)

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 issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
ý Yes ¨ 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   ý  Yes   ¨ 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,” “non-accelerated filer,” and “a 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 ý

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

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

Class
 
Outstanding at May 10, 2012
Common Stock, $0.00005 par value
 
17,533,536
 
1
 
 

 
Z TRIM HOLDINGS, INC.
     
 FORM 10-Q QUARTERLY REPORT
 
Table of Contents
     
Item
 
Page
 
PART I
 
   
Item l.
Financial Statements (see below)
3
     
Item 2.
Management's Discussion and Analysis of Financial
3
 
Condition and Results of Operations
 
     
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
  9
     
Item 4.
Controls and Procedures
  10
     
PART II
   
     
Item 1.
Legal Proceedings
  11
     
Item 1A.
Risk Factors
  11
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
  11
     
Item 6.
Exhibits
  11
     
SIGNATURES
    12
     
EXHIBIT INDEX
    13
     
Financial Statements
Balance Sheets
 
 
At March 31, 2012 (unaudited) and December 31, 2011
F-1
     
 
Statements of Operations
 
 
for the three months ended March 31, 2012 and 2011 (unaudited)
F-3
     
 
Statements of Cash Flows
 
 
for the three months ended March 31, 2012 and 2011 (unaudited)
F-4
     
 
Notes to Financial Statements  (unaudited)
F-5
 
2
 
 

 


PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements.

See Financial Statements beginning on page F-1.

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

Cautionary Statement Regarding Forward Looking Information

This report contains or incorporates by reference various forward-looking statements concerning the Company’s prospects that are based on the current expectations and beliefs of management. Forward-looking statements may contain words such as “anticipate,” “believe,” “estimate,” “expect,” “objective,” “projection” and similar expressions or use of verbs in the future tense, and are intended to identify forward-looking statements; any discussions of periods after the date for which this report is filed are also forward-looking statements. The statements contained herein and such future statements involve or may involve certain assumptions, risks, and uncertainties, many of which are beyond the Company’s control, that could cause the Company’s actual results and performance to differ materially from what is expected.  Readers are cautioned not to place undue reliance on such forward-looking statements.  The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.  There can be no assurance that the forward-looking statements contained in this document will, in fact, transpire or prove to be accurate.

In addition to the assumptions and other factors referenced specifically in connection with such statements, factors that could cause or contribute to our actual results differing materially from those discussed herein or for our stock price to be adversely affected include, but are not limited to: 
·  
our history of operating losses and inability to guarantee profitable operations in the future;
·  
risk that we will not be able to remediate identified material weaknesses in our disclosure controls and procedures and internal control over financial reporting;
·  
the risk that we will be unable to pay our debt obligations as they become due;
·  
risk that there will not be market acceptable of our products;
·  
our plans for commercialization of our products;
·  
possible problems in implementing new relationships or the failure to achieve the desire benefits;
·  
our reliance on a limited number of product offerings;
·  
our product development efforts, including risk that we will not be able to produce our products in a cost-effective manner;
·  
our ability to secure new customers, maintain our current customer base and deliver product on a timely basis;
·  
our dependence on a small concentration of customers;
·  
possible issuance of common stock subject to options, warrants and other securities that may dilute the interest of stockholders;
·  
our ability to protect technology through patents;
·  
our ability to protect our proprietary technology and information as trade secrets and through other similar means;
·  
competition from larger, more established companies with far greater economic and human resources;
·  
fluctuations in raw materials and price for agricultural products;
·  
the effect of changes in the pricing and margins of products;
·  
the potential loss of key personnel or other personnel disruptions;
·  
sufficient voting power by one large stockholder to make corporate governance decisions that could have significant effect on us and the other stockholders;
·  
our nonpayment of dividends to common stockholders and lack of plans to pay dividends to common stockholders in the future;
·  
our need for additional financing;
·  
future sale of a substantial number of shares of our common stock that could depress the trading price of our common stock, lower our value and make it more difficult for us to raise capital;
·  
our additional securities available for issuance, which, if issued, could adversely affect the rights of the holders of our common stock; and
·  
our stock price is likely to be highly volatile due to a number  of factors, including a relatively  limited public float.

In addition, see Risk Factors in Part I, Item 1A of the Company’s 2011 Annual Report on Form 10-K for a further discussion of some of the factors that could affect future results.

3
 
 

 
The following discussion is intended to assist in understanding the financial condition and results of operations of Z Trim Holdings, Inc. You should read the following discussion along with our financial statements and related notes included in this Form 10-Q.

Unless the context requires otherwise, in this report, the “Company,” “Z Trim,” “Z Trim Holdings,” “Company,” “we,” “us” and “our” refer to Z Trim Holdings, Inc.

Overview
 
Z Trim Holdings, Inc. is an agri-technology company that owns existing, and has developed new, products and processes to make use of agricultural by-products for uses in food and other industries.   The Company currently sells a line of products to the food industry that can help food manufacturers reduce their costs of goods sold, and also help them solve many production problems.  The Company’s revolutionary technology provides value-added ingredients across virtually all food industry categories.  The Company’s all-natural products, among other things, help to reduce fat and calories, add fiber, provide shelf-stability, prevent oil migration, and add binding capacity – all without degrading the taste and texture of the final food products.  Perhaps most significantly, Z Trim’s products can help extend finished products, and thereby increase its customers’ gross margins.  Under the direction of new management since December 2007, Z Trim has focused its efforts and resources towards the manufacture, marketing and sales of its industry-changing products, while simultaneously developing related products and processes for both food and industrial ingredients.
 
The Company, through an exclusive license to technology patented by the United States Department of Agriculture, has developed products that manage moisture and help reduce costs in finished foods, with the added benefit of maintaining taste and mouth-feel associated with full fat products.  The global market for Z Trim's line of products spans the entire food and nutritional beverage industry, including fat free,  low-fat, reduced fat and full fat, across meats, baked goods, dairy and non-dairy products, snacks, beverages, dressings, sauces and dips.
 
As our current facility is a prototype plant, being the first of its kind to produce our innovative products, we are constantly seeking ways to improve efficiencies and achieve economies of scale. We are currently re-designing the process to make use of newer separation technologies and thereby optimize plant capacity.  The Company has entered into an agreement with an outside manufacturer for the purpose of increasing capacity in the second half of 2012.
 
Current Trends and Recent Developments Affecting the Company
 
Sales and Manufacturing

Sales for the first quarter = of fiscal 2012 were up 28% over the first quarter of fiscal 2011.

On October 17, 2011, the Company entered into a Custom Processing Agreement (“CPA”) with AVEKA Nutra Processing, LLC (“ANP”), part of the Aveka Group, in order to provide the Company with a partner for future manufacturing initiatives.  The CPA provides that ANP will perform certain services related to the Company’s dietary fiber product, including manufacturing, processing, packaging and storage/warehousing for an initial term of three years.  The CPA automatically renews at the end of the initial term for an additional two year term unless either party provides written notice to the other within the specified time frame.  Production pursuant to the CPA is anticipated to begin in the third quarter of fiscal 2012.  Once production commences, the CPA provides for minimum production volumes of 40,000 lbs per month and average volumes of 100,000 lbs. per month with the ability to increase future production volume to potentially as much as 1,000,000 lbs. per month.  However, due to factors, including potential start-up problems, changes in customer demand, inability of parties to perform their obligations and factors outside the Company’s control, the Company cannot assure that production will begin as anticipated or that it will achieve these levels.
 
4
 
 

 
Funding Initiatives
 
In the first quarter of fiscal 2012, our largest shareholder, Brightline Ventures I, LLC, decided to convert $1,300,000 in principal balance on Notes it held, plus $208,000 of interest accrued thereon into 1,508,000 shares of the Company’s Common Stock. As a result, the Company was able to reduce indebtedness for outstanding convertible notes due in 2012 from $1,420,000 to $120,000.  Subsequent to the reporting period on April 19, 2012, the remaining $120,000 in outstanding convertible notes due in 2012, plus $30,979 in accrued interest, was converted into 150,979 shares of common stock the Company’s Common Stock.
 
Issuance of Convertible Notes and Warrants
 
During the first quarter of fiscal 2012, we secured financing from three accredited investors (the “Investors”) pursuant to which we sold senior secured convertible promissory notes (each a “Note” and collectively the “2012 Notes”) and warrants and received gross proceeds of $200,000.   The 2012 Notes have a twenty-four month term and accrue interest at the rate of 8% per annum.  The principal balance of the 2012 Notes is convertible at $1.00 per share into an aggregate of 200,000 shares of our common stock, $.00005 par value (the “Common Stock”).  The interest is payable either upon maturity of the 2012 Notes or quarterly at the Investors’ option in shares of our Common Stock.  Any amount of principal or interest which is not paid when due shall bear interest at a rate of interest equal to the eighteen percent (18%) per annum.    

The 2012 Notes are secured by a first lien on all of our assets for so long as the Notes remain outstanding.  The 2012 Notes are callable at any time by us, at which time the Investors may choose to either convert such notes into Common Stock or to receive payment in cash.  The Investors also received a five year warrant, to purchase an aggregate of 100,000 shares of Common Stock per unit with an exercise price of $1.50 per share (“Warrants”).  The Warrants are also callable by us in the event that the ten day trailing average closing price per share of Common Stock exceeds $2.99.

Investment Banking Agreement

On February 17, 2011 (the “Effective Date”), we entered into an Investment Banking Agreement (“Investment Banking Agreement”) with Legend Securities, Inc. ("Legend"), pursuant to which Legend agreed to provide business advisory services to us for a period of up to eighteen months with our ability to further extend the term of the Investment Banking Agreement for an additional six months.  We can terminate the Investment Banking Agreement at any time for any reason except during the first ninety days which requires a material breach by Legend that is uncured for ten days following notification of such breach.

In exchange for Legend's services, we agreed to pay Legend the sum of $10,000 per month and to issue Legend a warrant for the purchase of five hundred and fifty thousand (550,000) shares of the Company’s Common Stock (the “Legend Warrants”) at an exercise price of $0.71 per share.  The Legend Warrants vest as follows: 91,666 of the Legend Warrants vest on the Effective Date and then 91,666 of the Legend Warrants vest each ninety (90) day period thereafter.  The Legend Warrants have a term of five years.  The Legend Warrants contain a cashless exercise provision and certain “piggy-back” registration rights, pursuant to which the Company is obligated to register the shares underlying the Legend Warrants under the Securities Act of 1933, as amended (the “Securities Act”), in any future registration statement that is filed by the Company with the U.S. Securities and Exchange Commission.

Issuance of Common Stock

 On February 23, 2012, we entered into a private placement subscription agreement with Brightline Ventures I-B, LLC, a Delaware Limited Liability Company (“Brightline Ventures I-B”), pursuant to which we sold 311,545 shares of Common Stock, for a price of $1.50 per share and received gross proceeds of $467,318.

On March 29, 2012, we entered into a private placement subscription agreement with Brightline Ventures I-B, pursuant to which we sold 437,380 shares of Common Stock, for a price of $1.50 per share and received gross proceeds of $656,070.

On May 8, 2012, we entered into a private placement subscription agreement with Brightline Ventures I-B pursuant to which we sold 744,711 shares of Common Stock, for a price of $1.50 per share and received gross proceeds of $1,117,067.

5
 
 

 
Results of Operations

Three Months Ended March 31, 2012 Compared with Three Months Ended March 31, 2011

Revenues

Revenue for the three months ended March 31, 2012 was $318,383, as compared to revenue of $247,366 for the three months ended March 31, 2011.  Our revenue for the three months ended March 31, 2012 and 2011 was entirely attributable to product sales.  Based on current order levels from our customers, we anticipate revenues will increase during the second quarter of fiscal 2012 because of increased demand for our products and the addition of production capacity to meet such demand.  Our ability to generate increased revenue in future reporting periods will be partially dependent on continued increased demand for our products from existing and new customers and the completion of changes in our production process to further improve our capacity and reduce costs, all of which cannot be assured.

Cost of Revenues

Cost of revenues for products sold for the three months ended March 31, 2012 and 2011 was $740,424 and $645,658, respectively, an increase of $94,766 or 15%.  The increase in costs of goods sold is attributable to an increase in monthly production volume, labor costs and manufacturing overhead.  If we are successful in completing changes in our production process and increasing production volume, we expect that the cost of good sold, on a per pound basis, should be decreasing although we cannot provide assurances.  We believe that sustained increases in sales and monthly production volume will also enable us to allocate our fixed costs over a greater number of finished goods and further reduce costs of goods sold in the future to improve margins.

Gross Loss

Gross loss for the three months ended March 31, 2012 was $422,041, or approximately 133% of revenues, as compared to gross loss of $398,292, or approximately 161% of revenues for the three months ended March 31, 2011.  Gross loss reflects a number of factors that can vary from period to period, including those described above.

Operating Expenses

Operating expenses for the three months ended March 31, 2012 and 2011 consisted entirely of selling, general and administrative expenses.  Operating expenses for the three months ended March 31, 2012 were $936,275, a decrease of $857,466 or 48% from $1,793,741 for the three months ended March 31, 2011.  The significant components of selling, general and administrative expenses are as follows:
 
 
Three months ended March 31,
 
2012
2011
Stock-based compensation expenses
$     190,112
$  715,411
Salary expenses
263,202
350,619
Professional fees
69,432
96,931
Non-manufacturing depreciation expenses
9,040
22,775
Employment recruiting expenses
780
24,000
Investor relations expense
27,354
138,525
     Total
$  559,920
$    1,348,261

The decrease in stock-based compensation was attributable to the fewer employees being granted stock-based compensation and a decrease in market price for the stock on the dates issued.  In addition, the decrease in the number of employees reduced salary expense in the first quarter of fiscal 2012.  Investor relations expense decrease for the quarter ended March 31, 2012, as compared to the same period in 2011, due to the issuance of stock-based compensation to our investor relations consultants in 2011.

Operating Loss

Operating loss for the three months ended March 31, 2012 decreased to $1,358,316 compared to $2,192,033 for the three months ended March 31, 2011 due to the reasons described above.

6

 
 

 

Operating Loss

Operating loss for the three months ended March 31, 2012 decreased to $1,358,316 compared to $2,192,033 for the three months ended March 31, 2011 due to the reasons described above.

Other Income (Expense)

Other expense for the three months ending on March 31, 2012 was $3,677,908 as compared to $4,085,519 for the three months ending on March 31, 2011.  The decrease in other expense of $407,611 was primarily due to a reduction in interest expense and the recognition of a loss on derivative settlement in the first quarter of fiscal 2011 offset by the change in the fair value of our derivatives which resulted in an additional expense of $1,792,076 from the prior year.  The lower interest expense was a result of the conversion of notes payable to common stock during first quarter of fiscal 2012.

Net Profit (Loss)

As a result of the above, for the three months ended March 31, 2012 and 2011, we reported a net loss of $5,036,224 and $6,277,552, respectively.

Basic and Diluted Income (Loss) per Share

The basic and diluted net loss per share for the three months ended March 31, 2012 was ($0.40) per share, as compared to net loss per share of ($0.83) for the three months ended March 31, 2011 due to the effect of the results described above as well as the offset of additional shares outstanding in 2012 due to the conversion of notes payable into shares of common stock and sale of common stock.

Liquidity and Capital Resources

As of March 31, 2012, we had a cash balance of $408,562, an increase from a balance of $313,073 at December 31, 2012.  At March 31, 2011, we had a working capital deficit of $14,002,487, an increase in working capital deficit from $12,009,724 as of December 31, 2011.  The difference in working capital deficit was primarily because of an increase in the derivative liability of $3,628,841 in the first quarter of fiscal 2012.

Over the last several years, the Company’s operations have been funded primarily through the sale of both equity and debt securities.  During the first quarter of fiscal 2012, the Company received a total of $1,123,388 in proceeds from the sale of common stock and $200,000 in proceeds from the sale of convertible notes.  Subsequent to the first quarter of fiscal 2012, the Company received a total of $1,117,067 in proceeds from the sale of common stock.

To successfully grow our business, our management believes it must improve our cash position through greater and sustainable sales of our product lines, and increase the productivity and efficiency of the production process.  The Company has purchased equipment to increase production capacity and anticipates increased sales in the second quarter of 2012 and for fiscal 2012 based on current order levels from its customers and resulting from its ability to have the capacity to meet increased customer demand for its products.  However, such an increase would depend on sustained or increased levels of purchases by existing and new customers and actual realization of our customers’ current demand levels, as well as the completion of changes in our production process, all of which cannot be assured.

In the first quarter of fiscal 2012, our largest shareholder, Brightline Ventures I, LLC, decided to convert $1,300,000 in principal balance on Notes it held, plus $208,000 of interest accrued thereon into 1,508,000 shares of the Company’s Common Stock. As a result, the Company was able to reduce indebtedness for outstanding convertible notes due in 2012 from $1,420,000 to $120,000.  Subsequent to the reporting period on April 19, 2012, the remaining $120,000 in outstanding convertible notes due in 2012, plus $30,979 in accrued interest, was converted into 150,979 shares of the Company’s Common Stock.  We have $200,000 in convertible notes issued in the first quarter of 2012 and matrue in 2014.

We also have agreed to make available to with AVEKA Nutra Processing, LLC (“ANP”), part of the Aveka Group, a $500,000 line of credit for use financing ANP’s operating costs.  As of March 31, 2012, we have advanced $410,000 to ANP under the line of credit.  We are obligated to make available to ANP an additional $90,000.  The extension of credit to ANP has had a material adverse impact on the Company's cash resources.  For this  reason we have found it necessary to raise additional capital in 2012 and we may need to raise additional capital in 2012. The Company cannot provide any assurances of the availability of future financing or the terms on which it might be available.  In the absence of such financing, we may be forced to scale back or cease operations, liquidate assets, seek additional capital on less favorable terms and/or pursue other remedial measures.
   
The Company’s warrants issued in 2008 through 2011 have reset provisions to the exercise price and conversion price if the Company issues equity or other derivatives at a price less than the exercise price set forth in such warrants. This ratchet provision results in a derivative liability in our financial statements.  Our derivative liabilities increased to $14,660,273 at March 31, 2012 from $11,031,432 at December 31, 2012. The change in derivative fair value during the three months ended March 31, 2012 resulted in other expense of $3,628,841.  Fair values for exchange traded securities and derivatives are based on quoted market prices. Where market prices are not readily available, fair values are determined using market based pricing models incorporating readily observable market data and requiring judgment and estimates.
 
7
 
 

 
The following discussion focuses on information in more detail on the main elements of the $95,489 net increase in cash during the three months ended March 31, 2012 included in the accompanying  Statements of Cash Flow. The table below sets forth a summary of the significant sources and uses of cash for the three month periods ended March 31:

 
2012
2011
Cash used in operating activities
 $          (1,227,899)
$       (1,054,454)
Cash used in investing activities
                           -
            (292,242)
Cash provided by financing activities
              1,323,388
          3,179,422
Increase in cash
$                 95,489
$        1,832,726

Cash used in operating activities was $1,227,899 in the three month period ended March 31, 2012, compared to $1,054,454 in the three month period ended March 31, 2011.  Net losses of $5,036,224 and $6,277,552 for the three months ended March 31, 2012 and 2011, respectively, were the primary reasons for our negative operating cash flow in both years.  The Company’s negative operating cash flows for the three months ended March 31, 2012 and 2011 was offset by the effect of non-cash charges to income, such as depreciation, changes in the fair value of the derivative liability, amortization on debt discount and stock-based compensation.

Cash used in investing activities was $0 in the three month period ended March 31, 2012, compared to $292,242 in the three month period ended March 31, 2011.  Investing activities in the three months ended March 31, 2011 consisted entirely of purchases of equipment for our manufacturing plant.

Cash provided by financing activities was $1,323,388 in the three month period ended March 31, 2012, compared to $3,179,422 in the three month period ended March 31, 2011.  Over the last several years, the Company’s operations have been funded primarily through the sale of both equity and debt securities.  Proceeds from financing activities totaled $1,323,388 and $3,329,422 in the first three months of 2012 and 2011, respectively.  During the first quarter of fiscal 2011,  the Company made a $150,000 principal payment on outstanding debt. The Company did engage in $200,000 worth of debt financings in the first three months of fiscal 2012, as compared to $1,796,000 in borrowing on debt in the first three months of fiscal 2011.

Commitments/Contingencies:

AVEKA Nutra Processing, LLC Line of Credit.  On October 17, 2011, the Company entered into a Custom Processing Agreement (the “Agreement”) with ANP in order to provide the Company with a partner for future manufacturing initiatives.  Under the terms of the Agreement, the Company agreed to make available to ANP a $500,000 line of credit (which includes $10,000 that the Company loaned ANP to assist it with the purchase of its Waukon, Iowa facility) at an interest rate of 5.5%.  The line of credit is only permitted to be used by ANP for operating costs which excludes capital expenditures of equipment in excess of $5,000.  ANP may not drawn down on the line of credit more than $75,000 in any given thirty day period.  The loan is to be paid back to the Company in the form of discounts on production pricing commencing either two years after the first draw by ANP on the line of credit (other than the $10,000 the Company loaned ANP to assist it with the purchase of its Waukon, Iowa facility) or the first month after the Company has ordered 80,000 lbs. of product for three consecutive months, whichever shall occur first.  All of ANP’s obligations under the line of credit, as well as the Agreement, are specifically guaranteed by its parent company, Aveka Inc.  As of March 31, 2012, we advanced $410,000 to ANP under the line of credit.  We are obligated to make available to ANP an additional $90,000.

Debt Instruments and Redeemable Preferred Stock.  Our disclosures regarding our obligations under debt instruments and Redeemable Preferred Stock are located in various parts of our regulatory filings. We have $8,061,988 worth of Series I and II Redeemable Preferred Stock outstanding, of which $4,675,291 comes due in 2012.  If the preferred stock holders decide not to convert their securities to common stock, we will have an obligation to redeem the shares of Series I and II redeemable preferred stock for cash.  In such case, the Company would have to find sources of cash to repay such investors and there can be no assurance such resources will be available.  If we are forced to repay the such investors in cash, this need for funds would have a material adverse impact on our business operations, financial condition and prospects, would threaten our ability to operate as a going concern.

Information in the following table provides a summary of our outstanding obligations and Redeemable Preferred Stock as of March 31, 2012:

       
Payments Due by Fiscal Year
 
Obligation
 
Total as of March 31, 2012
 
2012
 
2013
 
2014
 
2008 Convertible Notes
 
$    100,000
 
$    100,000
         
2010 Convertible Notes
 
$      20,000
 
$      20,000
         
2012 Convertible Notes
 
$    200,000
         
$    200,000
 
2010 Redeemable Preferred Stock
 
$ 4,675,291
 
$ 4,675,291
         
2011 Redeemable Preferred Stock
 
$ 3,386,697
     
$ 3,386,697
     
Total Obligations
 
$ 8,381,988
 
$ 4,795,291
 
$ 3,386,697
 
$    200,000
 
                   
 
Subsequent to the first quarter of fiscal 2012, $100,000 of 2008 Convertible Notes and $20,000 of 2010 Convertible Notes that were to mature in 2012 were converted into an aggregate of 150,979 shares of common stock the Company’s Common Stock.  These conversions are not reflected in the table above.
 
8
 
 

 

Capital Expenditures.  At March 31, 2012, the Company has no material commitments for capital expenditures.

Lease commitments.  The Company leases a combined production and office facility located in Mundelein, Illinois.  The lease expires in March 2013 and monthly rental payments are $21,000, exclusive of property taxes.  The Company has the ability to terminate the lease by providing 60 days’ notice.

Litigation.  On July 7, 2007, the Company was served with a complaint by Joseph Sanfilippo and James Cluck for violation of the Consumer Fraud Act and is seeking damages in excess of $200,000.  Management believes that the allegations are frivolous and wholly without merit and will vigorously defend the claim. The pleadings are still at issue and discovery is underway.  Thus, the outcome is unknown as of the report date.


On or about December 12, 2011, the Company was served with a complaint by LIBCO Industries, Inc., alleging the Company breached a construction contract and tortuously interfered with a business relationship, and is seeking damages in excess of $185,000.  Management believes that the allegations are frivolous and wholly without merit and will vigorously defend the claim.  Related to this matter, Process Piping, LLC, a sub-contractor for LIBCO Industries, filed a mechanics lien on the property leased by the Company, claiming it was owed in excess of $95,000 by LIBCO Industries.  On March 6, 2012, the Company paid $62,500 to Process Piping, LLC in exchange for a release of its lien as well as an assignment of all of its claims against LIBCO Industries.  The pleadings of the matters are still at issue and discovery is underway.  Thus, the outcome is unknown as of the report date.

On or about March 15, 2012, the Company was served with a Charge of Discrimination filed with the Equal Employment Opportunity Commission by Richard Rothmaller, a former employee of the Company.  Rothmaller claims that the Company failed to accommodate his alleged disability and ultimately terminated him on October 13, 2011 because of his alleged disability.  On or about April 19, 2012, the parties resolved the matter, the case has been dismissed and proper amounts have been accrued at the period ended March 31, 2012.  The resolution of this matter is not expected to have any material impact on the Company’s financial position.

Although there can be no assurances, based on the information currently available, management believes that it is probable that the ultimate outcome of each of these actions will not have a material adverse effect on the consolidated financial statements of the Company.  However, an adverse outcome in either of these actions could have a material adverse effect on the financial results of the Company in the period in which it is recorded.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Critical Accounting Policies

Our financial statements have been prepared in conformity with GAAP. For a full discussion of our accounting policies as required by GAAP, refer to our Annual Report on Form 10-K for the year ended December 31, 2011. We consider certain accounting policies to be critical to an understanding of our condensed consolidated financial statements because their application requires significant judgment and reliance on estimations of matters that are inherently uncertain. The specific risks related to these critical accounting policies are unchanged at the date of this report and are described in detail in our Annual Report on Form 10-K.

Item 3. Quantitative and Qualitative Analysis of Market Risks

(Not Applicable)
 
9
 
 

 
Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures.

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are not effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act.  This conclusion is based primarily on the material weakness in internal control over financial reporting which was disclosed in our Annual Report on Form 10-K for the year ended December 31, 2011, where management identified material weaknesses consisting of ineffective controls over the control environment and financial statement disclosures.  

Changes in Internal Control Over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting through the date of this report or during the quarter ended March 31, 2012, that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Remediation of Material Weaknesses

As discussed above, as of December 31, 2011, we identified material weaknesses in our internal control over financial reporting primarily due to the Company not having developed accounting policies and procedures and effectively communicated to same to its employees.  Management plans to address these weaknesses by providing future investments in the continuing education of our accounting and financial professionals.

If the remedial measures described above are insufficient to address any of the identified material weaknesses or are not implemented effectively, or if additional deficiencies arise in the future, material misstatements in our interim or annual financial statements may occur in the future. Among other things, any unremediated material weaknesses could result in material post-closing adjustments in future financial statements.

10

 
 

 


PART II – OTHER INFORMATION


Item 1.   Legal Proceedings.

There are no material changes to the disclosure regarding legal proceedings in our Annual Report on Form 10-K for the year ended December 31, 2011.

Item 1A.  Risk Factors.

In addition to the risks and uncertainties discussed herein, particularly those discussed in the “Safe Harbor” Cautionary Statement and the other sections of Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part I, Item 2,  see the risk factors set forth in Part I, Item 1A of our annual report on Form 10-K for the fiscal year ended December 31, 2011.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.

In the first quarter of fiscal 2012, the Company’s largest shareholder, Brightline Ventures I, LLC, decided to convert $1,300,000 in principal balance on convertible notes issued in 2010 (“2010 Convertible Notes”) it held, plus $208,000 of interest accrued thereon into 1,508,000 shares of the Company’s Common Stock.  The issuance of the 2010 Convertible Notes was disclosed in the Company’s Current Report on Form 8-K dated  January 15, 2010 and is incorporated herein by reference.  The shares of common stock were issued pursuant to the provisions of Section 3(a)(9) of the Securities Act of 1933. The Company did not receive any proceeds upon conversion of the 2010 Convertible Notes and such issuances involved the issuance of shares to an existing security holder in exchange for other securities.



Item 6.  Exhibits.

See the Exhibit Index included as the last part of this report (following the signature page), which is incorporated herein by reference.



11

 
 

 



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.
 


Z TRIM HOLDINGS, INC.
(Registrant)


Date: May 15, 2012
/s/ Steven J. Cohen
 
 
Steven J. Cohen
Chief Executive Officer

Date: May 15, 2012                                                                /s/ Brian Chaiken
 
Brian Chaiken
Chief Financial Officer (Principal Financial Officer)



12

 
 

 


EXHIBIT INDEX
Z TRIM HOLDINGS, INC.

Form 10-Q for Quarter Ended March 31, 2012

Exhibit Number
Description
 
4.1
Form of Note (filed as Exhibit 4.1 to the Company’s Form 8-K dated February 17, 2012 and incorporated herein by reference).
 
4.2
Form of Warrant (filed as Exhibit 4.2 to the Company’s Form 8-K dated February 17, 2012 and incorporated herein by reference).
 
10.1
Form of Subscription Agreement (filed as Exhibit 10.1 to the Company’s Form 8-K dated February 17, 2012 and incorporated herein by reference).
 
10.2
Investment Banking Agreement (filed as Exhibit 10.2 to the Company’s Form 8-K dated February 17, 2012 and incorporated herein by reference).
 
31.1
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.
 
31.2
Certification of Principal Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.
 
32.1
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
32.2
Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
101.INS *
XBRL Instance Document
 
101.SCH *
XBRL Taxonomy Extension Schema Document
 
101.CAL *
XBRL Taxonomy Extension Calculation Linkbase Document
 
1.01 LAB *
XBRL Extension Labels Linkbase Document
 
101.PRE *
XBRL Taxonomy Extension Presentation Linkbase Document
 
101.DEF *
XBRL Taxonomy Extension Definition Linkbase Document
 

* In accordance with SEC rules, this interactive data file is deemed “furnished” and not “filed” for purposes of Sections 11 or 12 of the Securities Act of 1933 and Section 18 of the Securities and Exchange Act of 1934, and otherwise is not subject to liability under those sections or acts.

13

 
 

 
     
INDEX TO FINANCIAL STATEMENTS
       
                     
                   
PAGE
                     
Balance Sheets at March 31, 2012 (unaudited) and December 31, 2011
     
F-1
                     
Statements of Operations for three months ended as of March 31, 2012 and 2011 (unaudited)
 
F-2
                     
 Statements of Cash Flows for the three months ended as of March 31, 2012 and 2011 (unaudited)
F-3
                     
Notes to Financial Statements as of March 31, 2012 and 2011 (unaudited)
     
F-4











14
 

 
 

 

Z TRIM HOLDINGS, INC.
       
BALANCE SHEET
       
ASSETS
       
   
(Unaudited)
   
   
3/31/2012
 
12/31/2011
Current Assets
       
Cash and cash equivalents
 
 $                       408,562
 
 $                       313,073
Accounts receivable
 
                          321,989
 
                          315,277
Inventory
 
                          290,239
 
                          256,842
Prepaid expenses and other assets
 
                          101,664
 
                          120,475
         
Total current assets
 
                       1,122,454
 
                       1,005,667
         
Long Term Assets
       
        Letter of Credit
 
 $                       412,946
 
 $                         85,215
        Property and equipment, net
 
                       3,013,122
 
                       3,188,998
         
Total long term assets
 
                       3,426,068
 
                       3,274,213
         
TOTAL ASSETS
 
 $                    4,548,522
 
 $                    4,279,880
         
LIABILITIES & CONVERTIBLE, REDEEMABLE PREFERRED STOCK & STOCKHOLDERS' EQUITY (DEFICIT)
   
(Unaudited)
   
   
3/31/2012
 
12/31/2011
Current Liabilities
       
Accounts payable
 
 $                       135,876
 
 $                       214,632
Accrued expenses and other
 
                          182,982
 
                          351,460
Accrued Liquidated Damages
 
                            36,178
 
                            36,178
Derivative Liabilities
 
                     14,660,273
 
                     11,031,432
Current portion of Convertible Notes Payable, Net
 
                          109,632
 
                          108,122
Convertible Notes Payable to Related Party, Net
 
                                   -
 
                       1,273,567
Total Current Liabilities
 
                     15,124,941
 
                     13,015,391
         
        Convertible Notes Payable, Net
 
                          162,058
 
                                   -
         
Total Liabilities
 
                     15,286,999
 
                     13,015,391
         
Commitment & Contingencies
       
Dividends payable
 
                          811,461
 
                          650,616
Convertible, Redeemable Preferred Stock Preferred Stock Series I, $0.01 par value; authorized 1,000,000 shares, issued and outstanding 947,058 shares, March 31, 2012 and December 31, 2011, respectively
4,735,291
 
4,735,291
Convertible, Redeemable Preferred Stock Preferred Stock Series II, $0.01 par value; authorized 1,000,000 shares, issued and outstanding 665,339 shares, March 31, 2012 and December 31, 2011, respectively
3,326,697
 
                       3,326,697
  Discount on Preferred Stock
 
(3,817,149)
 
(4,853,776)
    Net Preferred Stock
 
4,244,839
 
3,208,212
         
Total Commitment & Contingencies
 
5,056,300
 
3,858,828
         
Stockholders' Equity (Deficit)
       
Common stock, $0.00005 par value; authorized 200,000,000 shares; issued and outstanding 15,886,421 and 14,139.621 shares, March 31, 2012 and December 31, 2011, respectively
                                 794
 
                                 707
Common stock payable
 
                       1,123,388
 
                                   -
Additional paid-in capital
 
                     91,974,739
 
                     91,262,428
Accumulated deficit
 
                 (108,893,698)
 
                 (103,857,474)
         
Total Stockholders' Equity (Deficit)
 
                   (15,794,777)
 
                   (12,594,339)
         
TOTAL LIABILITIES & CONVERTIBLE REDEEMABLE PREFERRED STOCK & STOCKHOLDERS' EQUITY (DEFICIT)
 $                    4,548,522
 
 $                    4,279,880
 
The accompanying notes are an integral part of the financial statements.
F-1
 
 

 


Z TRIM HOLDINGS, INC.
     
STATEMENTS OF OPERATIONS
     
 (Unaudited)      
FOR THE THREE MONTHS ENDED MARCH 31,
2012
 
2011
       
REVENUES:
     
  Products
 $           318,383
 
 $           247,366
    Total revenues
               318,383
 
               247,366
       
COST OF REVENUES:
     
  Products
               740,424
 
               645,658
    Total cost of revenues
               740,424
 
               645,658
       
GROSS MARGIN
             (422,041)
 
             (398,292)
       
OPERATING EXPENSES:
     
Selling, general and administrative
       936,275
 
   1,793,741
    Total operating expenses
               936,275
 
           1,793,741
       
OPERATING LOSS
          (1,358,316)
 
          (2,192,033)
       
OTHER INCOME (EXPENSES):
     
Rental and other income
           2,000
 
               216
Interest income
           2,731
 
           1,344
Interest expense - Other
               (68)
 
                  -
Interest expense - Note Payable
       (39,763)
 
  (1,826,662)
Change in Fair Value - Derivative
  (3,628,841)
 
  (1,836,765)
Loss on Derivative Settlement
                  -
 
     (411,192)
Settlement (loss), net
       (13,967)
 
       (12,460)
    Total other income (expenses)
          (3,677,908)
 
          (4,085,519)
       
NET LOSS
 $      (5,036,224)
 
 $      (6,277,552)
       
Less Preferred Dividends
               160,845
 
       171,849
Accretion of Discount of Preferred Stock
           1,036,627
 
       456,374
       
NET LOSS  ATTRIBUTABLE TO COMMON STOCKHOLDERS
 $      (6,233,696)
 
 $      (6,905,775)
       
NET LOSS PER SHARE - BASIC AND DILUTED
 $                 (0.40)
 
 $                 (0.83)
       
Weighted Average Number of Shares Basic and Diluted
         15,540,755
 
           8,314,026

The accompanying notes are an integral part of the financial statements.
F-2

 
 

 

Z TRIM HOLDINGS, INC.
     
STATEMENTS OF CASH FLOWS
     
       
FOR THE THREE MONTHS ENDED MARCH 31
2012
 
2011
       
CASH FLOWS FROM OPERATING ACTIVITIES
     
Net loss
 $               (5,036,224)
 
 $               (6,277,552)
Adjustments to reconcile loss from continuing operations to
     
net cash used in operating activities:
     
Stock based compensation - stock options vested
                       190,112
 
                       715,410
Preferred and common shares issued for director fees
                       160,000
 
                       201,400
Shares & Warrants issued for Services
                         11,250
 
                       118,125
Amortization on Debt Discount
                         30,509
 
                    1,593,767
Depreciation
                       175,876
 
                       164,945
Change in  Derivative Liability, net of bifurcation
                    3,628,841
 
                    2,247,957
Changes in operating assets and liabilities:
     
Accounts receivable
                         (6,712)
 
                       (27,486)
Inventory
                       (33,397)
 
                         (3,797)
Prepaid expenses and other assets
                         18,811
 
                            (442)
Letter of credit
                     (327,731)
 
                                   -
Increase/(Decrease) in:
     
Accounts payable and accrued expenses
                       (39,234)
 
                       213,219
CASH USED FOR OPERATING ACTIVITIES
                  (1,227,899)
 
                  (1,054,454)
       
CASH FLOWS FROM INVESTING ACTIVITIES
     
Purchase of Fixed Assets
                                   -
 
                     (292,242)
CASH USED FOR INVESTING ACTIVITIES
                                   -
 
                     (292,242)
       
CASH FLOWS FROM FINANCING ACTIVITES
     
Proceeds from sale of preferred stock
                                   -
 
                    3,326,697
Proceeds from sale of common stock
                    1,123,388
 
                           2,725
Borrowing on debt
                       200,000
 
                                   -
Principal payment on debt
                                   -
 
                     (150,000)
CASH PROVIDED BY FINANCING ACTIVITIES
                    1,323,388
 
                    3,179,422
NET INCREASE IN CASH
                         95,489
 
                    1,832,726
       
CASH AT BEGINNING OF PERIOD
                       313,073
 
                    2,327,013
CASH AT THE PERIOD ENDED MARCH 31
 $                    408,562
 
 $                 4,159,739
       
Supplemental Disclosures of Cash Flow Information:
     
        Note payable conversion
 $                 1,508,000
 
 $                 4,332,529
        Discount on preferred stock
 $                              -
 
 $                 3,386,697
        Amortization on preferred stock discount
 $                 1,036,627
 
 $                    456,374
        Change in derivative liability due to exercise of warrants
 $                              -
 
 $                      26,842
        Change in derivative liability due to conversion of note payable
 $                              -
 
 $                 2,119,193
        Dividends Payable
 $                    160,845
 
 $                    104,945
 
The accompanying notes are an integral part of the financial statements.
F-3

 
 

 

Z TRIM HOLDINGS, INC.
Notes to Financial Statements
March 31, 2012
 
NOTE 1 – NATURE OF BUSINESS
 
Z Trim Holdings, Inc. (the “Company”) manufactures a line of functional food ingredients that can be used to reduce costs, manage moisture, replace fats and deliver fiber to a wide variety of foods.  The Company’s products can be used by food manufacturers and processors, restaurants, schools, and the general public worldwide. The Company continues to explore all available options for its other Z Trim technologies and related assets. The Company owns an exclusive license to Z Trim, a natural, agriculture-based functional food ingredient.
 
 
NOTE 2 – GOING CONCERN
 
These financial statements have been prepared on a going concern basis, which implies the Company will continue to realize its assets and discharge its liabilities in the normal course of business. The Company had a working capital deficit of $14,002,487 and an accumulated net loss equal to $108,893,698 as of March 31, 2012. These factors raise substantial doubt regarding the ability of the Company to continue as a going concern. The continuation of the Company as a going concern is dependent upon the continued financial support from its shareholders, the ability of the Company to obtain necessary debt and equity financings, and the ability of the Company to improve operating margins. These financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
 
 NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Presentation of Interim Information

The financial information at March 31, 2012 is unaudited, but includes all adjustments (consisting only of normal recurring adjustments) that the Company considers necessary for a fair presentation of the financial information set forth herein, in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information, and with the instructions to Form 10-Q. Accordingly, such information does not include all of the information and footnotes required by U.S. GAAP for annual financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.
 
The results for three months ended March 31, 2012 may not be indicative of results for the year ending December 31, 2012 or any future periods.

 Use of Estimates
 
The preparation of the accompanying consolidated financial statements in conformity with accounting principles generally accepted in the United States (U.S. GAAP) requires management to make certain 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 revenues and expenses during the reporting period. Actual results could differ from those estimates.
 
Revenue Recognition
 
The Company generally recognizes product revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is probable. In instances where the final acceptance of the product is specified by the customer, revenue is deferred until all acceptance criteria have been met. No provisions were established for estimated product returns and allowances based on the Company’s historical experience.
 

Allowance for Doubtful Accounts
 
Management of the Company makes judgments as to its ability to collect outstanding receivables and provide allowances for the portion of receivables when collection becomes doubtful. Provisions are made based upon a specific review of all significant outstanding invoices. For those invoices not specifically reviewed, provisions are provided at differing rates, based upon the age of the receivable. In determining these percentages, management analyzes its historical collection experience and current economic trends. If the historical data the Company uses to calculate the allowance for doubtful accounts does not reflect the future ability to collect outstanding receivables, additional provisions for doubtful accounts may be needed and the future results of operations could be materially affected.  As of March 31, 2012 and December 31, 2011 the allowance for doubtful accounts is $0.
 
F-4
 
 

 
Accounting for Derivative Instruments
 
All derivatives have been recorded on the balance sheet at fair value based on the lattice model calculation. These derivatives, including embedded derivatives in the Company’s warrants and its Convertible 8% Senior Secured Notes issued in 2008 through 2010, which have reset provisions to the exercise price and conversion price if the Company issues equity or other derivatives at a price less than the exercise price set forth in such warrants and notes, are separately valued and accounted for on the Company’s balance sheet. Fair values for exchange traded securities and derivatives are based on quoted market prices. Where market prices are not readily available, fair values are determined using market based pricing models incorporating readily observable market data and requiring judgment and estimates.
 
Lattice Valuation Model
 
The Company valued the conversion features and warrants in their convertible notes using a lattice valuation model, with the assistance of a valuation consultant. The lattice model values these instruments based on a probability weighted discounted cash flow model. The Company uses the model to develop a set of potential scenarios. Probabilities of each scenario occurring during the remaining term of the debentures are determined based on management's projections. These probabilities are used to create a cash flow projection over the term of the instruments and determine the probability that the projected cash flow will be achieved. A discounted weighted average cash flow for each scenario is then calculated and compared to the discounted cash flow of the instruments without the compound embedded derivative in order to determine a value for the compound embedded derivative.
 
Cash and cash equivalents
 
For purposes of the statement of cash flows, the Company considers all highly liquid investments with a maturity of three months or less to be cash equivalents. There were $408,562 in cash at March 31, 2012 and $313,073 in cash at December 31, 2011.
 
Fair value of financial instruments
 
The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, inventory, accounts payable, accrued liabilities and long-term debt. The estimated fair value of cash, accounts receivable, accounts payable and accrued liabilities approximate their carrying amounts due to the short-term nature of these instruments. The carrying value of long-term debt also approximates fair value since their terms are similar to those in the lending market for comparable loans with comparable risks. None of these instruments are held for trading purposes.
 
The Company utilizes various types of financing to fund its business needs, including convertible debt with warrants attached. The Company reviews its warrants and conversion features of securities issued as to whether they are freestanding or contain an embedded derivative and, if so, whether they are classified as a liability at each reporting period until the amount is settled and reclassified into equity with changes in fair value recognized in current earnings. At March 31, 2012, the Company had convertible debt and warrants to purchase common stock, the fair values of which are classified as a liability. Some of these units have embedded conversion features that are treated as a discount on the notes. Such financial instruments are initially recorded at fair value and amortized to interest expense over the life of the debt using the effective interest method.
 
Inputs used in the valuation to derive fair value are classified based on a fair value hierarchy which distinguishes between assumptions based on market data (observable inputs) and an entity’s own assumptions (unobservable inputs). The hierarchy consists of three levels:
 
·  
Level one — Quoted market prices in active markets for identical assets or liabilities
 
·  
Level two — Inputs other than level one inputs that are either directly or indirectly observable; and
 
·  
Level three — Unobservable inputs developed using estimates and assumptions, which are developed by the reporting entity and reflect those assumptions that a market participant would use
 
 
Determining which category an asset or liability falls within the hierarchy requires significant judgment. The Company evaluates its hierarchy disclosures each quarter. The Company’s only asset or liability measured at fair value on a recurring basis is its derivative liability associated with the units consisting of convertible debt and warrants to purchase common stock (discussed above). The Company classifies the fair value of these warrants under level three. The fair value of the derivative liability at March 31, 2012 was $14,660,273 compared to $11,031,432 as of December 31, 2011.  The change in fair value for the three months ended March 31, 2012 was $3,628,841 compared to $1,836,765 for the three months ended March 31, 2011. The loss on derivative for the three months ended March 31, 2012 was $0 compared to $411,192 for the three months ended March 31, 2011. See also Note 11 herein.

Concentrations
 
Cash and cash equivalents are maintained with several financial institutions. Deposits held with banks may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and therefore bear minimal risk.
 
Inventory
 
Inventory is stated at the lower of cost or market, using the first-in, first-out method.
 
Property and Equipment
 
Property and equipment are stated at cost less accumulated depreciation.  Maintenance and repair costs are expensed as incurred.  Depreciation is calculated on the accelerated and straight-line methods over the estimated useful lives of the assets. Estimated useful lives of five to ten years are used for machinery and equipment, office equipment and furniture, and automobile. Estimated useful lives of up to five years are used for computer equipment and related software. Depreciation and amortization of leasehold improvements are computed using the term of the lease.
 
Intangible Assets
 
Intangible assets were carried at the purchased cost less accumulated amortization. Amortization was computed over the estimated useful lives of the respective assets, generally from fifteen to twenty years.
 
F-5
 
 

 
Impairment of Long-Lived Assets
 
Long-lived assets and certain identifiable intangible assets to be held and used are reviewed for impairment whenever events or changes in circumstance indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. Measurement of an impairment loss for long-lived assets and certain identifiable intangible assets that management expects to hold and use is based on the fair value of the asset. Long-lived assets and certain identifiable intangible assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell.
 
Income Taxes
 
The amount of current and deferred taxes payable or refundable is recognized as of the date of the financial statements, utilizing currently enacted tax laws and rates.  Deferred tax expenses or benefits are recognized in the financial statements for the changes in deferred tax liabilities or assets between years.
 
Advertising Costs
 
The Company expenses all advertising costs as incurred.  The amount for the three months ended March 31, 2012 and 2011 was $4,130 and $2,680, respectively.
 
Income (Loss) Per Common Share
 
Basic net income (loss) per share includes no dilution and is computed by dividing net income (loss) available to common stockholders by the weighted average number of common stock outstanding for the period. Diluted earnings per share is computed by dividing net income by the weighted average number of shares outstanding and, when diluted, potential shares from options and warrants to purchase common stock using the treasury stock method. Diluted net loss per common share does not differ from basic net loss per common share since potential shares of common stock are anti-dilutive for all periods presented.
 
Cashless Exercise of Warrants
 
The Company has issued warrants to purchase common stock where the holder is entitled to exercise the warrant via a cashless exercise, when the exercise price is less than the fair value of the common stock. The Company accounts for the issuance of common stock on the cashless exercise of warrants on a net basis.
 
Stock Based Compensation

The Company estimates the fair value of share-based payment awards made to employees and directors, including stock options, restricted stock and employee stock purchases related to employee stock purchase plans, on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as an expense ratably over the requisite service periods.  We estimate the fair value of each share-based awards using the Black-Scholes option pricing model. The Black-Scholes model is highly complex and dependent on key estimates by management. The estimates with the greatest degree of subjective judgment are the estimated lives of the stock-based awards and the estimated volatility of our stock price. The Company recognized pre-tax compensation expense related to stock options of $190,112 and $715,410 for the three months ended March 31, 2012 and 2011, respectively.
 
New Accounting Pronouncements
 
In September 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-08, Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment. The guidance in ASU 2011-08 is intended to reduce complexity and costs by allowing an entity the option to make a qualitative evaluation about the likelihood of goodwill impairment to determine whether it should calculate the fair value of a reporting unit. The amendments also improve previous guidance by expanding upon the examples of events and circumstances that an entity should consider between annual impairment tests in determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Also, the amendments improve the examples of events and circumstances that an entity having a reporting unit with a zero or negative carrying amount should consider in determining whether to measure an impairment loss, if any, under the second step of the goodwill impairment test. The amendments in this ASU are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued. The adoption of this guidance did not have a material impact on the Company’s financial position or results of operations.
 
In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income”, which is effective for annual reporting periods beginning after December 15, 2011. ASU 2011-05 will become effective for the Company on January 1, 2012. This guidance eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. In addition, items of other comprehensive income that are reclassified to profit or loss are required to be presented separately on the face of the financial statements. This guidance is intended to increase the prominence of other comprehensive income in financial statements by requiring that such amounts be presented either in a single continuous statement of income and comprehensive income or separately in consecutive statements of income and comprehensive income. The adoption of ASU 2011-05 did not have a material impact on the Company’s financial position or results of operations.
 
F-6
 
 

 
In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs”, which is effective for annual reporting periods beginning after December 15, 2011. This guidance amends certain accounting and disclosure requirements related to fair value measurements. Additional disclosure requirements in the update include: (1) for Level 3 fair value measurements, quantitative information about unobservable inputs used, a description of the valuation processes used by the entity, and a qualitative discussion about the sensitivity of the measurements to changes in the unobservable inputs; (2) for an entity’s use of a nonfinancial asset that is different from the asset’s highest and best use, the reason for the difference; (3) for financial instruments not measured at fair value but for which disclosure of fair value is required, the fair value hierarchy level in which the fair value measurements were determined; and (4) the disclosure of all transfers between Level 1 and Level 2 of the fair value hierarchy. ASU 2011-04 will become effective for the Company on January 1, 2012. The adoption of ASU 2011-04 did not have a material impact on the Company’s financial position or results of operations.
 
In April 2011, the FASB issued ASU 2011-02, “Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring”. This amendment explains which modifications constitute troubled debt restructurings (“TDR”). Under the new guidance, the definition of a troubled debt restructuring remains essentially unchanged, and for a loan modification to be considered a TDR, certain basic criteria must still be met. For public companies, the new guidance is effective for interim and annual periods beginning on or after June 15, 2011, and applies retrospectively to restructuring occurring on or after the beginning of the fiscal year of adoption. This guidance did not have a material impact on the Company’s financial statements.
 
NOTE 4 – INVENTORY
 
At March 31, 2012 and December 31, 2011, inventory consists of the following:
 
 
3/31/2012
 
12/31/2011
Raw materials
 $    54,712
 
 $    77,942
Packaging
         3,542
 
         4,063
Work-in-process
         3,427
 
                -
Finished goods
     228,558
 
     174,837
  Total inventory
 $  290,239
 
 $  256,842
       
 
 
NOTE 5 – PROPERTY AND EQUIPMENT, NET
 
At March 31, 2012 and December 31, 2011,  property and equipment, net consists of the following:
   
3/31/2012
 
12/31/2011
Production, engineering and other equipment
 
$6,702,194
 
$6,702,194
Leasehold improvements
 
2,904,188
 
2,904,188
Office equipment and furniture
 
603,182
 
603,182
Computer equipment and related software
 
140,238
 
140,238
   
$10,349,802
 
$10,349,802
Accumulated depreciation
 
($7,336,680)
 
($7,160,804)
Property and equipment, net
 
$3,013,122
 
$3,188,998
         
 
Depreciation expense was $175,876 and $164,945 for the three months ended March 31, 2012 and March 31, 2011 respectively.  During 2012, the company has not sold any equipment.
 
NOTE 6 – LETTER OF CREDIT
 
On October 17, 2011, the Company entered into a Custom Processing Agreement (the “Agreement”) with AVEKA Nutra Processing, LLC (“ANP”), part of the Aveka Group, in order to provide the Company with a partner for future manufacturing initiatives.  

 The Agreement provides that ANP will perform certain services related to the Company’s dietary fiber product, including manufacturing, processing, packaging and storage/warehousing for an initial term of three years.  The Agreement automatically renews at the end of the initial term for an additional two year term unless either party provides written notice to the other within the specified time frame.  Production pursuant to the Agreement is anticipated to begin no later than June 30, 2012.  Once production commences, the Agreement provides for minimum production volumes of 40,000 lbs per month and average volumes of 100,000 lbs. per month with the ability to increase future production volume to potentially as much as 1,000,000 lbs. per month.

In addition, the Company has agreed to make available to ANP a $500,000 line of credit (which includes $10,000 that the Company loaned ANP to assist it with the purchase of its Waukon, Iowa facility) at an interest rate of 5.5%.  The line of credit is only permitted to be used by ANP for operating costs which excludes capital expenditures of equipment in excess of $5,000.  ANP may not drawn down on the line of credit more than $75,000 in any given thirty day period.  The loan is to be paid back to the Company in the form of discounts on production pricing commencing either two years after the first draw by ANP on the line of credit (other than the $10,000 the Company loaned ANP to assist it with the purchase of its Waukon, Iowa facility) or the first month after the Company has ordered 80,000 lbs. of product for three consecutive months, whichever shall occur first.  All of ANP’s obligations under the line of credit, as well as the Agreement, are specifically guaranteed by its parent company, Aveka Inc.  As of March 31, 2012 we advanced a total of $410,000 and accrued interest on the advance was $2,946.

The foregoing description of the Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the Agreement, which is attached as Exhibit 10.1 to the Company’s Report on Form 8-K filed on October 17, 2011 and is incorporated by reference herein.  
 
F-7
 
 
 

 
 
NOTE 7 – ACCRUED EXPENSES AND OTHER
 
At March 31, 2012 and December 31, 2011 accrued expenses consist of the following:
 
 
3/31/2012
 
12/31/2011
Accrued payroll and taxes
 $             63,031
 
 $             29,153
Accrued Settlements
                14,026
 
                62,500
Accrued Interest
                33,744
 
              232,490
Accrued expenses and other
                72,181
 
                27,317
Total accrued expenses & other
 $           182,982
 
 $           351,460
                                                          
 
NOTE 8 – CONVERTIBLE NOTES PAYABLE
 
As of March 31, 2012, the Company had $320,000 worth of convertible notes outstanding.  In April 2012, $120,000 of the convertible notes will mature.  The balance, $200,000 of convertible notes will mature in 2014.

During the first quarter of fiscal 2012, we secured financing from three accredited investors (the “Investors”) pursuant to which we sold senior secured convertible promissory notes (each a “Note” and collectively the “Notes”) and warrants and received gross proceeds of $200,000.   The Notes have a twenty-four month term and accrue interest at the rate of 8% per annum.  The principal balance of the Notes is convertible at the rate of $1.00 per share into an aggregate of 200,000 shares of our common stock, $.00005 par value (the “Common Stock”).  The interest is payable either upon maturity of the Notes or quarterly at the Investors’ option in shares of our Common Stock.  Any amount of principal or interest which is not paid when due shall bear interest at a rate of interest equal to the eighteen percent (18%) per annum.  Attached to the Notes are warrants that entitle the Investor to purchase a specified number of shares of common stock of the Company at a price of $1.50 per share within five years.  The warrants value is discounted against the Notes and is being amortized as interest expense using the effective interest method over the term of the Notes. The valuation of the related discount for the warrants was calculated using the Black Scholes model and was equal to $40,508. The key inputs to the model were the numberof warrants of 100,000, share prices on grant dates of $0.59 and $0.70, exercise price of $1.50, terms of 5 years, volatilities of 98.16 and 103.66%, and discount rates of 0.91% and 0.88%. As of March 31, 2012, the amount of debt discount, net of amortization, was $37,942.
 
Amortization on Convertible Notes

For the periods ended March 31, 2012 and March 31, 2011, the Company recorded amortization on debt discounts in the amount of $30,509 and $1,593,767, respectively. The warrants value and the beneficial conversion value are discounted against the Notes and are being amortized as interest expense using the effective interest method over the term of the Notes. The total debt discount as of March 31, 2012 and December 31, 2011, was $48,310 and $38,311, respectively, net of total amortization.

 
NOTE 9 – PREFERRED STOCK
 
On March 17, 2011, the Company entered a private placement subscription agreement with New York-based investment firm Brightline Ventures I, LLC ("Brightline"), pursuant to which we sold 332.6697 units consisting of Preferred Stock and warrants, for an aggregate offering price of $3,326,697. Each of the units (individually, a “Unit” and collectively, the “Units”) consists of 2,000 shares of the Series II 8% Convertible Preferred Stock (“Preferred Stock”) at an Original Issue Price of $5.00 per share, with rights to: (i) a dividend which accrues cumulatively on a daily basis at the rate of 8% per annum of the Original Issue Price payable in shares of the Common Stock; (ii) conversion into such a number of shares of Common Stock determined by dividing the Original Issue Price by the Conversion Price, initially, $1.00; (iii) a liquidation preference equal to the sum of the Original Issue Price and an amount equal to 8% of the Original Issue Price for each 12 months that passed since the date of issuance of any of the Preferred Stock; and (iv) mandatory redemption, by the Company, 24 months from the date of issuance of the Preferred Stock at a redemption price equal to the Original Issue Price plus any accrued but unpaid dividends. The dividend component on liquidation and redemption is payable in shares of the Common Stock of the Company. Payment of the dividend, mandatory redemption and any provisions requiring payment on the Preferred Stock are deferred until the 2008 Notes due in 2010 and the 2009 Notes due in 2011 and 2012 are paid in full. Such deferral, even if the maturity dates on the Notes are extended, will not constitute a default under the Preferred Stock terms.
 
The Preferred Stock terms may be amended by the Company and the consent of the holders of the majority of the outstanding shares and such majority may also waive an adjustment to the Conversion Price.The Preferred Stock is convertible into a total of 3,326,697 shares of Common Stock, exclusive of the convertible 8% dividend. Brightline also received one five-year warrant for each Unit purchased, to purchase 15,000 shares of Common Stock per unit with an exercise price of $1.50 per share (“Warrants”). The total warrants issued were 4,990,046. Current Z Trim Director Edward Smith, III, is a managing partner of Brightline Capital Management, LLC, which is the investment manager of Brightline Ventures I, LLC.
F-8
 
 

 
We also entered into a registration rights agreement with Brightline pursuant to which we agreed to file with the Securities and Exchange Commission a registration statement covering the resale of the Common Stock underlying the Preferred Stock and Warrants no later than 60 days after April 15, 2011. In addition, the Company was required to use its best efforts to have the registration statement become effective no later than 120 days after April 15, 2011. The Company would make pro rata payments to each investor, as liquidated damages and not as a penalty in the amount equal to 1.5% of the aggregate amount invested by such investor for each 30-day period. The registration statement was filed on June 2, 2011 and went effective on June 3, 2011.
 
The descriptions herein are qualified in their entirety by reference to the copies of the forms of the Subscription Agreement, the Warrant, and the Registration Rights Agreement which are attached as exhibits to the Company’s Form 8-K filed on March 21, 2011.

In January 2011,  the Company’s external Directors, Mark Hershhorn, Morris Garfinkle, Brian Israel and Edward Smith each agreed to apply $15,000 of their Directors’ fees (20% of which is past due), to the purchase of Units pursuant to the terms of the preferred stock series I.   As such, we entered into 4 private placement subscription agreements with investors pursuant to which we issued 6 units consisting of Preferred Stock and warrants, for an aggregate offering price of $60,000.   Each of the units (individually, a “Unit” and collectively, the “Units”) consists of 2,000 shares of the Series I 8% Convertible Preferred Stock (“Preferred Stock”) at an Original Issue Price of $5.00 per share, with  rights to:  (i) a dividend which accrues cumulatively on a daily basis at the rate of 8% per annum of the Original Issue Price payable in shares of the Common Stock; (ii) conversion into such a number of shares of Common Stock determined by dividing the Original Issue Price by the Conversion Price, initially, $1.00; (iii) a liquidation preference equal to the sum of the Original Issue Price and an amount equal to 8% of the Original Issue Price for each 12 months that passed since the date of issuance of any of the Preferred Stock; and (iv) mandatory redemption, by the Company, 24 months from the date of issuance of the Preferred Stock at a redemption price equal to the Original Issue Price plus any accrued but unpaid dividends.  The dividend component on liquidation and redemption is payable in shares of the Common Stock of the Company.  Payment of the dividend, mandatory redemption and any provisions requiring payment on the Preferred Stock are deferred until the 2008 Notes due in 2010 and the 2009 Notes due in 2011 and 2012 are paid in full.  Such deferral, even if the maturity dates on the Notes are extended, will not constitute a default under the Preferred Stock terms.  The Preferred Stock terms may be amended by the Company and the consent of the holders of the majority of the outstanding shares and such majority may also waive an adjustment to the Conversion Price.
 
Beginning September 3, 2010 through December 31, 2010, we entered into several private placement subscription agreements with investors pursuant to which we sold 478.43 units consisting of Preferred Stock and warrants, for an aggregate offering price of $4,784,291. Each of the units (individually, a "Unit" and collectively, the "Units") consists of 2,000 shares of the Series I 8% Convertible Preferred Stock ("Preferred Stock") at an Original Issue Price of $5.00 per share, with rights to: (i) a dividend which accrues cumulatively on a daily basis at the rate of 8% per annum of the Original Issue Price payable in shares of the Common Stock; (ii) conversion into such a number of shares of Common Stock determined by dividing the Original Issue Price by the Conversion Price, initially, $1.00; (iii) a liquidation preference equal to the sum of the Original Issue Price and an amount equal to 8% of the Original Issue Price for each 12 months that passed since the date of issuance of any of the Preferred Stock; and (iv) mandatory redemption, by the Company, 24 months from the date of issuance of the Preferred Stock at a redemption price equal to the Original Issue Price plus any accrued but unpaid dividends. The dividend component on liquidation and redemption is payable in shares of the Common Stock of the Company. Payment of the dividend, mandatory redemption and any provisions requiring payment on the Preferred Stock are deferred until the 2008 Notes due in 2010 and the 2009 Notes due in 2011 and 2012 are paid in full. Such deferral, even if the maturity dates on the Notes are extended, will not constitute a default under the Preferred Stock terms. The Preferred Stock terms may be amended by the Company and the consent of the holders of the majority of the outstanding shares and such majority may also waive an adjustment to the Conversion Price.
 
The Investors also received one five-year warrant for each Unit purchased, to purchase 15,000 shares of Common Stock per unit with an exercise price of $1.50 per share ("Warrants"). The total warrants issued to the investors were 7,176,437. Brightline Ventures I, LLC, invested $4,395,291 of the total amount set forth in the preceding paragraph. Current Z Trim Director Edward Smith, III, is a managing partner of Brightline Capital Management, LLC, which is the investment manager of Brightline Ventures I, LLC. Further, current Z Trim Director Morris Garfinkle invested $30,000 of the total amount set forth in the preceding paragraph.
 
As of March 31, 2012, the Company accrued dividends of $811,461 compared to $650,616 as of December 31, 2011.
 
We also entered into registration rights agreements pursuant to which we have agreed to file with the Securities and Exchange Commission a registration statement covering the resale of the Common Stock underlying all issued Preferred Stock (Series I and II) and accompanying Warrants.  This registration statement was filed on June 2, 2011, and went effective on June 3, 2011.
 
Currently, there are 947,058 shares of Series I Preferred Stock outstanding, convertible into 4,735,291 shares of common stock, exclusive of dividends, which are also convertible into common stock. Accrued dividends payable are convertible in 535,117 shares of common stock.
 
Currently, there are 665,339 shares of Series II Preferred Stock outstanding, convertible into 3,326,697 shares of common stock, exclusive of dividends, which are also convertible into common stock. Accrued dividends payable are convertible in 276,344 shares of common stock.
 
F-9
 
 

 
 
NOTE 10 – LIQUIDATED DAMAGES
 
In connection with certain private placements of the Company’s securities (the “Registrable Securities”) effected in 2008 the Company entered into registration rights agreements (the “RRA”) that required the Company to file a registration statement covering the Registrable Securities with the Securities and Exchange Commission no later than thirty days after the final closing as contemplated in the Private Placement Memorandum for the 2008 offering (the “Filing Deadline”), which the Company did not meet. Under the terms of the registration rights agreement, as partial compensation, the Company would be required to make pro rata payments to each Investor in an amount equal to 1.5% of the aggregate amount invested by such Investor for each 30-day period or pro rata for any portion thereof following the Filing Deadline for which no registration statement was filed.  We obtained a release and waiver of the amounts due from almost all of the 2008 investors.   Under the terms of the RRA, we potentially owe, and have recognized as liquidated damages, the amount of $36,178 relating to holders from whom we did not receive waivers.
 
NOTE 11 – DERIVATIVE LIABILITIES
 
The Company’s warrants and its Convertible 8% Senior Secured Notes issued in 2008 and 2010 have reset provisions to the exercise price and conversion price if the Company issues equity or other derivatives at a price less than the exercise price set forth in such warrants and notes. This ratchet provision results in a derivative liability in our financial statements.
 
Our derivative liabilities increased to $14,660,273 at March 31, 2012 from $11,031,432 at December 31, 2011.  The change in fair value during the three months ended March 31, 2012 was $3,628,841 as compared to $1,836,765 for the three months ended March 31, 2011.
 
The following tabular presentation reflects the components of derivative financial instruments on the Company’s balance sheet at March 31, 2012 and December 31, 2011:
 
   
12/31/11
 
12/31/11
Common stock warrants
 
 $    12,252,984
  
 $       8,829,215
Embedded conversion features –part of note discount
 
         2,407,289
  
          2,202,217
Total
 
 $    14,660,273
 
 $     11,031,432
         
       
Beginning Balance
 $    11,031,432
 
 $     13,528,355
Bifurcated Amount
                        -
 
          3,386,697
Change in Derivative Liability
 
         3,628,841
 
        (3,396,298)
Change in Derivative Liability-Conversion
 
                        -
 
        (2,487,322)
Total
 $    14,660,273
 
 $     11,031,432
         

 
F-10
 
 

 
NOTE 12 – EQUITY
 
Common Stock Payable

On February 23, 2012, we entered into a private placement subscription agreement with Brightline Ventures I-B, LLC, a Delaware Limited Liability Company pursuant to which we sold 311,545 shares of Common Stock, for a price of $1.50 per share and received gross proceeds of $467,318.

On March 29, 2012, we entered into a private placement subscription agreement with Brightline Ventures I-B, LLC, a Delaware Limited Liability Company pursuant to which we sold 437,380 shares of Common Stock, for a price of $1.50 per share and received gross proceeds of $656,070.

As of March 31, 2012, the gross proceeds of $1,123,388 was recorded as common stock payable subject to the issuance of the common stock certificates of the Company to Brightline Ventures I-B, LLC for these transactions.
 
Common Stock issued on Converted Notes
 
During the first quarter of fiscal 2012, the Company issued 1,508,000 shares of its common stock, $.00005 par value per share, upon conversion to common stock of  its 8% Convertible Secured Notes Due in 2012, (representing principal of $1,300,000 and interest of $208,000.  The conversion was in accordance with the agreement, and therefore no gain or loss was recorded.
 
Common Stock Issued to Directors

On February 6, 2012 the Company issued 238,800 shares of common stock to four of its non-executive directors (59,700 each) – Mark Hershhorn, Brian Israel, Morris Garfinkle and Edward Smith III. The Company recognized a total of expense of $160,000 related to these issuances.  These shares were valued based on the closing price of the grant date.

Common Stock Issued for Services

On August 22, 2011, the Company entered into an Agreement for Services with Alliance Advisors, LLC, pursuant to which Alliance agreed to provide investor relations services to us for a period of twelve months.  In exchange for Alliance’s services, we agreed to pay Alliance 84,000 restricted shares of common stock valued at $12,600 for purposes of the agreement, as well as $6,500 per month for the first six months, and $7,500 per month for the second six months of the agreement.  The agreement provides, that either party has the right to terminate the agreement after 6 months, and in the event of such termination, a pro rata portion of the 84,000 shares of common stock would be returned to the Company.  On May 10, 2012 the Company terminated the agreement and requested Alliance to return 42,000 of the restricted shares.  Alliance has agreed to these stipulations.  The initial 42,000 vested shares were expensed in the prior year.  Due to the termination of the contract, no expense was recorded during the three months ended March 31, 2012.

On April 12, 2011, the Company entered into an Agreement for Services with AIM Capital Corporation, pursuant to which AIM agreed to provide public relations services to us for a period of twelve months. In exchange for AIM’s services, we agreed to pay Aim an annual fee of 125,000 shares of common stock which vest as follows: 50,000 upon execution of agreement, 25,000 on the 90th day following this agreement, 25,000 on the 180th day following this agreement, and 25,000 on the 270th day following this agreement. The agreement also provides that should either party terminate this agreement, AIM shall be entitled to keep all vested a shares as of the date of termination, plus any pro rata amount of shares based on the termination date.  As of March 31, 2012 all shares have vested to the benefit of AIM.  During the three months ended March 31, 2012 the Company recognized an expense of $11,250 for the remaining vested shares.

We also entered into registration rights agreements pursuant to which we have agreed to file with the Securities and Exchange Commission a registration statement covering the resale of the Common Stock underlying the issuance above. This registration statement was filed on June 2, 2011, and went effective on June 3, 2011.

We determined that all of the securities issued pursuant to the agreement were exempt from registration under the Securities Act of 1933, as amended (the "Act") pursuant to Section 4(2) of the Act and Rule 506 of Regulation D promulgated under the Act. We based this determination on the non-public manner in which we offered the securities and on the representations of the persons purchasing such securities, which included, in pertinent part, that such persons were "accredited investors" within the meaning of Rule 501 of Regulation D promulgated under the Act, and that such persons were acquiring such securities for investment purposes for their own respective accounts and not as nominees or agents, and not with a view to resale or distribution, and that each such person understood such securities may not be sold or otherwise disposed of without registration under the Act or an applicable exemption therefrom.

The description of the terms of sale of the securities described in this report is qualified in its entirety by reference to the full text of the underlying document which has been filed as exhibits to the Company’s Form 8-K filed with SEC on February 11, 2011.

Exercising of Stock Warrants and/or Options
 
During the first quarter of 2012, there were no warrants exercised for cash and no options were exercised.
 
Common Stock Issued on the Cashless Exercise of Warrants
 
We have not issued any shares of common stock on the cashless exercise of warrants during the first quarter of 2012 or the fiscal year 2011.
 
F-11
 
 

 
 
NOTE 13 – STOCK OPTION PLAN AND WARRANTS
 
The Company has a Stock Option Plan (the Plan) effective January 2, 1999 and amended in 2002 and 2004, which provides for the issuance of qualified options to all employees and non-qualified options to directors, consultants and other service providers.
 
A summary of the status of stock options under the Plan as of March 31, 2012 and December 31, 2011 is as follows:
 
   
3/31/2012
 
12/31/2011
     
Weighted
   
Weighted
   
Number
Average
 
Number
Average
   
of
Exercise
 
of
Exercise
   
Shares
Price
 
Shares
Price
Outstanding at beginning of year
 
       5,645,202
 $          1.10
 
       3,484,833
 $          0.66
Granted
 
       2,009,275
 $          0.65
 
       2,298,702
 $          1.21
Exercised
 
                      -
 $               -
 
                     -
 $              -
Expired and Cancelled
 
                     -
 $               -
 
       (138,333)
 $          2.18
Outstanding at end of period
 
     7,654,477
 $          0.98
 
       5,645,202
 $          1.10
             
Exercisable at end of period
 
       5,485,202
 $          1.09
 
       5,317,003
 $          1.13
             
 
During the three months ended March 31, 2012, the Company granted 2,009,275 options.  Stock based compensation for the three months ended March 31, 2012 was $190,112.  As of March 31, 2012, the unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Plan was $665,063, of which $618,630 will be recognized in each of the remaining FY 2012 quarters.
 
During the three months ended March 31, 2011, the Company granted 1,918,702 options.  The total fair value of options vested during the first quarter of 2011 was $715,410.
 
The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option valuation model.  This model uses the assumptions listed in the table below.  Expected volatilities are based on the historical volatility of the Company’s stock.  The risk-free rate for periods within the expected life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.
 
 
Three months ended March 31, 2012
 
Weighted average fair value per option granted
 $                       0.37
Risk-free interest rate0
0.34- 1.04%
Expected dividend yield
0.00%
Expected lives
 2.59 – 4.96
Expected volatility
98-103%
 
As of March 31, 2012, the Company had reserved 20.0 million shares for issuance under the Plan.  As of March 31, 2012, the Company had 12,202,190 million options available for grant under the Plan. (20,000,000 less 7,414,477 options less 383,333 director shares =12,202,190).
 
Stock options outstanding at March 31, 2012 are as follows:
 
       
Weighted
         
       
Average
 
Weighted
     
Range of
     
Remaining
 
Average
     
Exercise
 
Options
 
Contractual
 
Exercise
 
Options
 
Prices
 
Outstanding
 
Life
 
Price
 
Exercisable
 
$0.01-$1.50
 
7,444,477
 
3.6
 
 $       1.18
 
5,275,202
$1.51-$3.00
 
   210,000
 
2.6
 
 $       1.49
 
  210,000
   
7,654,477
 
3.7
 
         0.98
 
5,485,202
 

F-12
 
 

 
 
Warrants
 
 
As of March 31, 2012, the Company has warrants outstanding to purchase 23,836,108, shares of the Company’s common stock, at prices ranging from $0.01 to $36.00 per share.  These warrants expire at various dates through February 2017.   There were 100,000 warrants issued in the three month period ended March 31, 2012.  The summary of the status of the warrants issued by the Company as of March 31, 2012 and December 31, 2011 are as follows:
 
   
Year  Ended
 
Year  Ended
   
3/31/2012
 
12/31/2011
   
Number of Shares
 
Weighted Average Exercise Price
 
Number of Shares
 
Weighted Average Exercise Price
Outstanding at beginning of year
 
   23,736,108
 
 $        1.55
 
     18,779,753
 
$1.59
Granted
 
        100,000
 
 $        0.71
 
       5,130,046
 
$1.66
Exercised
 
                    -
     
         (56,489)
 
$0.06
Cashless
 
                    -
     
                      -
   
Expired and Cancelled
 
                    -
     
       (117,202)
 
$13.72
   
   23,836,108
     
     23,736,108
   
                 
Outstanding, end of period
 
   23,836,108
 
 $        1.55
 
     23,736,108
 
$1.55
                 
Unexercisable at end of period
               
Exercisable at end of period
 
    23,836,108
 
 $        1.55
 
     23,736,108
 
$1.55
                 
 
During the first quarter of fiscal 2012, investors did not exercise any warrants.  During the first quarter of fiscal 2011, investors exercised 49,358 warrants.
 
 
NOTE 14 – MAJOR CUSTOMERS AND CREDIT CONCENTRATION
 
The Company’s customers are food manufacturers.  There were three significant customers that accounted for greater than 10% (each) of sales for the three months ended March 31, 2012. These three customers accounted for 37%, 25% and 10% of total net sales.   In addition, there were two significant customers that account for greater than 10% (each) of accounts receivable for the quarter ended March 31, 2012. These customers accounted for 50% and 19% of the accounts receivable as of March 31, 2012.
 
The Company maintains cash deposits with major banks, which from time to time may exceed federally insured limits.  At March 31, 2012 and December 31, 2011, $408,562 and $313,073, respectively, were in excess of federally insured limits.  The Company periodically assesses the financial condition of the institutions and believes that the risk of any loss is minimal.
 
F-13
 
 

 
NOTE 15 – COMMITMENTS
 
Building Lease
 
The Company leases a combined production and office facility located in Mundelein, Illinois.  The facility is approximately 44,000 square feet.  The Company extended the lease until March 2013 and the required monthly rental payments increased to $21,000, exclusive of property taxes.   The Company also is responsible for payment of all property taxes.  Insurance and maintenance are billed when due.  If we were to lose this lease or not be able to extend our lease due to the specific requirements of our Company, the outcome to our operations could be substantial.
 
The Company recognizes escalating lease expense on a straight line basis in accordance with current accounting standards.
 
For the three months ended March 31, 2012 and 2011, respectively, the Company recognized rent expense of $63,000 and $80,700. The future minimum annual rental payments and sub-lease income for the years ended December 31 under the lease terms are as follows:
 
Year Ended
Rentals
 
   
2012
                  $189,000
2013
                      63,000
2014
                           -
2015
                           -
 
 $                 252,000
 
 
NOTE 16 – PENDING LITIGATION/ CONTINGENT LIABILITY
 
On July 7, 2007, the Company was served with a complaint by Joseph Sanfilippo and James Cluck for violation of the Consumer Fraud Act and is seeking damages in excess of $200,000.  Management believes that the allegations are frivolous and wholly without merit and will vigorously defend the claim. The outcome of this matter is unknown as of the report date.

On or about December 12, 2011, the Company was served with a complaint by LIBCO Industries, Inc., alleging the Company breached a construction contract and tortuously interfered with a business relationship, and is seeking damages in excess of $185,000.  Management believes that the allegations are frivolous and wholly without merit and will vigorously defend the claim.  Related to this matter, Process Piping, LLC, a sub-contractor for LIBCO Industries, filed a mechanics lien on the property leased by the Company, claiming it was owed in excess of $95,000 by LIBCO Industries.  On March 6, 2012, the Company paid $62,500 to Process Piping, LLC in exchange for a release of its lien as well as an assignment of all of its claims against LIBCO Industries.  The outcome of this matter is unknown as of the report date.

On or about March 15, 2012, the Company was served with a Charge of Discrimination filed with the Equal Employment Opportunity Commission by Richard Rothmaller, a former employee of the Company.  Rothmaller claims that the Company failed to accommodate his alleged disability and ultimately terminated him on October 13, 2011 because of his alleged disability.  On or about April 19, 2012, the parties resolved the matter, the case has been dismissed and proper amounts have been accrued at the period ended March 31, 2012.


F-14
 
 

 
 
NOTE 17 – RELATED PARTY TRANSACTIONS
 
In 2012, the Company’s non-executive Directors, Mark Hershhorn, Morris Garfinkle, Brian Israel and Edward Smith each agreed to apply $40,000 of their Directors’ fees to the purchase of 59,700 shares of common stock.
 
NOTE 18 – GUARANTEES
 
The Company from time to time enters into certain types of contracts that contingently require the Company to indemnify parties against third party claims. These contracts primarily relate to: (i) divestiture agreements, under which the Company may provide customary indemnifications to purchasers of the Company’s businesses or assets; (ii) certain real estate leases, under which the Company may be required to indemnify property owners for environmental and other liabilities, and other claims arising from the Company’s use of the applicable premises; and (iii) certain agreements with the Company's officers, directors and employees, under which the Company may be required to indemnify such persons for liabilities arising out of their employment relationship.  The terms of such obligations vary. Generally, a maximum obligation is not explicitly stated. Because the obligated amounts of these types of agreements often are not explicitly stated, the overall maximum amount of the obligations cannot be reasonably estimated. Historically, the Company has not been obligated to make significant payments for these obligations, and no liabilities have been recorded for these obligations on its balance sheet as of March 31, 2012.
 
In general, the Company offers a one-year warranty for most of the products it sells.  To date, the Company has not incurred any material costs associated with these warranties.
 
NOTE 19 – SUBSEQUENT EVENTS
 
On or about March 15, 2012, the Company was served with a Charge of Discrimination filed with the Equal Employment Opportunity Commission by Richard Rothmaller, a former employee of the Company.  Rothmaller claims that the Company failed to accommodate his alleged disability and ultimately terminated him on October 13, 2011 because of his alleged disability.  On or about April 19, 2012, the parties resolved the matter, the case has been dismissed and proper amounts have been accrued at the period ended March 31, 2012.

As of March 31, 2012, we had$120,000 worth of convertible notes that remain outstanding, and which come due in 2012.  As of April 19, 2012 those notes, plus $30,979 were converted into 150,979 shares of Common Stock.

On May 8, 2012, we entered into a private placement subscription agreement with Brightline Ventures I-B, LLC, a Delaware Limited Liability Company pursuant to which we sold 744,711 shares of Common Stock, for a price of $1.50 per share and received gross proceeds of $1,117,067.

On April 11, 2012, an employee of the Company purchased 2,500 shares of common stock under the Stock Option Plan at $0.65 per share.

On February 23, 2012, we entered into a private placement subscription agreement with Brightline Ventures I-B, LLC, a Delaware Limited Liability Company pursuant to which we sold 311,545 shares of Common Stock, for a price of $1.50 per share and received gross proceeds of $467,318.  These shares were issued subsequent to March 31, 2012.

On March 29, 2012, we entered into a private placement subscription agreement with Brightline Ventures I-B, LLC, a Delaware Limited Liability Company pursuant to which we sold 437,380 shares of Common Stock, for a price of $1.50 per share and received gross proceeds of $656,070. These shares were issued subsequent to March 31, 2012.
 
F-15


PINX:ZTHO Z-Trim Holdings Inc Quarterly Report 10-Q Filling

Z-Trim Holdings Inc PINX:ZTHO Stock - Get Quarterly Report SEC Filing of Z-Trim Holdings Inc PINX:ZTHO stocks, including company profile, shares outstanding, strategy, business segments, operations, officers, consolidated financial statements, financial notes and ownership information.

PINX:ZTHO Z-Trim Holdings Inc Quarterly Report 10-Q Filing - 3/31/2012
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