---

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

Form 10-K

☒	ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2014

☐	TRANSITION REPORT UNDER 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)

 

Securities registered under Section 12(b) of the Exchange Act:  None.

Securities registered under Section 12(g) of the Exchange Act:

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes   ☐   No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes   ☐   No ☒

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 past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes   ☒   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).   Yes   ☒   No ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer    ☐ (Do not check if a smaller reporting company)	Smaller reporting company ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes   ☐   No ☒

The aggregate market value of the Company’s common equity held by non-affiliates computed by reference to the closing price  $0.84  as of the last business day of the registrant’s most recently completed second quarter was:   $30,197,202.

The number of shares of our common stock outstanding as of March 31, 2015 was 40,711,778.

Documents Incorporated by Reference:  None.

 

---

 

---

---

Cautionary Note Regarding Forward-Looking Statements

The statements contained in this Form 10-K that provide guidance or are not historical facts (such as statements in the future tense and statements including “believe,” “expect,” “intend,” “plan,” “anticipate,” “goal,” “target” and similar terms and concepts), including all discussions of periods which are not yet completed, are forward-looking statements that involve risks and uncertainties, including, but not limited to:

- our history of operating losses and our inability to achieve or guarantee profitable operations in the future or to continue operations;

- the risk that we will be unable to pay our debt obligations as they become due or that we will be able to find sufficient financing to fund our operations;

- risk that there will not be market acceptance of our products;

- our plans for commercialization of our products;

- possible problems in implementing new relationships or the failure to achieve the desire benefits from such relationships;

- 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 substantial dependence on the manufacturing facility owned by our toll manufacturer;

- 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 issuances of common stock subject to options, warrants and other securities that may dilute the interest of stockholders, and/or future exercise of such options and warrants;

- our ability to protect technology through patents;

- our ability to protect our proprietary technology and information as trade secrets and through confidentiality agreements or other similar means;

- the effects of the 2015 expiration of the USDA patent we have employed in manufacturing our products;

- competition from larger, more established companies with far greater economic and human resources;

- fluctuations in the availability of raw materials and the 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;

- possible product recalls due to adulteration of products or materials, future regulatory action, or other concerns;

- our ability to comply with all government regulation and retain favorable regulatory status, such as GRAS status, of our products and ingredients;

- risk that we will not be able to remediate identified material weaknesses in our disclosure controls and procedures and internal control over financial reporting;

- 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;

- our ability to successfully defend future litigation, including possible claims related to products liability and infringement of intellectual property, as well as the outcome of regulatory actions and inquiries;

- 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;

- our stock is classified as a penny stock and subject to additional regulation as such; and

- our stock price is likely to be highly volatile due to a number of factors, including a relatively limited public float and potential for short sales of our stock.

In addition, see Risk Factors in Part I, Item 1A and Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 for a further discussion of some of the factors that could affect future results.

 

---

PART I

ITEM 1.

BUSINESS.

Overview

Z Trim Holdings, Inc. is an agritech company that owns existing, and seeks to develop new, products and processes that convert generally available agricultural by-products into multi-functional all-natural ingredients that can be used in food manufacturing and other industries. We currently sell a line of all-natural products to the food industry designed to help manufacturers reduce their costs, improve the quality of finished goods, and solve many production problems.  Our innovative technology can provide value-added all-natural ingredients across virtually all food industry categories.  These products offer a range of functional attributes, including helping to reduce fat and calories, adding fiber, improving shelf-stability, preventing oil migration, and enhancing binding capacity – all without degrading the taste and texture of the final food products.  Perhaps most significantly, Z Trim’s ingredients can help extend the life of finished products, potentially increasing its customers’ gross margins.

In July 2012, we opened an industrial products division focusing on the manufacture, marketing and sales of products designed specifically for industrial applications, including oil drilling fluids, petroleum coke, charcoal briquettes, hydraulic fracturing, and paper and wood adhesives.  When used in industrial operations, we believe that Z Trim’s products can reduce costs, enhance supply-chain reliability, limit environmental impact, and improve finished product quality compared to current products such as guar gum, xanthan gum, CMC, lignosulfonates and starches used as binders, adhesives, viscofiers or emulsifiers. In January 2013, we entered into a joint development agreement with Newpark Drilling Fluids LLC, a subsidiary of Newpark Resources, Inc., to develop new, environmentally-friendly drilling fluids that incorporate Z Trim's proprietary industrial materials that could replace products such as guar and xanthan gums in drilling applications.

Products

Our core product portfolio of multifunctional food ingredients includes Corn Z Trim® (both GMO and non-GMO) and Oat Z Trim®. The superior water-holding capacity and amorphous structure of Z Trim ingredients are key to the exclusive multifunctional attributes they contribute to food product design, including moisture management, oil deflection, texture and appearance quality, fat and calorie reduction. Perhaps most significantly, these attributes allow manufacturers using Z Trim to reduce costs of finished products by replacing more expensive ingredients with Z Trim fiber and water.  Z Trim® is now being used by food manufacturers world-wide, across a multitude of food categories, such as meats, sauces, soups, dressings, baked goods, fillings, toppings, prepared meals, dairy products, frozen handheld snacks, and pizza dough. Food formulators are seeking greater functionality and product performance than they can get from starches, gums, fats, and other fibers – for both standard and lower fat content foods - and are increasingly discovering how Z Trim® multifunctional ingredients can help to delight their consumers with finished products that we believe have enhanced eating quality, outstanding product performance, and frequently, improved nutritional profiles.

Major market drivers such as greater nutrition awareness, increasing obesity trends, the economy, rising costs and hectic lifestyles have triggered an evolution of the food industry and consumer expectations.  Our goal is to further enable food manufacturers to address the challenges and opportunities of this evolution by helping them to lower their costs, differentiate their products, achieve their growth objectives, and delight their customers.  Through ongoing product applications research, we develop solutions that help food manufacturers solve formulation and product challenges and capture market opportunities with high quality, innovative products that fulfill consumer demands.

We currently manufacture and market Z Trim® products as cost-competitive ingredients that help improve the food industry’s ability to deliver on its promises of quality, taste, and healthfulness. Our primary goal is to establish Z Trim as an important ingredient in the evolution of the food industry and consumer expectations.

We began manufacturing non-GMO corn products in early 2013 with the intent to meet potentially expanding domestic and international demand.  On February 6, 2013, we announced that we had recorded our first sales of such products.

In 2012, we opened an industrial division seeking to serve a variety of industries, including, but not limited to, oil drilling, hydraulic fracturing, petroleum coking, pharmaceuticals, nutracuticals, paper and corrugated box adhesives, and others.  We are developing products from our patented technologies to make value-added ingredients from low-cost agricultural sources to serve these industries.

 

---

In February 2013, we announced our first sale of industrial grade Bio-Fiber Gum for use in the petroleum coke industry.

Product Distribution

We are developing our food ingredient market through (i) direct and brokered sales to major food manufacturers, as well as small and midsize companies for packaged retail foods, and (ii) direct and brokered sales to large and small foodservice manufacturers that supply to restaurants, hospitals, schools and cafeterias. In addition to direct sales, we use a network of ingredient distributors, both domestic and international, to distribute our products.

Competition

Z Trim® ingredients compete with a wide variety of hydrocolloids and other fiber ingredients.  Within the food industry, depending on the food application, required functional properties and product development objectives, competitive ingredients might include gums (e.g., guar, xanthan, locust bean, and Arabic), seaweed extracts (e.g., alginates, carrageenan), starches (native, modified and resistant), and fibers (e.g., oat bran, corn bran, pea fiber, potato fiber).  Most of these competitive ingredients are well-established in the food industry, and many of the companies that supply them have substantially greater resources than we do.  However, we believe that the unique properties of Z Trim multifunctional fiber ingredients pose not only significant market opportunities for us, but also provide differentiation and growth opportunities for food companies.  We believe that no other single hydrocolloid or fiber has the combined water holding and binding capacity that is effective across as wide a pH and temperature range as Z Trim®, nor imparts as many superior attributes to the finished consumer food product.  Furthermore, we believe Z Trim® ingredients can have synergistic effects with other hydrocolloids and fibers, allowing food manufacturers to achieve even greater processing improvements, cost efficiencies, and finished product performance.  Many of the same ingredients used in foods are also used for industrial applications, where they compete with a similar complement of ingredients.  We believe that our products’ unique functionalities, combined with the fact that they are produced domestically from abundant raw material sources (agricultural by-products), provide us with strengths that our competitors’ products do not possess.

Sources and Availability of Raw Materials and the Names of Principal Suppliers

Raw materials used in Z Trim® products are sourced principally in the United States.  Approximately 70% of our raw materials consist of corn bran and oat hulls, which are generally available from a variety of suppliers.  Our major suppliers include Agricor, Inc. and Hydrite Chemical. We seek to mitigate the risk of a shortage of raw materials through identification of alternative suppliers for the same or similar raw materials, where available. We have purchasing staff with extensive knowledge of our products that work with marketing, product research and development and quality control personnel to source raw materials for products and other items.

Dependence on a Few Major Customers

Our customers are predominantly food manufacturers.  There were three significant customers who accounted for 28%, 26% and 6%, respectively, of total sales for the year ended December 31, 2014.  There were three significant customers who accounted for 36%, 24% and 5%, respectively, of total sales for the year ended December 31, 2013.

Intellectual Property

 

---

Government Regulation

We are subject to a broad range of federal, state, local and foreign laws and regulations intended to protect public health and the environment. Food production and marketing are highly regulated by a variety of federal, state, local, and foreign agencies.  However, as Z Trim ingredients are made from natural raw material sources (corn and oat), they are considered Generally Recognized As Safe or “GRAS” and therefore not subject to many of the regulations applicable to foods.  Should the products lose their GRAS designation, we will be required to sell the products as food additives by obtaining a license to sell from each individual state in which sales would occur.  There is no assurance  that we  would  be  able to successfully  obtain or  maintain  licenses  in all  states  in which  sales are expected to be made or that the cost of obtaining and maintaining these licenses would not limit its ability to sell its products.

In October 2012, the FDA approved the labeling of Z Trim products in meat applications. Specifically, the FDA has approved the use of Z Trim ingredients in ground, emulsified, and processed meats and poultry.  We believe this will create the potential for increased sales, although there can be no assurances.

Research and Development

Our R&D team, in conjunction with our customers and strategic industry partners, including the USDA, continues to work on the development of additional products and applications.  In June 2011, we entered into a 3-year agreement with the USDA to conduct joint research for the development of additional products and processes relating to its current patented products.  This agreement has been amended and the duration extended through May 31, 2016.  We require all employees and visitors to our plant to execute a non-disclosure agreement.  Our success depends to a significant degree upon our ability to develop proprietary products and technologies and to obtain patent coverage for these products and technologies. We intend to continue to file patent applications covering any newly developed products and technologies. However, there can be no guarantee that any of our pending or future filed applications will issue as patents.

We spent $1,377,611 in 2014 and $65,867 in 2013 for research and development expense, and are still innovating toward developing value-added products to add to our core line.

Environmental Compliance

We do not face any material environmental compliance issues as a result of our manufacturing process, however there can be no assurances that we will continue to comply in the future.

Employees

Z Trim Holdings, Inc. was incorporated in the State of Illinois on May 5, 1994 under the original name Circle Group Entertainment Ltd.  On June 21, 2006, we filed a certificate of amendment to our certificate of incorporation and changed our name to Z Trim Holdings Inc.

Our principal offices are located at 1011 Campus Drive, Mundelein, Illinois 60060.  Our website address is www.ztrim.com. We operate our business directly through the Company and have no operating subsidiaries. The information contained in, and that can be accessed through, our website is not incorporated into and is not part of this report.

We make available on our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K as soon as reasonably practicable after those reports are filed with the SEC. The following Corporate Governance documents are also posted on our website: Code of Conduct, Code of Ethics for Financial Management and the Charters for the Audit Committee, Compensation Committee and Nominating Committee of the Board of Directors. Our phone number is (847) 549-6002 and our facsimile number is (847) 549-6146. Our filings may also be read and copied at the SEC's Public Reference Room at 100 F Street NE, Room 1580 Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of that website is www.sec.gov.

 

---

Item 1A.

Risk Factors.

Risks Relating to Our Business

We have a history of operating losses and cannot guarantee profitable operations in the future. Any failure on our part to achieve profitability may cause us to reduce or eventually cease operations.

We incurred a net loss of $5,579,708 for the twelve months ended December 31, 2014, and had an accumulated deficit of $132,453,199.  We incurred a net loss of $13,432,261 for the twelve months ended December 31, 2013.

If we continue to incur significant losses, it may not be able to continue operations.  Even if we can continue operations, our cash reserves may be depleted earlier than currently anticipated, and we may be required to limit its future growth objectives to levels corresponding with its then available cash reserves.

Due to our history of losses, our accountants have raised substantial doubt with respect to our ability to continue as a going concern.

As noted in our financial statements, we incurred a net loss of $5,579,708 for the year ended December 31, 2014 and had an accumulated deficit of $132,453,199.  We incurred a net loss of $13,432,261 for the year ended December 31, 2013.  Although we have generated revenue, we are still operating at a significant net loss, and may continue to incur significant losses for a period of time.  We will be required to obtain additional financing in order to repay existing contractual obligations coming due in 2015, and to continue to cover operating losses and working capital needs.  We cannot assure you that our revenue generated from operations or the funds we recently raised in our private placement offering or any future funds we raise will be sufficient to support our continued operations.

The audit report of M&K CPAS, PLLC for the fiscal year ended December 31, 2014 contained a paragraph that emphasizes the substantial doubt as to our continuance as a going concern.  This is a significant risk that we may not be able to generate or raise enough capital to remain operational for an indefinite period of time.

If we do not obtain additional financing, we will be required to discontinue operations.

As of December 31, 2014, we had cash in the amount of $1,027,713 and total liabilities in the amount of $3,376,161. We also had a working capital deficit of $539,935 as of December 31, 2014. Over the last several years, our operations have been funded primarily through the sale of both equity and debt securities.  In January and February 2015, we raised an aggregate of $1,540,000 from the first two closings of our private placement offering. However, we still require additional financing to fully implement our business plan for the next twelve months and beyond.  Our current cash on hand is insufficient for us to be able to maintain its operations at the current level through the end of the fiscal 2015.  In order to continue to pursue our business plan, we will require additional funding. If we are not able to secure additional funding, the implementation of our business plan will be delayed and its ability to maintain or expand operations will be impaired. We intend to secure additional funding through debt or equity financing arrangements, increased sales generated by operations and reduced expenses.

Our ability to repay our loans, including the loan to Fordham is predicated on future sales growth and generating positive cash flow from the business or securing other financing.

As of December 31, 2014, we had total liabilities of $3,376,161, which includes a $500,000 revolving loan (the “Loan”) to Fordham Capital Partners, LLC (“Fordham”) us.  The Loan requires monthly payments of $12,143 plus interest, commencing on July 24, 2014 and continuing until February 24, 2015, followed by a final balloon payment of the entire unpaid principal balance of the Loan and all accrued and unpaid interest on March 24, 2015.  The interest on the Loan is calculated at a fixed rate of 22% per annum.  The amount of revenues generated by the business has been insufficient to support ongoing daily operations.  Previously, we had to rely on new equity or debt financing in order to satisfy other financing incurred by us.  The $1,540,000 raised in our private placement will not be sufficient to repay the Loan and support our continuing operations as planned. There are no assurances that we will grow sales sufficiently to generate the requisite positive cash flow or secure additional debt or equity financing in order to satisfy the Loan and support our continuing operations as planned.

If we default on our secured loans with Fordham, we would be forced to suspend all operations.

We have entered into a Loan with Fordham which is due March 24, 2015 that is secured by substantially all of our:  (i) accounts, (ii) inventory, (iii) chattel paper, deposit accounts, documents, equipment, financial assets, fixtures, general intangibles, instruments, investment property, letter-of-credit tights, securities, software and supporting obligations, (iv) our books and records which relate to accounts, (v) all amounts owing to us under the factoring agreement, and (vi) proceeds of the foregoing.  The Security Agreement also contains customary restrictive covenants, including without limitation, covenants prohibiting us from: (i) granting additional liens in the collateral, (ii) selling, leasing or transferring the Collateral, (iii) entering into certain merger, consolidation or other reorganization transactions, and (iv) creating, incurring or assuming additional indebtedness, in each case subject to certain exceptions.  The Security Agreement also contains customary events of default.    If we fail to comply with these covenants or if we fail to make timely monthly payments under the secured loans when due, Fordham could declare our Loans in default.   If we default on the Loan, Fordham has the right to seize the collateral secured by the Loan, which would force us to suspend all operations.  In order to comply with the covenants of the Loan and to make timely payments Fordham under the Loan, we may need to raise additional capital, which might not be available to us on favorable terms or at all.

 

---

Our success is dependent on market acceptance of our products. We make no projections regarding the viability of our functional food ingredients and we cannot assure you that we will achieve any particular results.

We have not conducted, nor have others made available to us, results of market research indicating how much market demand exists for Z Trim, our functional food ingredient. We are relying on the current concerns over obesity, weight-health issues, and the rising cost of both foods and health care to drive demand for Z Trim’s line of products offered to the food and nutritional beverage industry. We have only recently begun exploring the use of our products for non-food usage (such as industrial products) and are also unable to determine whether there will be a viable non-food market going forward. We cannot assure you that we will be able to gain the market acceptance necessary to achieve profitability or that a significant market will exist for our products.

We make no projection with respect to our future income, assets or business. No expert has reviewed our business plan for accuracy or reasonableness. It is likely that our actual business and results of operations will differ from those presented herein.

We derive a significant portion of our current revenues and order bookings from a small number of customers.

Our revenues and order bookings are concentrated with a small number of customers. There were three significant customers who accounted for 28%, 26% and 6%, respectively, of total sales for the year ended December 31, 2014.  There were three significant customers who accounted for 36%, 24% and 5%, respectively, of total sales for the year ended December 31, 2013 The loss of one or more of our customers or material changes to the contracts with or payment terms of these customers may result in a significant business interruption through reduced revenues, reduced cash flows, delays in revenues or cash flows and such delays or reductions could have a material adverse impact on our future revenue growth and results of operations, as well as our ability to continue operations.

Our manufacturing facility is currently operating at a loss and we do not have any commitments for manufacturing.

Our original manufacturing facility was merely a pilot plant and our second facility, owned and operated by our toll manufacturer, is still ramping up.  In order to fully implement our business plans we will need to successfully ramp up production at our second facility, move the operations to larger facilities, develop strategic partnerships or find other means to produce greater volumes of finished product, and we cannot assure that we will be able to do so or to achieve positive gross margins and profitable operations.  Our recent agreement with our second facility does not guarantee any minimum manufacturing quantities and therefore there can be no assurance that we will be able to manufacture products on a timely basis.

In 2012 we launched a new industrial products division in which we had no prior experience.

The industrial products division focuses on the manufacture, marketing and sale of products designed for industrial applications, such as oil drilling fluids, petroleum coke, charcoal briquettes, hydraulic fracturing, and paper and wood adhesives.  Prior to its launch in 2012 we had no prior experience in the manufacturing, marketing or sale of industrial products.  To date we have had limited sales of products by this division.  We may not be successful in these activities and may never generate significant revenues or profitability from our industrial products division.

The availability and cost of agricultural products that we use in our business are subject to weather and other factors beyond our control.

All of our current products depend on our proprietary technology using agricultural products, mainly corn bran and oat hull. Historically, the costs of corn bran and oat hull are subject to fluctuations depending upon a number of factors which affect commodity prices in general and over which we have no control, including crop conditions, weather, government programs and purchases by foreign governments. Commodity price changes may result in unexpected increases in raw material, packaging, and energy costs.  We currently do not hedge against changes in commodity prices.  If we are unable to increase productivity to offset these increased costs or increase our prices, we may experience reduced margins and profitability.

 

---

We are substantially dependent on our manufacturing facility and the ability of our toll manufacturer, Aveka Nutra Processing, LLC (“ANP”) to ramp up production; any operational disruption could result in a reduction of our sales volumes and could cause it to incur substantial losses.

Our revenues primarily are derived from the sale of functional ingredients made from dietary fiber that we manufacture at ANP’s facility in Iowa.  Our new agreement with ANP does not provide any guaranteed minimum quantity that ANP must manufacture for us and does not provide us with a right of first refusal for production capacity. Therefore, we could have a delay in supplying products to customers if other customers of ANP should occupy ANPs production capacity at a time when we require products to be manufactured., Our operations may be subject to significant interruption if the ANP facility experiences a major accident or is damaged by severe weather or other natural disasters.  In addition, the ANP operation may be subject to labor disruptions and unscheduled downtime, or other operational hazards inherent in the industry, such as equipment failures, fires, explosions, abnormal pressures, blowouts, pipeline ruptures, transportation accidents and natural disasters. Some of these operational hazards may cause personal injury or loss of life, severe damage to or destruction of property and equipment or environmental damage, and may result in suspension of operations and the imposition of civil or criminal penalties. Our insurance may not be adequate to fully cover the potential operational hazards described above; in addition, we may not be able to renew this insurance on commercially reasonable terms or at all.

If competition increases, our ability to attract and retain customers or expand our business could be impaired.

Competition is intense in our targeted industries, including nutraceuticals, functional food ingredients, oils, and gums.  A large number of businesses are engaged in various fat replacement industries. Many of our competitors have established reputations for successfully developing and marketing their products, including products that are widely recognized as providing similar calorie reduction. In addition, many of our competitors have greater financial, managerial, and technical resources than we have.   If we are not successful in competing in these markets, we may not be able to attain our business objectives or continue operations.

Our intellectual property rights are valuable, and any inability to protect them could reduce the value of our products, services and brand.

Our patents, trademarks, trade secrets, copyrights and other intellectual property rights are important assets for us.  Various events outside of our control pose a threat to our intellectual property rights as well as to our products and services.  For example, effective intellectual property protection may not be available in every country in which our products and services are distributed.  Also, the efforts we have taken to protect our proprietary rights may not be sufficient or effective.  Any significant impairment of our intellectual property rights could harm our business or our ability to compete.  Also, protecting our intellectual property rights is costly and time consuming.  Any increase in the unauthorized use of our intellectual property could make it more expensive to do business and harm our operating results.

Our inability to secure and protect our intellectual property may result in costly and time-consuming litigation and could impede us from ever attaining market success.

Although we seek to obtain patent protection for our innovations, it is possible we may not be able to protect some of these innovations.  In addition, given the costs of obtaining patent protection, we may choose not to protect certain innovations that later turn out to be important.  Furthermore, there is always the possibility, despite our efforts, that the scope of the protection gained will be insufficient or that an issued patent may be deemed invalid or unenforceable.

A patent for the technology that we can employ to manufacture our products expires in 2015.

We license or hold several patents as well as copyrights and trademarks with respect to our products and expect to continue to file applications in the future as a means of protecting our intellectual property. In addition, we seek to protect our proprietary information and know-how through the use of trade secrets, confidentiality agreements and other similar security measures. With respect to patents, there can be no assurance that any applications for patent protection will be granted, or, if granted, will offer meaningful protection.  Some of the technology employed by us in our products is licensed to us by the USDA. The original USDA patent expires in 2015 and we will therefore lose our patent protection with respect to that patent at that time. Although we have four additional provisional patents on file that cover composition, process and various applications, each filed jointly with the USDA, there can be no assurance that new patents will in fact be issued or that they will provide effective protection.  In addition, we have received two other patents in our own name:  Patent Nos. 7,763,301 and 7,625,591 that were issued in 2009 and 2010, respectively.

Additionally, there can be no assurance that competitors will not develop, patent or gain access to similar know-how and technology, or reverse engineer our products, or that any confidentiality agreements upon which we rely to protect our trade secrets and other proprietary information will be adequate to protect our proprietary technology. The occurrence of any such events could have a material adverse effect on our results of operations and financial condition.

 

---

Confidentiality agreements with employees and others may not adequately prevent disclosure of trade secrets and other proprietary information and may not adequately protect our intellectual property.

We rely on the legal protections of trade secrets to protect our technology, especially where we do not believe patent protection is appropriate or obtainable. However, trade secrets are difficult to protect. In order to protect our proprietary technology and processes, we also rely in part on confidentiality and intellectual property assignment agreements with our corporate partners, employees, consultants, outside scientific collaborators and sponsored researchers and other advisors. These agreements may not effectively prevent disclosure of confidential information nor result in the effective assignment to us of intellectual property, and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information or other breaches of the agreements. In addition, others may independently discover our trade secrets and proprietary information, and in such case we could not assert any trade secret rights against such party. Enforcing a claim that a party illegally obtained and is using our trade secrets is difficult, expensive and time consuming, and the outcome is unpredictable. In addition, courts outside the United States may be less willing to protect trade secrets. Costly and time-consuming litigation could be necessary to seek to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.

Our competitors may design products around our intellectual property protection.

We hold an intellectual property portfolio, including patent, trademark, copyright and trade secret protection.  Our competitors, however, may design around our patent claims, rendering our patent protection ineffective against such competitors.  Similarly, our competitors may independently develop technology similar to our trade secrets and technical know-how.  Such occurrences could increase competitive pressure on our marketing and sales efforts, and adversely affect our results of operation.

We may not be successful in avoiding claims that we infringe others’ proprietary rights and could be required to pay judgments or licensing fees.

Any claim that we infringe a third party’s patents or other intellectual property rights, whether meritorious or not, could be time consuming and result in costly litigation.  If any of our practices are found to be in violation of another party’s rights, we may be required to pay monetary damages or licensing fees, which could be substantial, or cease making products which are deemed to be infringing.  Any of those occurrences could substantially harm our business, results and financial condition.

If our food products become adulterated, misbranded, or mislabeled, we might need to recall those items and may experience product liability claims if consumers are injured.

We may need to recall some of our products if they become adulterated, misbranded, or mislabeled. A widespread product recall could result in significant losses due to the costs of a recall, the destruction of product inventory, and lost sales due to the unavailability of product for a period of time. In such a case, or in the event that injuries are determined to arise from our products, we could also suffer losses from a significant product liability judgment against us. A significant product recall or product liability case could also result in adverse publicity, damage to our reputation, and a loss of consumer confidence in our food products, which could have a material adverse effect on our business results and the value of our brands.

If we fail to comply with government regulation impacting our business, we may be subject to a range of sanctions that will adversely impact our operations.

We are subject to extensive regulation, and compliance with existing or future laws and regulations may require us to incur substantial expenditures or require us to make product recalls.  As such, we are subject to a broad range of federal, state, local and foreign laws and regulations intended to protect public health and the environment.  Food production and marketing are highly regulated by a variety of federal, state, local, and foreign agencies.  Changes in laws or regulations that impose additional or different regulatory requirements on us could increase our cost of doing business or restrict our actions, causing our results of operations to be adversely affected.  In addition, we advertise our products.  Our advertisements could be the target of claims relating to alleged false or deceptive advertising under federal, state, and foreign laws and regulations and of new laws or regulations restricting our right to advertise products.

Our operations are also subject to regulation by various federal agencies, including the Alcohol and Tobacco Tax Trade Bureau, the Occupational Safety and Health Administration, the Food and Drug Administration and the Environmental Protection Agency, and by various state and local authorities.  Such regulation covers virtually every aspect of our operations, including production facilities, marketing, pricing, labeling, packaging, advertising, water usage, waste water discharge, disposal of hazardous wastes and omissions and other matters.  Violations of any of these laws and regulations may result in administrative, civil or criminal penalties being levied against us, permit revocation or modification, performance of environmental investigatory or remedial activities, voluntary or involuntary product recalls, or a cease and desist order against operations that are not in compliance.  These laws and regulations may change in the future and we may incur material costs in our efforts to comply with current or future laws and regulations or to affect any product recalls. These matters may have a material adverse effect on our business.

 

---

If our products do not satisfy certain governmental regulations, we may be unable to obtain regulatory approval or may be required to obtain multiple licenses to sell our products.

Z Trim has self-certified that all components of its products are generally recognized as safe (“GRAS”) according to the U.S. Food and Drug Administration regulations.  A GRAS designation exempts the products from the regulations of the U.S. Department of Agriculture, permitting the sale of the products anywhere in the United States without obtaining a license. Should the products lose their GRAS designation, Z Trim will be required to sell the products as food additives by obtaining a license to sell from each individual state in which sales would occur.  There is no assurance that Z Trim would be able to successfully obtain or maintain licenses in all states in which  sales are expected to be made or that the cost of obtaining and maintaining these licenses would not limit its ability to sell its products.

We are subject to periodic litigation and other regulatory proceedings, which could result in unexpected expense of time and resources.

We are a defendant from time to time in lawsuits and regulatory actions relating to our business, including litigation brought by former employees. Due to the inherent uncertainties of litigation and regulatory proceedings, we cannot accurately predict the ultimate outcome of any such proceedings. An unfavorable outcome could have an adverse impact on our business, financial condition and results of operations. In addition, any significant litigation in the future, regardless of its merits, could divert management’s attention from our operations and result in substantial legal fees.

We have identified material weaknesses in our internal control over financial reporting, which could impact negatively our ability to report our results of operations and financial condition accurately and in a timely manner.

Effective internal controls over financial reporting are necessary for us to provide reliable financial reports.  We have identified material weaknesses in these controls.  A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.  In our annual evaluation of the effectiveness of our internal control over financial reporting conducted by management as required by the Sarbanes-Oxley Act of 2002, at December 31, 2014, we identified material weaknesses in our internal control over financial reporting and concluded that, as of December 31, 2014, we did not maintain effective control over financial reporting based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. For a detailed description of these material weaknesses, see Item 9A, “Controls and Procedures,” herein.  Each of our material weaknesses results in more than a remote likelihood that a material misstatement of the annual or interim financial statements that we prepare will not be prevented or detected. As a result, we must perform additional work to obtain reasonable assurance regarding the reliability of our financial statements.

As of December 31, 2014, we carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a – 15(c) and 15d – 15(e)).  Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of the end of the period covered in this report, our disclosure controls and procedures were not effective to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the required time periods and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

If we are unsuccessful in developing and implementing or following a remediation plan, or fail to update our internal control over financial reporting as our business evolves, we may not be able to timely or accurately report our financial condition, results of operations or cash flows or to maintain effective disclosure controls and procedures. If we are unable to report financial information in a timely and accurate manner or to maintain effective disclosure controls and procedures, we could be subject to, among other things, regulatory or enforcement actions by the SEC, securities litigation and a general loss of investor confidence, any one of which could adversely affect our business prospects and the market value of our common stock.

Failure to attract and retain qualified personnel could lead to a loss of revenue and/or profitability.

Our success depends, in part, on the efforts and abilities of our management team and other key employees. Their skills, experience and industry contacts significantly benefit our operations and administration. The failure to attract and retain members of our management team and other key employees could have a negative effect on our operating results. In addition, transitions of important responsibilities to new individuals inherently include the possibility of disruptions to our business and operations, which could negatively affect our business, financial condition, results of operations and cash flow.

 

---

Risks Relating to our common stock

Our stock trades at low prices per share and trades on the OTC: pink electronic quotation system, which provides limited liquidity and significant volatility.

Since our common stock is currently traded on the OTC Markets Group’s OTCQB electronic quotation system (the “OTCQB”), investors may find it difficult to obtain accurate quotations of our common stock and may experience a lack of buyers to purchase such stock or a lack of market makers to support the stock price.  Being a penny stock also could limit the liquidity of our common stock and limit the coverage of our stock by analysts.  The OTCQB generally provides less liquidity than stock exchanges like NYSE or NASDAQ.  Stocks trading on the OTC markets may be very thinly traded and highly volatile.  Therefore, holders of our common stock may be unable to sell their shares at any price, whether or not such shares have been registered for resale.  A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the marketplace of willing buyers and sellers of our common shares at any given time.  This presence depends on the individual decisions of investors and general economic and market conditions over which we have no control.  Given the lower trading volume of our common shares, significant sales of our common shares, or the expectation of these sales, could cause our share price to fall.

There may be a limited public market for our securities; we presently fail to qualify for listing on any national securities exchanges.

Our common stock currently does not meet all of the requirements for initial listing on a national securities exchange. Specifically, the bid price of our common stock is less than the minimum bid price required to obtain a listing. Trading in our common stock continues to be conducted in the over-the-counter market. As a result, an investor may find it difficult to dispose of or to obtain accurate quotations as to the market value of our common stock, and our common stock may be less attractive for margin loans, for investment by larger financial institutions, as consideration in possible future acquisition transactions or other purposes.

The fluctuation in our stock price may result in a decline in, or the loss of, the value of your investment.

The price of our common stock has fluctuated widely in the past, and may continue to do so.  In 2014 our stock had high and low bid prices of $0.90 and $0.15, respectively. In 2013, our common stock had high and low bid prices of $2.70 and $0.52 per share, respectively.  This volatility is likely to continue for the foreseeable future. Factors affecting potential volatility include:

- differences between our actual financial and operating results and those expected by investors and analysts;

- our cash resources and our ability to obtain additional funding;

- announcements of private or public sales of our securities;

- announcements by us or a competitor of business development or exhibition projects;

- our entering into or terminating strategic business relationships;

- changes in government regulations;

- changes in our revenue or expense levels;

- fluctuations in operating results and general economic and other external market factors;

- negative reports on us by security analysts or changes in analysts' recommendation or projections;

- short selling of our stock in the market;

- developments and resolution of current litigation that we are a party to;

- announcements of new products or technologies by us or our competitors.

The occurrence of any of these events may cause the price of the common stock to fall.  In addition, the stock market in general has recently experienced volatility that often has been unrelated to the operating performance or financial condition of individual companies.  Any broad market or industry fluctuations may adversely affect the trading price of our common stock, regardless of operating performance or prospects.

Companies that experience volatility in the market price of their securities often are subject to securities class action litigation.  This type of litigation, if instituted against us, could result in substantial costs and divert management’s attention and resources away from our business.

Shares eligible for future sale may adversely affect the market for our common stock.

From time to time, certain of our stockholders may be eligible to sell all or some of their shares of common stock by means of ordinary brokerage transactions in the open market pursuant to Rule 144 (“Rule 144”), promulgated under the Securities Act of 1933, as amended (the “Securities Act”), subject to certain limitations. In general, pursuant to Rule 144, a stockholder (or stockholders whose shares are aggregated) who has satisfied the required holding period may, under certain circumstances, sell within any three-month period a number of securities which does not exceed the greater of 1% of the then outstanding shares of common stock. Rule 144 also permits, under certain circumstances, the sale of securities, without any limitations, by a non-affiliate of our company that has satisfied a one-year holding period. Any substantial sale of common stock pursuant to Rule 144 or pursuant to any resale prospectus may have an adverse effect on the market price, if any, of our securities.

 

---

Exercises of stock options, warrants and other convertible securities will dilute your percentage of ownership and could cause our stock price to fall.

As of March 31, 2015, we had outstanding stock options to purchase 11,033,675 shares of common stock and outstanding warrants to purchase 97,709,890 shares of our common stock, at prices ranging from $0.35 to $1.50 per share.  Additionally, we have reserved up to a total of 18,000,000 shares (inclusive of the 11,033,675 outstanding stock options) to be issued pursuant to equity awards under our Incentive Compensation Plan. The exercise, conversion or exchange of stock options, warrants or convertible securities will dilute the percentage ownership of our other stockholders. Sales of a substantial number of shares of our common stock could cause the price of our common stock to fall and could impair our ability to raise capital by selling additional securities.

We have additional securities available for issuance, which, if issued, could adversely affect the rights of the holders of our common stock.

Our Articles of Incorporation authorize the issuance of 200,000,000 shares of our common stock, 1,000,000 shares of Series I Preferred Stock and 1,000,000 shares of Series II Preferred Stock. The common stock and preferred stock, as well as the awards available for issuance under the Incentive Compensation Plan, can be issued by our board of directors without stockholder approval. We will not be required to seek, and will generally not seek, stockholder approval in connection with our equity offerings.  Any future issuances of such stock would further dilute the percentage ownership of us held by public stockholders. Any preferred stock that is issued may rank ahead of our common stock in terms of dividends, liquidation rights and voting rights and could adversely affect the voting power and the rights of our holders of common stock. In addition, the issuance of the preferred stock may be used as an “anti-takeover” device without further action on the part of our stockholders, and may adversely affect the holders of the common stock.

Our principal stockholder currently has the ability to exert significant influence in determining the outcome of all corporate transactions or other matters which require the approval of our stockhoders and may have different interests than you.

Aristar Capital Management, LLC (“Aristar Capital”), Aristar Ventures I, LLC (“Aristar I”), Aristar Ventures I-B, LLC (“Aristar I-B”), and Aristar Ventures I-C, LLC (“Aristar I-C”), (collectively “Aristar Ventures”), entities indirectly controlled by Edward Smith, our Chief Executive Officer, beneficially own approximately 75.8% of our common stock. Edward Smith, is the beneficial owner of 82.5% of our outstanding shares of common stock. As a result, Aristar has a significant influence in determining the outcome of all corporate transactions or other matters which require approve of our stockholders, including mergers, consolidations and the sale of all or substantially all of our assets, the power to elect directors to the board of directors, and also the power to prevent or cause a change in control.  Aristar may prevent or frustrate attempts to effect a transaction or series of transactions that is or are in our best interests or our minority stockholders. The interests of Aristar may differ from the interests of the other stockholders.  In addition, this concentration of ownership may delay or prevent a change in our control, even when a change in control may be in our best interest or the other stockholders, and might affect the market price of our common stock. Furthermore, the interests of this concentration of ownership may not always coincide with our interests or the interests of other stockholders.

Certain of our officers and directors have sufficient voting power to make corporate governance decisions that could have a significant effect on us and the other stockholders.

As of March 31, 2015, our officers and directors together beneficially own approximately 85.0% of our outstanding common stock on a fully diluted basis. Mr. Smith alone through his direct and indirect holdings beneficially owns approximately 82.5% of our outstanding common stock on a fully diluted basis. As a result, Mr. Smith, alone will be able to exert a significant degree of influence over our management and affairs and over matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. In addition, this concentration of ownership may delay or prevent a change in our control and might affect the market price of our common stock, even when a change in control may be in the best interest of all stockholders. Furthermore, the interests of this concentration of ownership may not always coincide with our interests or the interests of other stockholders. Accordingly, these stockholders could cause us to enter into transactions or agreements that we would not otherwise consider.

Certain of our officers may have a conflict of interest.

One of our officers is currently working for us on a part-time basis. This part-time employee also works at other jobs and has discretion to decide what time he devotes to our activities, which may result in a lack of availability when needed due to responsibilities at other jobs. We expect that any part-time officers may join us on a full-time basis, but there can be no assurance given that any of our officers will be so employed.

 

---

Our stock price may drop unexpectedly due to short selling of our common stock in the market.

We have experienced and may continue to experience unexpected declines in our stock price due to manipulation of the market by individuals who profit by short selling our common stock. Short selling occurs when an individual borrows shares from an investor through a broker and then sells those borrowed shares at the current market price. The "short seller" profits when the stock price falls because he or she can repurchase the stock at a lower price and pay back the person from whom he or she borrowed the stock, thereby making a profit. We cannot assure you that short sellers will not drive the stock price down in the future, causing decline in the value of your investment.

We do not plan to pay dividends to holders of common stock.

We do not anticipate paying cash dividends to the holders of the common stock at any time.  Accordingly, investors in our common stock must rely upon subsequent sales after price appreciation as the sole method to realize a gain on investment. There are no assurances that the price of common stock will ever appreciate in value. Investors seeking cash dividends should not buy our securities.

Because the SEC imposes additional sales practice requirements on brokers who deal in our shares, which are penny stocks, some brokers may be unwilling to trade them.  This means that you may have difficulty in reselling your shares and may cause the price of the shares to decline.

Our stock is a penny stock. The SEC generally defines “penny stock” to be any equity security that has a market price less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. Our securities are covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and “accredited investors”. The term “accredited investor” refers generally to institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the SEC which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer’s account. The bid and offer quotations and the broker-dealer and salesperson compensation information must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer’s confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities. We believe that the penny stock rules discourage investor interest in, and limit the marketability of, our common stock.

In addition to the “penny stock” rules promulgated by the SEC, FINRA has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative, low-priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low-priced securities will not be suitable for at least some customers. The FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock.

ITEM 1B.

Unresolved Staff Comments.

None.

ITEM 2.

Properties.

We occupy approximately 44,000 square feet of leased space at 1011 Campus Drive, Mundelein, Illinois. This space is leased for $21,361 per month, including property taxes, pursuant to a cancelable operating lease.  The current lease term is through May 14, 2015.  Currently, we are negotiating a lease renewal with the landlord.

ITEM 3.

Legal Proceedings.

In July 2007, we were sued in the 20th Judicial Circuit Court, St. Clair County, Illinois by Joseph Sanfilippo and James Cluck for violation of the Consumer Fraud Act and they are seeking damages in excess of $200,000.  The trial court has issued a default order against us, and has denied our motion to reconsider.  Management believes that the trial court’s rulings were erroneous and that it has grounds for appeal, and that the underlying allegations are frivolous and wholly without merit. We intend to vigorously defend the claim. The outcome of this matter is unknown as of the report date.  However, we have conservatively allocated a reserve of $102,000 to satisfy any liability it may incur as a result of this proceeding.

 

---

In December 2011, we were sued in Circuit Court of the 17th Judicial District, Winnebago County, Illinois, by LIBCO Industries, Inc., alleging that we breached a construction contract and tortiously interfered with a business relationship, and is seeking damages in excess of $185,000.  The case has subsequently been transferred to the 19th Judicial Circuit Court, Lake County, Illinois.  Management believes that the allegations are frivolous and wholly without merit and intends to 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 us, claiming it was owed in excess of $95,000 by LIBCO Industries.  As of December 31, 2011, we accrued as a settlement loss, the $62,500 paid to Process Piping, LLC on March 6, 2012 in exchange for a release of its lien as well as an assignment of all of its claims against LIBCO Industries.  On January 31, 2013, the Circuit Court granted our motion for partial summary judgment on the tortious interference claim.  In the fourth quarter of 2013, the parties settled all outstanding matters and the case has subsequently been dismissed. As part of the settlement, during the first quarter of 2014 we received $10,000 in cash and both parties provided releases of all respective claims.

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 our financial statements.  However, an adverse outcome in either of these actions could have a material adverse effect on our financial results in the period in which it is recorded.

ITEM 4.

Mine Safety Disclosures.

Not Applicable.

PART II

ITEM 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Since October 6, 2010 our common stock has been quoted on the “OTCQB” electronic quotation system.

The market for our common stock is limited, volatile and sporadic.  The following table sets forth the range of high and low bid quotations for our common stock for each of the periods indicated as reported by the OTCQB.  Where such information is not available, the high and low closing bid quotations as reported by the OTCQB have been provided.  These quotations below reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.  The closing price of our common stock on March 23, 2015was $0.29.

 

---

Holders

As of March 31, 2015, there were approximately 3,459 record holders of the common stock.  This number does not include shareholders whose shares are held with brokers.

Dividends

To date, we have not declared or paid cash dividends on our shares of common stock.  We do not anticipate paying cash dividends to the holders of common stock at any time.

Securities Authorized for Issuance Under Equity Compensation Plans

The following table sets forth certain information regarding grants under our equity compensation plan as of December 31, 2014:

(1)	All options or shares relate to our Incentive Compensation Plan, which was approved by stockholders in 2012.

Issuer Purchases of Equity Securities

We have never repurchased any shares of its common stock.

Recent Issuances of Unregistered Securities

On February 11, 2014 the Company entered into an agreement with Edward Smith III, then a Director and Shareholder of the Company now our CEO, pursuant to which Mr. Smith agreed to lend the Company $200,000 in a convertible senior secured note.  The note matures in two years (February 11, 2016) and bears interest at 12.5% computed based on a 365-day year.  Accrued interest is payable either at maturity or quarterly at the option of Mr. Smith in shares of the Company’s Common Stock.  At any time on or after the date that is 90 days after the date of issuance of the note, Mr. Smith may elect to convert the aggregate principal balance and accrued interest into shares of Common Stock of the Company.  The conversion price under the note is $2.25, subject to adjustment as provided in the note.  If on the maturity date of the note, the thirty day trailing average closing price of the Company’s Common Stock (the “Trailing Average Price”) is below $2.25, the Conversion Price on the maturity date will be reduced to the Trailing Average Price, but to not less than $1.25.  The note is secured by the assets of the Company, which security interest is expressly subordinate to the interest of Fordham Capital Partners LLC described below, pursuant to an intercreditor agreement between Mr. Smith and Fordham dated March 18, 2014.

 

On April 25, 2014, we entered into an agreement with Edward Smith III, pursuant to which Mr. Smith agreed to lend us $300,000 in a convertible subordinated secured note.  The note matures April 25, 2016 and bears interest at 14% per annum computed based on a 365-day year.  Accrued interest is payable at maturity in shares of our common stock.  At any time on or after the date that is 90 days after the date of issuance of the note, Mr. Smith may elect to convert the aggregate principal balance and accrued interest into shares of common stock.  The conversion price under the note is $1.00.  The note is secured by our assets, which security interest is subordinate to the security interest granted to Fordham in connection with the Equipment Loan and the Factoring Agreement.

 

On April 30, 2014, we issued a 14% convertible subordinated secured note to each of Morris Garfinkle, Mark Hershhorn, Brian Israel and Edward Smith III, directors of our company, in the principal amount of $19,000, for director fees due and payable to them (the “Director Notes”).  Each Director Note matures in two years (April 30, 2016) and bears interest at 14% per annum computed on a 365-day year.  Accrued interest was payable at maturity in shares of common stock.  At any time on or after the date that is 90 days after the date of issuance of the Director Note, the director may elect to convert the aggregate principal balance and accrued interest into shares of common stock.  The conversion price under each Director Note was $1.00 Each Director Note was secured by our assets, which security interest is subordinate to the security interest granted to Fordham in connection with the Equipment Loan and the Factoring Agreement.

 

On May 12, 2014, we issued 14% convertible subordinated secured notes to both Morris Garfinkle and CKS Warehouse in the principal amount of $75,000 each.  Both notes mature May 12, 2016 and bear interest at 14% per annum computed on a 365-day year.  Accrued interest is payable at maturity in shares of common stock.  At any time on or after the date that is 90 days after the date of issuance of each note, Mr. Garfinkle and CKS Warehouse may elect to convert the aggregate principal balance and accrued interest into shares of common stock.  The conversion price under each note is $1.00.  Each note is secured by our assets, which security interest is subordinate to the security interest granted to Fordham in connection with the Equipment Loan and the Factoring Agreement.

 

---

On August 6, 2014, the Company issued a 14% convertible subordinated secured note to Edward B. Smith in the principal amount of $264,000.  The note matures in two years (August 6, 2016) and bears interest at 14% per annum computed on a 365-day year.  Under this note Mr. Smith has provided $200,000 of cash as of August 6, 2014 and the parties agreed to include the unsecured funds in the amount of $64,000 provided by Mr. Smith on July 15, 2014 and include those amounts as part of this subordinated secured transaction.  The loan agreement executed by the parties on July 15, 2014 is now null and void.  Accrued interest is payable at maturity in shares of the Company’s Common Stock.  At any time on or after the date that is 90 days after the date of issuance of the note, Mr. Smith may elect to convert the aggregate principal balance and accrued interest into shares of Common Stock of the Company.  The conversion price under this note is $1.00.  The conversion price was greater than the closing stock price on the agreement date; therefore, no beneficial conversion feature was recorded on this note.  The note is secured by the assets of the Company, which security interest is subordinate to the security interest granted to Fordham in connection with the Equipment Loan and the Factoring Agreement.

 

The notes issued and common stock underlying the notes were not registered under the Securities Act, or the securities laws of any state, and were offered and sold in reliance on the exemption from registration afforded by Section 4(a)(2) under the Securities Act and corresponding provisions of state securities laws, which exempt transactions by an issuer not involving any public offering. The investors represented their intention to acquire the securities for investment only and not with a view towards distribution. The investors were given adequate information about us to make an informed investment decision. We did not engage in any general solicitation or advertising.

 

ITEM 6.

Selected Financial Data.

 Not Applicable.

ITEM 7.

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

This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements.  Forward-looking statements are subject to risks, uncertainties and assumptions which could cause actual results to differ materially from those projected, including those described in Item 1A, “Risk Factors,” in Part I of this report and in “‘Cautionary Statement Regarding Forward Looking Statements” of this report.

The following discussion should be read in conjunction with our consolidated financial statements and the related notes to the consolidated financial statements in Item 8, “Financial Statements and Supplementary Data,” in Part II of this report.

Overview

Z Trim Holdings, Inc. is an agritech company that owns existing, and seeks to develop new, products and processes that convert generally available agricultural by-products into multi-functional all-natural ingredients that can be used in food manufacturing and other industries.

Recent Developments Affecting Our Company

On January 8, 2015, we  entered into agreements to sell an aggregate of 260,000 units to eight (8) accredited investors at a price per unit of $4.00 (the “Units”) with each Unit consisting of (i) one (1) share of 12.5% Redeemable Convertible Preferred Stock (the “Preferred Shares”) and (ii) one (1) warrant (the “Initial Warrant”), representing the right to acquire 8.56 shares of our common stock, par value, $0.00005 per share, at an exercise price of $0.64 per share, for aggregate cash proceeds of $1,040,000 pursuant to separate purchase agreements entered into with each investor (the “Securities Purchase Agreements”). On February 9, 2015, we closed a second round of our private placement offering with four (4) accredited investors in which we raised gross proceeds of $500,000 and sold 125,000 Units.  In addition, we issued to each of the investors in the first and second round of financing an additional warrant for each Unit acquired (the “Additional Warrant” and together with the Initial Warrant, the “Warrants”) to acquire 3.64 shares of our common stock at an exercise price of $0.64 per share.  The Additional Warrants issued in the initial closing of 260,000 Units are exercisable for an aggregate of 946,400 shares of our common stock. The Warrants expire on the fifth anniversary of their issuance, may be exercised on a cashless basis, are subject to full ratchet price anti-dilution protection and entitled to registration rights as set forth below. We intend to use the net proceeds of the above-described offering for working capital and general corporate purposes, including without limitation, to repay certain loans.

 

Due to the anti-dilution provisions of some of the outstanding warrants, the exercise price on 15,512,057 warrants has been reduced to $0.35 and the number of shares of common stock into which the warrants are now exercisable has been adjusted such that the warrants are now exercisable into 54,400,204 shares of common stock.

---

The following is a summary of material provisions of the Preferred Shares as set forth in the Certificate of Designations.

The Preferred Shares accrue dividends at the rate per annum equal to 12.5% of the sum of (i) the Stated Value (which initially is $4.00) and (ii) the amount of accrued and unpaid dividends payable.  Accrued dividends are payable on the Maturity Date (as defined below) in cash or shares of common stock at the option of the holder.

Subject to adjustment, each Preferred Share (together with any accrued but unpaid dividends thereon) is convertible into shares of common stock at the option of the holder at any time at a conversion price per share equal to the sum of the Stated Value and any accrued but unpaid dividends thereon through the date of redemption divided by the conversion price, subject to adjustment as described below. The initial conversion price shall be equal to $0.35.  At any time the closing bid price of the common stock exceeds $1.75 (subject to adjustment) for five consecutive trading days, we may cause the conversion of the Preferred Shares, plus accrued but unpaid dividends  into shares of common stock (the “Call Provision”). If the Call Provision is exercised, holders will be entitled to all of the dividends they would have received as if they had converted on the date of redemption (discussed below). In addition, if a holder elects to convert their Preferred Shares, the holder will receive upon conversion a number of shares of common stock equal to the number of shares of common stock the holder would have received had they also received all of the dividends (without duplication) payable to them through the Redemption Date.

 

 

Unless the Preferred Shares are earlier converted, we have the right to redeem the Preferred Shares for a cash payment equal to the Stated Value plus accrued and unpaid dividends on the Maturity Date which is the earlier of (i) the date that is three years from the last closing of the Preferred Shares, or (ii) the date of our Company’s consummation of a merger, combination or sale of substantially all of our assets or purchase by one or a group of related person of more than 50% of our outstanding voting stock.

 

 

 

 

The Preferred Shares are entitled to full ratchet anti-dilution protection under certain circumstances specified in the Statement of Resolution Establishing Series.

 

Except as otherwise required by law and except as set forth below, holders of Preferred Shares will not have the right to vote.

So long as at least fifty percent (50%) of the Preferred Shares that are issued in the Offering are outstanding, we will need the approval of a majority of the outstanding Preferred Shares to take certain actions including: (i) repayment, repurchase of acquisition of any equity other than the exercise of the Redemption right and payment of dividends on the Preferred Shares; (ii) amend our articles of incorporation or bylaws so as to adversely affect the rights of the Preferred Shares; (iii) engage in certain a transactions with any officer, director, employee of affiliate of our Company; (iv) consummate a Change of Control as defined in the Statement of Resolution Establishing Series; (v) create and issue a new series of preferred stock senior to the Preferred Shares in terms of voting or liquidation preference; or (vi) enter into any agreement with respect to any of the foregoing.

 

---

Pursuant to the terms of the Stock Purchase Agreement the holders of the Preferred Shares and Initial Warrants and Additional Warrants are entitled to up to one (1) demand registration right at the request of the holders of no less than fifty percent (50%) of the Preferred Shares and piggyback registration rights for a period of six months from the closing.

Any single investor or group of investors who invest in excess of $5,000,000 in the Offering and acquire at least fifty percent (50%) of the Preferred Shares in the Offering shall have the right to appoint one director to our Board of Directors so long as the investor holds in excess of fifty percent (50%) of the total outstanding Preferred Shares and the outstanding Preferred Shares represent at least twenty percent (20%) of the fully diluted ownership of our Company.

 

Sales for fiscal 2014 were down 29% as compared to fiscal 2013 as a result of lower volume shipped to customers and a reduction in unit sales prices.

On July 16, 2014, we announced that we had retained Chandler Horton, a former VP of R&D at Keystone Foods, LLC, as an External Consultant.  Mr. Horton advises and assists the management team in several critical areas of our food ingredient business, including: sales and marketing initiatives; strategic partnership opportunities; and raising awareness about Z Trim solutions in key domestic and offshore markets. Mr. Horton spent over 37 years at Keystone, a global food services company that supplies some of the world's finest consumer brands with high-quality, fresh and frozen animal protein products including poultry, beef, pork and fish.  As Vice President of R&D, he led the company's customer centric research and development process, which focused on consumer needs and tastes as well as operational productivity and sustainability as it relates to new food products.

On June 18, 2014 we announced that we had retained Gordon F. Brunner, a former Chief Technology Officer of Procter & Gamble® (NYSE: PG), as an External Consultant.  Mr. Brunner assists the management team in several key areas, including: the review of all matters relating to our intellectual property; research and development of products, processes and applications derived from that property; the investigation of strategic research partnership opportunities; and initiatives designed to raise awareness regarding Z Trim's technology capabilities in relevant commercial, industrial, scientific and investment sectors. Mr. Brunner spent nearly four decades at Procter & Gamble. As Senior Vice President, Chief Technology Officer and Head of Worldwide Research and Development, he was instrumental in accelerating product innovation and led the creation of one of the most effective global R&D organizations. A native of Des Plaines, IL, Mr. Brunner earned a BS in Biochemical Engineering from the University of Wisconsin and an MBA from Xavier University. He has served on Z Trim's Advisory Board since 2011.

On April 22, 2014, we announced that we had engaged the services of two new distributors – SPI Group (www.spigroup.net) and Unipex Solutions Canada (http://www.unipex.ca/en/index.php). SPI Group is a distributor of specialty ingredients to food, nutritional, and nutraceutical manufacturers in the Western United States and Canada. Unipex Solutions Canada, a leader in the distribution of active ingredients and specialty chemicals, offers a wide range of distinctive services and customized solutions throughout North America. Additionally, their sales force has technical expertise in key markets such as personal care, pharmaceutical, nutraceutical, and nutrition, as well as industrial specialties including lubricants, HI&I, and oil & gas

 

On October 17, 2011, we entered into a Custom Processing Agreement (“CPA”) with ANP, part of the Aveka Group, in order to provide us with a partner for future manufacturing initiatives.  The CPA provided that ANP would perform certain services related to our dietary fiber product, including manufacturing, processing, packaging and storage/warehousing for an initial term of three years.   Start-up activities began in the third quarter of 2012, and production began in the fourth quarter of 2012.  The CPA provided 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.

 

---

On January 1, 2015 we and ANP entered into a new Custom Processing Agreement (the “new CPA”) replacing the Agreement from October 17, 2011.  The term of the new CPA is one year.  The new CPA will automatically renew every year unless or until either party provides written notice at least three months prior to the new expiration date.  The new CPA provided that we and ANP mutually agree to release each other from all claims and liabilities related to the original agreement.  Also agreed to was the Company absolution to ANP of any responsibility to pay the balance of a line of credit in the amount of $459,608 and accrued interest of $59,398.  ANP further agreed to release the Company from any responsibility to pay $359,713 owed to ANP relating to the original Agreement..  We further agreed to remove from ANP’s premises any BioFiber Gum product and all remaining product and raw materials.

 

Funding Initiatives During The Years Ended December 31, 2014 and 2013

Issuance of convertible and nonconvertible notes payable and revolving equipment loan

On February 11, 2014 we entered into an agreement with Edward Smith III, pursuant to which Mr. Smith agreed to lend us $200,000 in a convertible senior secured note.  The note matures on February 11, 2016 and bears interest at 12.5% computed based on a 365-day year.  Accrued interest is payable either at maturity or quarterly at the option of Mr. Smith in shares of our common stock.  At any time on or after the date that is 90 days after the date of issuance of the note, Mr. Smith may elect to convert the aggregate principal balance and accrued interest into shares of our common stock.  The conversion price under the note is $2.25, subject to adjustment as provided in the note.  If on the maturity date of the note, the thirty day trailing average closing price of our common stock (the “Trailing Average Price”) is below $2.25, the conversion price on the maturity date will be reduced to the Trailing Average Price, but to not less than $1.25.  The note is secured by our assets, which security interest is expressly subordinate to the interest of Fordham described below, pursuant to an intercreditor agreement between Mr. Smith and Fordham dated March 18, 2014.

 

Pursuant to the Security Agreement, dated March 24, 2014, between us and Fordham (the “Security Agreement”), the Equipment Loan is secured by a first priority security interest in all of our equipment (as more specifically defined in the Security Agreement, the “Collateral”).  The Security Agreement also contains customary restrictive covenants, including without limitation, covenants prohibiting us from (i) granting additional liens in the Collateral, (ii) selling, leasing or transferring the Collateral, (iii) entering into certain merger, consolidation or other reorganization transactions, and (iv) creating, incurring or assuming additional indebtedness, in each case subject to certain exceptions.  The Security Agreement also contains customary events of default.  If an event of default under the Security Agreement occurs and is continuing, Fordham may declare any outstanding obligations under the Credit Agreement immediately due and payable.  After an event of default, interest on the Note would accrue at a rate of 25% per annum.  Also on July 16, 2014, we and Fordham Capital Partners, LLC entered into a First Amendment to Security Agreement in which the Amended Note is secured by a first priority security interest in all of our equipment under substantially the same terms and covenants as stated in the original Security Agreement indicated above. On July 25, 2014, we entered into a Second Amendment to Security Agreement in which the Second Amended Note with Fordham is secured by a first priority security interest in all of our equipment under substantially the same terms and covenants as stated in the original and the First Security Agreement indicated above.

 

Additionally, pursuant to the Factoring Agreement, dated March 24, 2014, between us and Fordham, Fordham may purchase any of our Accounts (the “Factoring Agreement”).  To secure payment and performance of our liabilities and obligations to Fordham, including obligations under the Factoring Agreement, we granted Fordham a security interest in all of our (i) Accounts, (ii) Inventory, (iii) Chattel Paper, Deposit Accounts, Documents, Equipment, Financial Assets, Fixtures, General Intangibles, Instruments, Investment Property, Letter-of-Credit Rights, Securities, Software and Supporting Obligations, (iv) books and records of Seller which relate to Accounts, (v) all amounts owing to us under the Factoring Agreement, and (vi) Proceeds of the foregoing.  The Factoring Agreement terminates at any time that the Equipment Loan is paid in full.

 

---

On April 25, 2014, we entered into an agreement with Edward Smith III, pursuant to which Mr. Smith agreed to lend us $300,000 in a convertible subordinated secured note.  The note matures April 25, 2016 and bears interest at 14% per annum computed based on a 365-day year.  Accrued interest is payable at maturity in shares of our common stock.  At any time on or after the date that is 90 days after the date of issuance of the note, Mr. Smith may elect to convert the aggregate principal balance and accrued interest into shares of common stock.  The conversion price under the note is $1.00.  The conversion price was greater than the closing stock price on the agreement date; therefore, no beneficial conversion feature was recorded on this note.  The note is secured by our assets, which security interest is subordinate to the security interest granted to Fordham in connection with the Equipment Loan and the Factoring Agreement.

 

On April 30, 2014, we issued a 14% convertible subordinated secured note to each of Morris Garfinkle, Mark Hershhorn, Brian Israel and Edward B. Smith, directors of our company, in the principal amount of $19,000, for director fees due and payable to them (the “Director Notes”).  Each Director Note matures in two years (April 30, 2016) and bears interest at 14% per annum computed on a 365-day year.  Accrued interest was payable at maturity in shares of common stock.  At any time on or after the date that is 90 days after the date of issuance of the Director Note, the director may elect to convert the aggregate principal balance and accrued interest into shares of common stock.  The conversion price under each Director Note was $1.00.  The conversion price was greater than the closing stock price on the agreement date; therefore, no beneficial conversion feature was recorded on this note.  Each Director Note was secured by our assets, which security interest is subordinate to the security interest granted to Fordham in connection with the Equipment Loan and the Factoring Agreement. In January 2015, in connection with the private placement, each note together with accrued interest was exchanged for 5,211 shares of Preferred Stock, 44,606 Initial Warrants and 18,968 Additional Warrants.

 

On May 12, 2014, we issued 14% convertible subordinated secured notes to both Morris Garfinkle and CKS Warehouse in the principal amount of $75,000 each.  Both notes mature May 12, 2016 and bear interest at 14% per annum computed on a 365-day year.  Accrued interest is payable at maturity in shares of common stock.  At any time on or after the date that is 90 days after the date of issuance of each note, Mr. Garfinkle and CKS Warehouse may elect to convert the aggregate principal balance and accrued interest into shares of common stock.  The conversion price under each note is $1.00.  The conversion price was greater than the closing stock price on the agreement date; therefore, no beneficial conversion feature was recorded on this note.  Each note is secured by our assets, which security interest is subordinate to the security interest granted to Fordham in connection with the Equipment Loan and the Factoring Agreement. In January 2015, $17,842 plus interest on each note was exchanged for 4,873 shares of Preferred Stock, 41,711 Initial Warrants and 17,737 Additional Warrants.   The remaining principal balance on each note is $57,158.

 

On July 15, 2014, we entered into an agreement with Edward Smith III, pursuant to which Mr. Smith agreed to lend us $64,000 in an unsecured note payable.  The note matured October 15, 2014 without interest payable on the unpaid principal and subject to the terms of our agreements with our secured creditors.

 

On August 6, 2014, we issued a 14% convertible subordinated secured note to Edward B. Smith in the principal amount of $264,000.  The note matures August 6, 2016 and bears interest at 14% per annum computed on a 365-day year.  Under this note Mr. Smith has provided $200,000 of cash as of August 6, 2014 and the parties agreed to include the unsecured funds in the amount of $64,000 provided by Mr. Smith on July 15, 2014 and include those amounts as part of this subordinated secured transaction.  The loan agreement executed by the parties on July 15, 2014 is now null and void.  Accrued interest is payable at maturity in shares of common stock.  At any time on or after the date that is 90 days after the date of issuance of the note, Mr. Smith may elect to convert the aggregate principal balance and accrued interest into shares of common stock.  The conversion price under this note is $1.00.  The conversion price was greater than the closing stock price on the agreement date; therefore, no beneficial conversion feature was recorded on this note.  The note is secured by our assets, which security interest is subordinate to the security interest granted to Fordham in connection with the Equipment Loan and the Factoring Agreement.

 

On September 29, 2014, October 23, 2014, October 30, 2014 and December 3, 2014 we issued 14% nonconvertible subordinated secured notes to Edward B. Smith in the principal amounts of $85,000, $85,000, $70,000 and $30,000, respectively.  The note matured November 29, 2014, December 23, 2014, December 30, 2014 and February 3, 2015.  Each note bears interest at 14% per annum computed based on a 365-day year.  Accrued interest is payable at maturity in cash.   The notes are secured by our assets, which security interest is subordinate to the security interest granted to Fordham in connection with the Equipment Loan and the Factoring Agreement. On December 19, 2014, we executed an amendment to the 14% nonconvertible subordinated secured notes (dated September 29, 2014, October 23, 2014, October 30, 2014 and December 3, 2014, respectively) whereby the maturity date for each note was extended to April 15, 2015.

 

---

 

Private Placements, Warrant Programs, Waivers, Cashless Exercises and Anti-dilution Adjustments during the Year Ended December 31, 2013

 

In the first quarter of 2013, we completed a warrant exercise program, which resulted in the exercise of 1,756,088 warrants into 1,756,088 shares of common stock.  The warrant program, which was open to all holders of $1.50 warrants, allowed those warrant holders to exercise their warrants for a $1.25 strike price during February 2013; it also required a waiver of the anti-dilution provisions in these warrants until February 28, 2013 so that those provisions would not be triggered by the exercises. The conversion of these warrants raised approximately $2.2 million in additional capital for us.

On August 20, 2013, we entered into a private placement subscription agreement with Brightline Ventures I-C, LLC (together with Brightline Ventures I, LLC and Brightline Ventures I-B, LLC, referred to collectively herein as “Brightline” unless the context indicates otherwise) pursuant to which it sold 376,000 shares of common stock, at a price of $1.25 per share (the “$1.25 Raise”), and received gross proceeds of $470,000.

Concurrent to the $1.25 Raise, we (i) allowed the holders of our outstanding warrants with a $1.50 per share exercise price (the “$1.50 Warrants”) with certain anti-dilution provisions contained in the warrant agreements to choose to exercise their $1.50 Warrants on a cashless basis such that for every ten $1.50 warrants exercised, the holder received 4.5 shares of common stock (fractional shares were rounded up) (the “Cashless Exercise Program”), (ii) sought a temporary waiver from the holders of the $1.50 Warrants of the anti-dilution provisions in the warrant agreements with respect to the Cashless Exercise Program and potential capital-raising activities (other than the $1.25 Raise) by us prior to December 31, 2014, and (iii) asked the holders of the $1.50 Warrants to permanently amend the warrant agreements with respect to certain ratchet provisions so as to reduce the derivative liability our Company incurs as a result of those provisions in the agreement.

The Cashless Exercise Program resulted in 7,172,751 of the $1.50 Warrants being converted into 3,227,742 shares of common stock (including 5,718,750 $1.50 Warrants that were converted by Brightline Ventures I, LLC into 2,573,438 shares of common stock).  As a result of the Cashless Exercise Program, we recognized a loss on equity modification of $990,656—the difference in value between the $1.50 Warrants exercised and the common stock issued for the three months ended September 30, 2013.

As a result of the August 20, 2013 transaction with Brightline Ventures I, pursuant to the anti-dilution provisions contained in the $1.50 Warrants that were not exercised as part of the Cashless Exercise Program, we reduced the exercise price of the remaining warrants to $1.25 per share and adjusted the number of shares issuable upon the exercise of those warrants such that for every five warrants owned, each remaining holder of $1.50 Warrants received one additional warrant with an exercise price of $1.25 per share.  Thus, we issued an additional 2,376,009 warrants at an exercise price of $1.25 per share to the holders of the $1.50 Warrants that were not exercised as part of the Cashless Exercise Program.

On September 18, 2013, we entered into a private placement subscription agreement with Brightline Ventures I-C pursuant to which it sold 468,571 shares of common stock at a price of $1.05 per share, along with warrants to purchase 234,286 shares of common stock at an exercise price of $1.50 per share (the “$1.05 Raise”), and received gross proceeds of $492,000.  The waiver indicated above was effective for the $1.05 Raise; therefore, no additional warrants were issued and no exercise price adjustments were made pursuant to anti-dilution and ratchet provisions as a result of the $1.05 Raise.

Public Offering

On November 18, 2013, we completed a public offering of 1,866,667 shares of common stock at $0.75 per share and warrants to purchase up to 1,400,000 shares of common stock.  For every share of common stock purchased in the public offering, the investor received a warrant to purchase three-quarters (3/4) of a share of common stock.  The warrants have an exercise price of $1.00 per share and a term of exercise of five years from date of issuance.  We realized net proceeds from this public offering of $1,210,165.  These funds were be used to finance our working capital needs and other general corporate purposes.

Conversion of Preferred Stock to common stock

In March 2013, Brightline Ventures I converted all outstanding Series II Preferred Stock   plus accrued dividends into 3,859,697 shares of common stock.   Following the above conversions, all outstanding shares of Series II Preferred Stock have been converted and none remain outstanding.

 

Equity Issued in Connection with Advisory Agreements

On January 23, 2013, we entered into an agreement with Maxim Group, LLC, pursuant to which Maxim agreed to act as our lead or managing placement agent in connection with a potential offering of our common equity up to $20 million.  This agreement expired on May 30, 2013.

On June 24, 2013, an amendment to the above agreement was executed by us and Maxim, whereas, in exchange for Maxim’s services, we agreed to pay Maxim a cash placement fee equal to 6.6% of the gross proceeds of any such offering, as well as to reimburse its expenses in the offering up to $100,000.  In addition, we agreed to issue to Maxim warrants exercisable for a number of shares of common stock equal to 5% of the aggregate number of shares sold in any offering specified in the agreement (excluding any shares of common stock issuable upon exercise of any warrants included in such offering).  At the closing of the public offering on November 18, 2013 we and Maxim agreed to compensation for Maxim of the 6.6% placement fee and a 2% (of gross proceeds) expense allowance adjusted for certain expenses incurred.  The total fees paid to Maxim as a result of the public offering were $95,900.

 

---

On October 21, 2013, we issued warrants to purchase up to 30,000 shares of common stock in a private placement transaction to a business consultant who assisted us in various product placement matters.  The per share exercise prices of those warrants will be determined based on the market price of the common stock if and when certain sales targets are met; the warrants are exercisable through October 21, 2018.  In addition, on October 28, 2013, we issued 220,000 shares of restricted stock in a private placement transaction to a business-consulting firm that assisted us in evaluating various business and financial matters.  Then again on December 3, 2013, we issued another 550,000 shares of restricted stock to the same business consultant as compensation for assisting us in evaluating various business and financial matters.

Results of Operations

Revenues

Revenue for the year ended December 31, 2014 was $1,013,670, as compared to revenue of $1,429,419 for the year ended December 31, 2013, a decrease of 29.1%.  Our revenue for both years was entirely attributable to product sales.  The decrease in sales was due to a decrease in product volume shipped to customers.  We cannot provide any assurance that demand for our products will increase in the future or that we will be successful in implementing changes to our production process to improve our capacity and reduce costs.

Our revenues, by quarter, for 2014, were as follows:

Cost of Revenues

Cost of revenues for products sold for the year ended December 31, 2014 and 2013 was $995,683 and $3,534,248, respectively, a decrease of $2,538,565 or 71.8%.  The decrease in costs of revenues was primarily attributable to the lower sales volume and our reliance on our outside toll manufacturer to produce sellable product.  Costs that previously were related to our manufacturing of products at our facility have been classified as research and development costs.  During 2013, we set up an inventory valuation reserve of $742,168 for slow moving inventory within the industrial products division  Since production has been moved to the ANP facility costs are lower as a result of improvements in the production process and increasing production volume.  We believe that this will enable us to allocate our fixed costs over a greater number of finished goods and help reduce the costs of revenues in the future to improve margins.  However, there can be no assurance that greater efficiencies or improved margins can be sustainable in the future without greater efficiencies in our production process.

Gross Income (Loss)

Gross income for the year ended December 31, 2014 was $17,987, or approximately 2% of revenues, as compared to a gross loss of $2,104,829, or approximately 147% of revenues for the year ended December 31, 2013.  Gross income or loss reflects a number of factors that can vary from period to period, including those described above.

Operating Expenses

As a result of all manufacturing activity being moved to ANP, direct manufacturing costs that were previously included with Cost of Revenues are now related to our efforts at research and development of new products and processes using different feed stocks, expanded grade applications and more efficient manufacturing methods.  These costs are being classified as operating expenses for the year ended December 31, 2014 and 2013.  Therefore, operating expenses for the year ended December 31, 2014 was $5,355,287 (including $1,377,611 of research and development costs) as compared to $6,545,898 (which includes $65,867 of research and development costs) for the year ended December 31, 2013, a decrease of $1,190,611, or 18.2%.

 

---

The significant components of selling, general and administrative expenses in the years indicated were as follows:

The decrease in operating expenses was primarily due to a decrease in stock-based compensation expense of $1,383,258 (non-cash) as a result of a lower stock price on the date employee stock options were granted, a decrease in professional fees due to capital raising activities in 2013 and a decrease in investor relations expense due to stock-based compensation issued to our investor relations consultants during 2013 also.

Operating Loss

Operating loss for the year ended December 31, 2014 decreased to $5,337,300 compared to $8,650,727 for the year ended December 31, 2013 due to the reasons described above.

Other Expense

Net Loss

As a result of the foregoing, we incurred a net loss of $5,579,708 for the year ended December 31, 2014, or $0.14 per share, compared to $13,432,261 for the year ended December 31, 2013, or $0.41 per share.

The net loss attributable to common stockholders of $13,488,405 for the year ended December 31, 2013, or $0.41 per share includes charges for the preferred dividends payable of $56,144.  There was no charge for preferred dividends payable for the year ended December 31, 2014.

The decrease in the basic and diluted net loss per share for the year ended December 31, 2014, as compared to the year ended December 31, 2013 was due to the effect of the results described above as well as the offset of additional shares outstanding in 2014.

Liquidity and Capital Resources

As of December 31, 2014, we had a cash balance of $1,027,713, an increase from a balance of $443,472 at December 31, 2013.  At December 31, 2014, we had a working capital deficit of $539,935, a decrease from the working capital of $805,195 as of December 31, 2013.  The difference in working capital was primarily because of an increase in accounts payable and the increase in short term borrowings and notes payable during 2014.  As of March 24, 2015, we had a cash balance of $215,433.

On February 11, 2014 we entered into an agreement with Edward Smith III, a Director and Shareholder of our Company, pursuant to which Mr. Smith agreed to lend us $200,000 in a convertible senior secured note.  The note matures in two years (February 11, 2016) and bears interest at 12.5% computed based on a 365-day year.  Accrued interest is payable either at maturity or quarterly at the option of Mr. Smith in shares of our common stock.  At any time on or after the date that is 90 days after the date of issuance of the note, Mr. Smith may elect to convert the aggregate principal balance and accrued interest into shares of our common stock.  The conversion price under the note is $2.25, subject to adjustment as provided in the note.  If on the maturity date of the note, the thirty day trailing average closing price of our common stock (the “Trailing Average Price”) is below $2.25, the Conversion Price on the maturity date will be reduced to the Trailing Average Price, but to not less than $1.25.  The note is secured by the assets of our Company, which security interest is expressly subordinate to the interest of Fordham Capital Partners LLC described below, pursuant to an intercreditor agreement between Mr. Smith and Fordham dated March 18, 2014.

 

---

On March 24, 2014, Fordham Capital Partners, LLC (“Fordham”) extended a $500,000 revolving loan (the “Equipment Loan”) to Z Trim Holdings, Inc. (the “Company”) evidenced by an Equipment Revolving Note (the “Note”) issued by us to Fordham.  The Note requires monthly payments of principal of $10,416.66 plus interest, commencing on April 24, 2014 and continuing until February 24, 2015, followed by a final balloon payment of the entire unpaid principal balance of the Note and all accrued and unpaid interest on March 24, 2015.  The interest on the Note is calculated at a fixed rate of 20% per annum.  The Note may be prepaid in full at any time; provided that if we prepay the Note prior to September 24, 2014 (such six-month period, the “Guaranteed Interest Period”), it must pay a prepayment penalty equal to the amount by which (i) the aggregate interest that Fordham would have received on the Note during the Guaranteed Interest Period had there been no prepayment exceeds (ii) the aggregate interest paid by us prior to the date of prepayment.

Pursuant to the Security Agreement, dated March 24, 2014, between us and Fordham (the “Security Agreement”), the Equipment Loan is secured by all of our equipment (as more specifically defined in the Security Agreement, the “Collateral”).  The Security Agreement also contains customary restrictive covenants, including without limitation, covenants prohibiting us from (i) granting additional liens in the Collateral, (ii) selling, leasing or transferring the Collateral, (iii) entering into certain merger, consolidation or other reorganization transactions, and (iv) creating, incurring or assuming additional indebtedness, in each case subject to certain exceptions.  The Security Agreement also contains customary events of default.  If an event of default under the Security Agreement occurs and is continuing, Fordham may declare any outstanding obligations under the Credit Agreement immediately due and payable.  After an event of default, interest on the Note would accrue at a rate of 25% per annum.

Additionally, pursuant to the Factoring Agreement, dated March 24, 2014, between us and Fordham, Fordham may purchase any Accounts of our Company (the “Factoring Agreement”).  To secure payment and performance of our liabilities and obligations to Fordham, including obligations under the Factoring Agreement, we granted Fordham a security interest in all of our (i) Accounts, (ii) Inventory, (iii) Chattel Paper, Deposit Accounts, Documents, Equipment, Financial Assets, Fixtures, General Intangibles, Instruments, Investment Property, Letter-of-Credit Rights, Securities, Software and Supporting Obligations, (iv) books and records of Seller which relate to Accounts, (v) all amounts owing to us under the Factoring Agreement, and (vi) Proceeds of the foregoing.  The Factoring Agreement terminates at any time that the Equipment Loan is paid in full.

 

On April 25, 2014, we entered into an agreement with Edward Smith III, a Director and Shareholder of our Company, pursuant to which Mr. Smith agreed to lend us $300,000 in a convertible subordinated secured note.  The note matures in two years (April 25, 2016) and bears interest at 14% per annum computed based on a 365-day year.  Accrued interest is payable at maturity in shares of our common stock.  At any time on or after the date that is 90 days after the date of issuance of the note, Mr. Smith may elect to convert the aggregate principal balance and accrued interest into shares of our common stock.  The conversion price under the note is $1.00.  The conversion price was greater than the closing stock price on the agreement date; therefore, no beneficial conversion feature was recorded on this note.  The note is secured by our assets, which security interest is subordinate to the security interest granted to Fordham in connection with the Equipment Loan and the Factoring Agreement.

 

On April 30, 2014, we issued a 14% convertible subordinated secured note to each of Morris Garfinkle, Mark Hershhorn, Brian Israel and Edward B. Smith, Directors of our Company, in the principal amount of $19,000, for director fees due and payable to them (the “Director Notes”).  Each Director Note matures in two years (April 30, 2016) and bears interest at 14% per annum computed on a 365-day year.  Accrued interest is payable at maturity in shares of our common stock.  At any time on or after the date that is 90 days after the date of issuance of the Director Note, the director may elect to convert the aggregate principal balance and accrued interest into shares of our common stock.  The conversion price under each Director Note is $1.00.  The conversion price was greater than the closing stock price on the agreement date; therefore, no beneficial conversion feature was recorded on this note.  Each Director Note is secured by our assets, which security interest is subordinate to the security interest granted to Fordham in connection with the Equipment Loan and the Factoring Agreement.

 

On May 12, 2014, we issued 14% convertible subordinated secured notes to both Morris Garfinkle and CKS Warehouse in the principal amount of $75,000 each.  Both notes mature in two years (May 12, 2016) and bear interest at 14% per annum computed on a 365-day year.  Accrued interest is payable at maturity in shares of our common stock.  At any time on or after the date that is 90 days after the date of issuance of each note, Mr. Garfinkle and CKS Warehouse may elect to convert the aggregate principal balance and accrued interest into shares of our common stock.  The conversion price under each note is $1.00.  The conversion price was greater than the closing stock price on the agreement date; therefore, no beneficial conversion feature was recorded on this note.  Each note is secured by our assets, which security interest is subordinate to the security interest granted to Fordham in connection with the Equipment Loan and the Factoring Agreement.

 

On July 15, 2014, we entered into an agreement with Edward Smith III, pursuant to which Mr. Smith agreed to lend the Company $64,000 in an unsecured note payable.  The note matures in 90 days (October 15, 2014) without interest payable on the unpaid principal and subject to the terms of our agreements with its secured creditors.

 

---

Also on July 16, 2014, we entered into a First Amendment to Security Agreement with Fordham Capital Partners, LLC in which the Amended Note is secured by a first priority security interest in all of our equipment under substantially the same terms and covenants as stated in the original Security Agreement indicated above.

 

On July 25, 2014, we entered into an Amended and Restated Equipment Revolving Note (the “Second Amended Note”) with Fordham Capital Partners, LLC in the amount of $668,750.  The Second Amended Note requires one monthly payment of principal of $12,143 plus interest, commencing on July 25, 2014 followed by successive monthly installments of principal of $13,679 plus interest and continuing until February 24, 2015, followed by a final balloon payment of the entire unpaid principal balance of the Second Amended Note and all accrued and unpaid interest on March 24, 2015.  The interest on the Second Amended Note is calculated at a fixed rate of 22% per annum.

 

Also on July 25, 2014, we entered into a Second Amendment to Security Agreement in which the Second Amended Note with Fordham Capital Partners, LLC is secured by a first priority security interest in all of our equipment under substantially the same terms and covenants as stated in the original and the First Security Agreement indicated above.

 

On August 6, 2014, we issued a 14% convertible subordinated secured note to Edward B. Smith in the principal amount of $264,000.  The note matures in two years (August 6, 2016) and bears interest at 14% per annum computed on a 365-day year.  Under this note Mr. Smith has provided $200,000 of cash as of August 6, 2014 and the parties agreed to include the unsecured funds in the amount of $64,000 provided by Mr. Smith on July 15, 2014 and include those amounts as part of this subordinated secured transaction.  The loan agreement executed by the parties on July 15, 2014 is now null and void.  Accrued interest is payable at maturity in shares of our common stock.  At any time on or after the date that is 90 days after the date of issuance of the note, Mr. Smith may elect to convert the aggregate principal balance and accrued interest into shares of our common stock.  The conversion price under this note is $1.00.  The conversion price was greater than the closing stock price on the agreement date; therefore, no beneficial conversion feature was recorded on this note.  The note is secured by our assets, which security interest is subordinate to the security interest granted to Fordham in connection with the Equipment Loan and the Factoring Agreement.

 

On September 29, 2014, we issued a 14% nonconvertible subordinated secured note to Edward B. Smith in the principal amount of $85,000.  The note matures in two months (November 29, 2014) and bears interest at 14% per annum computed based on a 365-day year.  Accrued interest is payable at maturity in cash.   The note is secured by our assets, which security interest is subordinate to the security interest granted to Fordham in connection with the Equipment Loan and the Factoring Agreement.

 

On October 23, 2014, we issued a 14% nonconvertible subordinated secured note to Edward B. Smith in the principal amount of $85,000.  The note matures in two months (December 23, 2014) and bears interest at 14% per annum computed based on a 365-day year.  Accrued interest is payable at maturity in cash.  The note is secured by our assets, which security interest is subordinate to the security interest granted to Fordham in connection with the Equipment Loan and the Factoring Agreement.

 

On October 30, 2014, we issued a 14% nonconvertible subordinated secured note to Edward B. Smith in the principal amount of $70,000.  The note matures in two months (December 30, 2014) and bears interest at 14% per annum computed based on a 365-day year.  Accrued interest is payable at maturity in cash.   The note is secured by our assets, which security interest is subordinate to the security interest granted to Fordham in connection with the Equipment Loan and the Factoring Agreement.

 

On December 3, 2014, we issued a 14% nonconvertible subordinated secured note to Edward B. Smith in the principal amount of $30,000.  The note matures in two months (February 3, 2015) and bears interest at 14% per annum computed based on a 365-day year.  Accrued interest is payable at maturity in cash.   The note is secured by our assets, which security interest is subordinate to the security interest granted to Fordham in connection with the Equipment Loan and the Factoring Agreement.

 

On December 19, 2014, we executed an amendment to the 14% nonconvertible subordinated secured notes (dated September 29, 2014, October 23, 2014, October 30, 2014 and December 3, 2014, respectively) whereby the maturity date for each note was extended to April 15, 2015.

Over the last several years, our operations have been funded primarily through the sale of both equity and debt securities.  During 2014, we raised a total of $2,858,211 in net proceeds from short term borrowings and long and short term notes payable.  We continue to explore additional equity and debt funding however, there can be no assurance that we will be successful in raising all of the additional funding that it is seeking or that such amount will be sufficient for its needs.

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. 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.

 

---

Under the terms of the CPA with ANP, we agreed to make available to ANP a $500,000 line of credit (which includes $10,000 that we loaned ANP to assist ANP with the purchase of its Waukon, Iowa facility) at an interest rate of 5.5%.  The line of credit was only permitted to be used by ANP for operating costs, which excludes capital expenditures of equipment in excess of $5,000.  The loan is to be paid back to us 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 we loaned ANP to assist it with the purchase of its Waukon, Iowa facility) or the first month after we have ordered 80,000 pounds of product for three consecutive months, whichever shall occur first.  All of ANP’s obligations under the line of credit, as well as the CPA, are specifically guaranteed by its parent company, Aveka Inc.  As of December 31, 2014, all $500,000 to ANP under the line of credit was outstanding.  This extension of credit to ANP had a material adverse impact on our cash resources, which has required us to seek additional capital resources to fund its operations.  ANP, in April of 2014, had begun repaying the line of credit at a rate of $5,000 per month. On January 1, 2015, we entered into a new agreement with ANP pursuant to which we agreed to absolve ANP of any responsibility to pay the balance of a line of credit and accrued interest that had been owed to us.

 

The following discussion focuses on information in more detail on the main elements of the $584,241 net increase in cash during the year ended December 31, 2014 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 years ended December 31:

Commitments/Contingencies:

AVEKA Nutra Processing, LLC Line of Credit.  As discussed under “Liquidity and Capital Resources” above, under the terms of the CPA with ANP, we agreed to make available to ANP a $500,000 line of credit (which includes $10,000 that we loaned ANP to assist ANP with the purchase of its Waukon, Iowa facility) at an interest rate of 5.5%.  As of December 31, 2014, all $500,000 to ANP under the line of credit was outstanding.  ANP, in April of 2014, has begun repaying the line of credit at a rate of $5,000 per month. On January 1, 2015, we entered into a new agreement with ANP pursuant to which we agreed to absolve ANP of any responsibility to pay the balance of a line of credit and accrued interest that had been owed to us.

 

---

Debt instruments and preferred stock.  As of December 31, 2014, no shares of Series I and Series II Preferred Stock remained outstanding.  See “Recent Developments Affecting the Company – Funding Initiatives” above regarding convertible and nonconvertible notes payable outstanding and deposits received towards the sale of convertible preferred stock.

 

On July 25, 2014, we entered into an Amended and Restated Equipment Revolving Note (the “Second Amended Note”) with Fordham Capital Partners, LLC in the amount of $668,750.  The Second Amended Note requires one monthly payment of principal of $12,143 plus interest, commencing on July 25, 2014 followed by successive monthly installments of principal of $13,679 plus interest and continuing until February 24, 2015, followed by a final balloon payment of the entire unpaid principal balance of the Second Amended Note and all accrued and unpaid interest on March 24, 2015.  The interest on the Second Amended Note is calculated at a fixed rate of 22% per annum.

 

Capital expenditures.   At December 31, 2014, we had no material commitments for capital expenditures.

Lease commitments.   We lease a combined production and office facility located in Mundelein, Illinois.  The lease was renewed in the first quarter of 2012 and expires in May 2014; monthly rental payments are $21,361, inclusive of property taxes.  On March 14, 2014 we entered into an amendment to the original lease agreement for office space located in Mundelein, Illinois.  The amendment extended the term of the lease to May 14, 2015 upon the same terms and conditions contained in the lease as amended.

Litigation.  In July 2007, we were sued in the 20th Judicial Circuit Court, St. Clair County, Illinois by Joseph Sanfilippo and James Cluck for violation of the Consumer Fraud Act and is seeking damages in excess of $200,000.  The trial court has issued a default order against us, and has denied our motion to reconsider.  Management believes that the trial court’s rulings were erroneous and that it has grounds for appeal, and that the underlying allegations are frivolous and wholly without merit and we will vigorously defend the claim. The outcome of this matter is unknown as of the report date.  However, we have conservatively allocated a reserve of $102,000 to satisfy any liability it may incur as a result of this proceeding.

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

Off-Balance Sheet Arrangements

As of December 31, 2014, we had no off-balance sheet arrangements.

Going Concern

As of the date of our most recent audit, which included the fiscal year ended December 31, 2014, we had not generated sufficient revenues to meet our cash flow needs.  As a result, our auditors have expressed substantial doubt about our ability to continue as a going concern.  Although we have generated revenue, we are still operating at a net loss, and may continue to incur losses for a period of time.  We cannot assure you that we will be able to obtain sufficient funds from our operating or financing activities to support our continued operations.  If we cannot continue as a going concern, we may need to substantially revise our business plan or cease operations, which may reduce or negate the value of your investment.

 

---

Critical Accounting Policies

The Financial Statements and related notes contain information that is pertinent to management’s discussion and analysis. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the 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. These estimates are generally based on historical experience, current conditions and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily available from other sources, as well as identifying and assessing our accounting treatment with respect to commitments and contingencies. Actual results could differ from those estimates.

Our significant accounting policies are described in Note 3 to the Financial Statements.

We consider the following policies and estimates to be the most critical in understanding the judgments that are involved in the preparation of the company’s financial statements and the uncertainties that could impact the company’s financial position, results of operations and cash flows.

Revenue Recognition – We generally recognize 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 our historical experience.

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 our common stock warrants, which have reset provisions to the exercise price and conversion price if we issue equity or other notes at a price less than the exercise price set forth in such warrants and notes, are separately valued and accounted for on our 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.

Fair Value of Financial Instruments – Our 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.

We utilizes various types of financing to fund our business needs, including convertible debt with warrants attached. We review our 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.

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. We evaluate our hierarchy disclosures each quarter. Our 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 December 31, 2014 and 2013 was $20,166 and $95,049, respectively, and the gain due to valuation for the twelve months ended December 31, 2014 was $74,883 as compared to $966,736 at December 31, 2013.

Stock - Based Compensation – We estimate 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 award 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. We recognized pre-tax compensation expense related to stock options of $935,097 and $2,318,355 for the year ended December 31, 2014 and 2013, respectively.

 

---

New Accounting Pronouncements

See Note 1 in Notes to Financial Statements regarding recent accounting pronouncements.

ITEM 7A.

Quantitative and Qualitative Disclosures About Market Risk.

Not Applicable.

ITEM 8.

Financial Statements and Supplementary Data.

See the F-Pages contained herein, which include our audited financial statements and are incorporated by reference in this Item 8.

ITEM 9.

Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.

None.

ITEM 9A.

Controls and Procedures.

Evaluation of Disclosure Controls and Procedures.

We carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined) in Exchange Act Rules 13a – 15(e) and 15d – 15(e)).  Based upon that evaluation, our chief executive officer and chief financial officer concluded that, as of the period ended December 31, 2014, our disclosure controls and procedures were not effective (1) to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (2) to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to us, including our chief executive and chief financial officers, as appropriate to allow timely decisions regarding required disclosure. Our 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, 2013 and our failure to complete the process of remediating these weaknesses by the end of the period covered by this Annual Report.

Limitations on the Effectiveness of Controls

 

Our Principal Executive Officer and Principal Financial Officer do not expect that our disclosure controls or internal controls will prevent all error and all fraud. Although our disclosure controls and procedures were designed to provide reasonable assurance of achieving their objectives, a control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented if there exists in an individual a desire to do so. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.  Furthermore, smaller reporting companies face additional limitations. Smaller reporting companies employ fewer individuals and find it difficult to properly segregate duties. Often, one or two individuals control every aspect of the Company's operation and are in a position to override any system of internal control. Additionally, smaller reporting companies tend to utilize general accounting software packages that lack a rigorous set of software controls.

 

Management’s Annual Report on Internal Control over Financial Reporting.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting.  Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act   as a process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States and includes those policies and procedures that:

 

---

- Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and any disposition of our assets;

- Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

- Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2014. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.  Based on this assessment, Management has identified the following three material weaknesses that have caused management to conclude that, as of December 31, 2014, our disclosure controls and procedures, and our internal control over financial reporting, were not effective at the reasonable assurance level:

1.

As of December 31, 2014, we did not maintain effective controls over the control environment.  Specifically we have not developed and effectively communicated to our employees our accounting policies and procedures.  This has resulted in inconsistent practices.   Since these entity level programs have a pervasive effect across the organization, management has determined that these circumstances constitute a material weakness.

2.

As of December 31, 2014, we did not maintain effective controls over financial statement disclosure. Specifically, controls were not designed and in place to ensure that all disclosures required were originally addressed in our financial statements.   Accordingly, management has determined that this control deficiency constitutes a material weakness.

3.

As of December 31, 2014, we did not maintain effective controls over financial reporting. Specifically controls were not designed and in place to ensure that the financial impact of certain complex equity and derivative liability transactions were appropriately and correctly reported. The transactions were identified by the auditors and calculated and reported correctly as of December 31, 2014.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Corrective Action

Management plans to provide future investments in the continuing education of our accounting and financial professionals.

ITEM 9B.

Other Information.

None.

PART III

ITEM 10.

Directors, Executive Officers and Corporate Governance.

The term of office of each director expires at each annual meeting of stockholders and upon the election and qualification of his successor.

The following information sets forth the names of our current directors, their ages, period of service and description of their business experience:

 

---

 

---

 

---

Other than with Edward Smith III, there are/were no arrangements with any director or executive officer regarding their election or appointment.  We agreed to nominate Mr. Smith as a director as part of Brightline Ventures I, LLC’s investment in 2009.   There are no family relationships between any director, executive officer, or person nominated or chosen by the Company to become a director or executive officer.

 

The following information sets forth the names of our sole executive officer that is not serving as a director, his age, period of service and description of his business experience:

 

---

Section 16(a) Beneficial Ownership Reporting

Pursuant to Section 16(a) of the Exchange Act and the rules promulgated there under, officers and directors of the company and persons who beneficially own more than 10% of our common shares are required to file with the SEC and furnish to our reports of ownership and change in ownership with respect to all equity securities of the company.  Based solely on our review of the copies of such reports received by us during or with respect to the fiscal year ended December 31, 2014 and all prior years, and written representations from such reporting persons, we believe that those persons who were our officers, directors and 10% shareholders during any portion of the fiscal year ended December 31, 2014, complied with all Section 16(a) filing requirements applicable to such individuals other than John Elo who had a late Form 3 filing and Aristar Capital Management, LLC that had a late Form 4 filing..

Code of Ethics and Business Conduct

We have adopted a Code of Ethics and Business Conduct (the “Code”).  The Code applies to all of our directors, officers, and employees.  Among other things, the Code is intended to focus the board of directors and the individual directors on areas of ethical risk, help directors recognize and deal with ethical issues, provide mechanisms to report unethical conduct, and foster a culture of honesty and accountability. The Code covers all areas of professional conduct relating to service on the Z Trim Board, including conflicts of interest, unfair or unethical use of corporate opportunities, strict protection of confidential information, compliance with all applicable laws and regulations and oversight of ethics and compliance by our employees.

The full text of the Code is published on our website at http://www.ztrim.com/pages/code_of_ethics___business_conduct/40.php.  We will disclose any future amendments to, or waivers from, provisions of these ethical policies and standards for Officers and Directors on our website within two business days following the date of such amendment or waiver.

Selection Criteria for Directors

The Company’s Board of Directors established a Nominating Committee in 2008.  The related provisions set forth in the Bylaws serve as the charter for the Nominating Committee.  The Board Nominating Committee, composed of two directors of our Company, identifies candidates for director nominees through recommendations solicited from other directors, our executive officers, search firms or other advisors, shareholders pursuant to the procedures set forth below, and through such other methods as the independent directors deem to be helpful.  Based upon an evaluation of the candidates by the Board Nominating Committee, it recommends to the full Board candidates it has determined to be qualified for serving on the Board.  Effective in 2008, Brian Israel was appointed a member of the Nominating Committee, with Brian Israel serving as chairman.  The Nominating Committee did not meet during 2014.

Our Bylaws provide that shareholders, in submitting recommendations to the Nominating Committee for director candidates, shall follow the following procedures:

- Recommendations for nomination must be received by a date not later than the close of business on the 120th calendar day prior to the calendar date our proxy statement was filed with the Securities and Exchange Commission in connection with the previous year’s annual meeting of shareholders or special meeting in lieu of annual meeting of shareholders.

- Such recommendation for nomination shall be made in writing and shall include the following information: (A) name of the shareholder making the recommendation; (B) a written statement disclosing such shareholder’s beneficial ownership of our securities; (C) name of the individual recommended for consideration as a director nominee; (D) a written statement as to why such recommended candidate would be able to fulfill the duties of a director; (E) a written statement describing how the recommended candidate meets the independence requirements established by the NYSE Amex (now known as NYSE MKT) or any other requirements adopted by us; (F) a written statement disclosing the recommended candidate’s beneficial ownership of our securities; (G) a written statement disclosing relationships between the recommended candidate and us which may constitute a conflict of interest; and (H) a written statement by the recommended candidate that the candidate is willing and able to serve on the Board of Directors.

Our Bylaws provide that the composition of the Board of Directors must meet the independence requirements promulgated by the NYSE Amex (now known as NYSE MKT) or such other requirements as may be adopted by us.

The Company requires its directors to possess certain minimum qualifications, including the following:

- Adequate Experience. Nominees should have demonstrated business acumen, experience and ability to exercise sound judgments in matters that relate to the current and long-term objectives of the corporation and should be willing and able to contribute positively to the decision-making process of the corporation.

 

---

- No Conflicts of Interest. Nominees must be free from any relationship that, in the opinion of the Board, would interfere with, or have the appearance of interfering with, the exercise of his or her independent judgment as a member of the Board, including any conflicts of interest stemming from his or her institutional or other affiliations, and candidates should be able to act in the interests of all shareholders.

- No Prior Bad Acts. Nominees shall not have been convicted of any criminal offense or been subject to any adverse civil judgment in any jurisdiction involving financial crimes, acts involving monies or breach of trust, moral turpitude, misfeasance or malfeasance, or been convicted in any jurisdiction of a crime that is a felony, or been deemed by the Board to have violated company policy

The Company also considers the following qualities and skills in selecting its directors:

- knowledge of the corporation’s business and industry;

- prior education;

- demonstrated ability to exercise sound business judgment;

- reputation for integrity and high moral and ethical character;

- potential to contribute to   the diversity of viewpoints, backgrounds, or experiences of the Board as a whole; and

- diligence and dedication to the success of the corporation.

A director candidate recommended by our stockholders will be considered in the same manner as a nominee recommended by a Board member, management or other sources.

While the Board does not have a separate formal diversity policy, it is our and the Board’s policy to identify qualified potential candidates without regard to any candidate’s race, color, disability, gender, national origin, religion or creed, and we seek to ensure the fair representation of shareholder interests on the Board of Directors through the criteria set forth above.  In selecting our directors, we consider the potential to contribute to the diversity of viewpoints, backgrounds, or experiences of the Board of Directors as a whole.  The Board of Directors believes that the use of the Nominating Committee’s general criteria, along with non-discriminatory policies, will best result in a Board of Directors that shows diversity in many respects. The Board of Directors believes that it currently maintains that diversity.

Audit Committee

The function of the Audit Committee is to assist the Board of Directors in preserving the integrity of the financial information published by the Company through the review of financial and accounting controls and policies, financial reporting systems, alternative accounting principles that could be applied and the quality and effectiveness of the independent public accountants.  Among its other responsibilities, the Committee also is responsible for the receipt, retention and treatment of complaints received by us relating to accounting, internal accounting controls or auditing matters and confidential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters.  See also “Report of the Audit Committee.”

Audit Committee Financial Expert

The Board of Directors has determined that Mr. Garfinkle qualifies as an “audit committee financial expert” based on a review of his educational background and business experience.

 

ITEM 11.

Executive Compensation.

Our compensation philosophy has been, and continues to be, that compensation should drive long-term value creation for our stockholders. Total compensation for each employee should be based on individual our performance, market practice, and the value of our employee’s position. Our compensation programs should not encourage unnecessary or excessive risk taking.

Compensation to our named executive officers (“NEOs”) consists solely of cash compensation and the issuance of stock options pursuant to our Incentive Compensation Plan.  We pay base salary in order to provide a predictable level of compensation that is competitive in the marketplace for the position responsibilities and individual skills, knowledge, and experience of each executive.  We provide our NEOs with stock options that are generally available to all of our employees in order to further our goal of attracting and retaining senior executives of outstanding ability.  We do not believe that our employee compensation policies are reasonably likely to have a material adverse effect on our company.

 

---

SUMMARY COMPENSATION TABLE

The following table summarizes the compensation earned in the fiscal years ended December 31, 2014 and 2013 by the person serving as  our Chief Executive Officer during such period and the two most highly paid executive officers whose total salary and bonus awards exceeded $100,000 for the fiscal years ended December 31, 2014 and 2013 (collectively, the “named executive officers”).

(1) The amounts in the table reflect the grant date fair value of options awards to the named executive officer in accordance with Accounting Standards Codification Topic 718.  The ultimate values of the options awards to the executives generally will depend on the future market price of our common stock, which cannot be forecasted with reasonable accuracy. The actual value, if any, which an optionee will realize upon exercise of an option, will depend on the excess of the market value of the common stock over the exercise price on the date the option is exercised.  See the “Outstanding Equity Awards at Fiscal Year-End” table below for information regarding all outstanding awards.

(2) The amounts in this column reflect the dollar amount recognized as expense with respect to stock options for financial statement reporting purposes during the twelve months ended December 31, 2014 and 2013 in accordance with applicable accounting standards.  In 2014, Steven Cohen received 228,800 options at a strike price of $0.56 that have an option expiration date of January 1, 2019.  In 2013, Steven Cohen received 288,000 options at a strike price of $1.67 that have an option expiration date of January 4, 2018.  In 2014, John R. Elo received 75,000 options at a strike price of $0.56 that have an option expiration of January 1, 2019 and upon his appointment to CFO, he received 153,500 options at a strike price of $0.62 that have an option expiration of August 18, 2019.  In 2013, Brian Chaiken received 226,667 options at a strike price of $1.67 that have an option expiration date of January 4, 2018.  Upon Mr. Chaiken’s resignation the amount of 2013 options was reduced to 150,000.

 (3) Mr. Cohen was appointed as our Managing Director of Communications and Planning and Secretary in January 2015 when Mr. Smith was appointed our Chief Executive Officer and President.

(4) Mr. Elo was appointed our Chief Financial Officer in August 2014 when Mr. Chaiken resigned as Chief Financial Officer.

(5) Upon Mr. Chaiken’s separation from our company he received compensation in the amount of $10,349 according to a Separation and Release Agreement (“Agreement”).  At December 31, 2014, we accrued $40,354 which was due and payable to Mr. Chaiken under the Agreement.  This amount was paid in January 2015.

In 2006, we entered into an employment agreement with Steven J. Cohen setting forth the terms of his employment as our President.  Mr. Cohen’s employment under the employment agreement was for an initial term of three years and is now renewable on an annual basis for a one year term based on the mutual desire of the parties.  Either Mr. Cohen or we can terminate the employment agreement without cause on 30 days written notice.  If Mr. Cohen is terminated for any reason other than disability or death, we are not required to make any further payments to Mr. Cohen other than with respect to obligations accrued on the date of termination.  In the event that Mr. Cohen is terminated by reason of disability or death, we are required to provide Mr. Cohen or his estate any benefits set forth in any of our benefit programs or plans on the date of termination.

Under Mr. Cohen’s employment agreement, we are also protected from competition by Mr. Cohen after his employment with us would cease. Upon termination, Mr. Cohen agrees to not interfere with the relationships between our suppliers, customers or agents for six months, and that he will not compete with us over the same period in any county of any state in which we are providing service at the time of termination.  Further, Mr. Cohen has agreed to related confidentiality requirements after the termination of his employment.

 

---

In 2007, we entered into an employment agreement with Brian Chaiken setting forth the terms of his employment as our General Counsel and Vice President of Business Development.  Mr. Chaiken’s employment under the employment agreement was at will.  The agreement provided that if Mr. Chaiken was terminated for cause, we were not required to make any further payments to Mr. Chaiken other than with respect to obligations accrued on the date of termination.  If Z Trim were to terminate Mr. Chaiken without cause, Mr. Chaiken was entitled to receive a severance payment equal to his wages at the time he was terminated for a minimum of six months, with an additional two months for each year of completed service on a pro-rata basis, up to a maximum of two years.  Under Mr. Chaiken’ s employment agreement, a termination for a “cause” would occur if  Mr. Chaiken did any of the following: (i) committed or participated in an act of fraud, gross neglect, misrepresentation, embezzlement or dishonesty against the Company; (ii) committed or participated in any other injurious act or omission wantonly, willfully, recklessly or in a manner which was grossly negligent against us, monetarily or otherwise; (iii) engaged in a criminal enterprise involving moral turpitude; (iv) engaged in an act or acts constituting a felony under the laws of the United States or any state thereof or in any act or acts resulting in the loss of any state or federal license required for Mr. Chaiken to perform his material duties or responsibilities for us; or (v) Mr. Chaiken’ s breach of any provision of the employment agreement. Mr. Chaiken would also be provided with COBRA expenses for family health insurance for nine months following his separation from us.

 Under Mr. Chaiken’s employment agreement, Z Trim was also protected from competition by Mr. Chaiken after his employment with Z Trim would cease. Upon termination, Mr. Chaiken agreed to not interfere with the relationships between the suppliers, customers or agents of Z Trim for twelve months, and that he would not compete with Z Trim over the same period in any target market in which it engages in or may engage in the future.

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

December 31, 2014

The following table contains information regarding outstanding equity awards held at December 31, 2014, by the named executive officers.

OPTION EXERCISES AND STOCK VESTED

2014

There were no Z Trim stock options that were exercised by the named executive officers in fiscal 2014. There were no outstanding awards of restricted stock in fiscal 2014.

2014 Directors’ Compensation

Employee directors do not receive any separate compensation for their activities on the board of directors.  Non-employee directors received 71,429 shares of common stock as an annual retainer as well as a maximum 35% tax gross up not to exceed $10,000 per board member.

Non-employee directors are reimbursed for travel expenses incurred in conjunction with their duties as directors. Furthermore, we will provide the broadest form of indemnification under Illinois law under which liabilities may arise as a result of their role on the board of directors and payments for reimbursements for expenses incurred by a director in defending against claims in connection with their role, and the director satisfies the statutory standard of care.

 

---

The following table provides compensation for non-employee directors who served during fiscal 2014:

(1)

In January 2014, each non-employee director was issued 71,429 shares of common stock as compensation or services as a director.  The amounts in the table reflect the grant date fair value of stock awards to the named directors in accordance with Accounting Standards Codification Topic 718, which was $0.56 per share.  The ultimate values of the stock awards to the directors generally will depend on the future market price of our common stock, which cannot be forecasted with reasonable accuracy.

(2)

In April 2014 each non-employee director received a note in the principal amount of $19,000 in lieu of receiving cash fees for services as a director.  Included in such fees is an amount for attending board meetings  during 2013 and 2014 (through April 2014) and a 35% tax gross up paid to each director based on the then-current fair market value of the shares of common stock issued as additional compensation.

(3)

On March 10, 2015, Mr. Hershhorn resigned from the Board of Directors.  Mr. Dan Jeffery was appointed to replace Mr. Hershhorn on the board.

 

---

ITEM 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The following table presents certain information as of March 31, 2015, regarding the beneficial ownership of the Z Trim common stock held by each director or nominee for director, each executive officer appearing in the “Summary Compensation Table” included in “Executive Compensation” and all directors and executive officers as a group.  As of March 31, 2015, we had 40,711,778 shares of common stock outstanding.

---

*Less than 1% of our common stock outstanding.

(1)	The address for each stockholder listed in the table is c/o Z Trim Holdings, Inc., 1011 Campus Drive, Mundelein, Illinois 60060.

(2)	The specified persons have sole voting and sole dispositive powers as to all shares, except as otherwise indicated.

(3)

Consists of: (i) 33,394,194 shares of common stock beneficially owned by Mr. Smith (consisting of: (A) 285,615 shares of common stock owned directly by Mr. Smith, (B) 407,889 shares of common stock issuable upon conversion of convertible notes held directly by Mr. Smith, (C) 813,839 shares of common stock issuable upon conversion of Series B Preferred Stock owned directly by Mr. Smith, and (D) 31,886,851 shares of common stock issuable upon exercise of warrants owned directly by Mr. Smith); and (ii) 68,660,798 shares of common stock beneficially owned by Aristar Capital Management, LLC (“Aristar Capital”), together with Aristar Ventures I, LLC (“Aristar Ventures I”), Aristar Ventures I-B, LLC (“Aristar Ventures I-B”) and Aristar Ventures I-C, LLC (“Aristar Ventures I-C”), which is further described in the table below setting forth persons known to us to be owners of more than 5% of our common stock.  Mr. Smith is the managing member of Aristar Capital, an investment management firm that serves as the investment manager of Aristar Ventures I, Aristar Ventures I-B and Aristar Ventures I-C.  Mr. Smith is also the managing member of Aristar GP (defined below), which serves as the managing member of Aristar Ventures I, Aristar Ventures I-B and Aristar Ventures I-C.  As a result of the foregoing, the shares of common stock deemed to be beneficially owned by each of (i) Aristar Ventures I, Aristar Ventures I-B and Aristar Ventures I-C are deemed to be beneficially owned by each of Aristar Capital and Aristar Capital GP and (ii) Aristar Capital and Aristar Capital GP are deemed to be beneficially owned by Mr. Smith. Aristar Capital, Aristar Capital Management GP, LLC (“Aristar GP”), Aristar Ventures I, Aristar Ventures I-B, Aristar Ventures I-C (collectively, “Aristar Ventures”) and Mr. Smith jointly filed a report with the SEC on Schedule 13D/A, dated February 10, 2015, reporting shared beneficial ownership with respect to an aggregate of 68,660,798 shares of common stock held by Aristar Ventures.  The 68,660,798 shares of common stock consist of: (i) 65,596,493 shares held directly by Aristar Ventures I (consisting of (A) 15,955,136 shares of common stock and (B) warrants to purchase 49,641,357 shares of common stock); (ii) 1,985,448 shares of common stock held directly by Aristar Ventures I-B; and (iii) 1,078,857 shares of common stock held directly by Aristar Ventures I-C (consisting of (A) 844,571 shares of common stock and (B) warrants to purchase 234,286 shares of common stock). Mr. Smith is the managing member of Aristar Capital, an investment management firm that serves as the investment manager of Aristar Ventures I, Aristar Ventures I-B and Aristar Ventures I-C.  Mr. Smith is also the managing member of Aristar GP, which serves as the managing member of Aristar Ventures I, Aristar Ventures I-B and Aristar Ventures I-C.  As a result of the foregoing, the shares of common stock deemed to be beneficially owned by each of (i) Aristar Ventures I, Aristar Ventures I-B and Aristar Ventures I-C are deemed to be beneficially owned by each of Aristar Capital and Aristar Capital GP and (ii) Aristar Capital and Aristar Capital GP are deemed to be beneficially owned by Mr. Smith.

 

---

(4)	Consists of 1,421,480 shares of common stock subject to options exercisable within sixty days of March 31, 2015.

(5)	Consists of 400,000 shares of common stock subject to options exercisable within sixty days of March 31, 2015.

(6)

Consists of: (i) 1,011,185 shares of common stock owned directly by Mr. Garfinkle, (ii) 53,665 shares of common stock issuable upon conversion of convertible notes owned directly by Mr. Garfinkle, (iii) 115,243 shares of common stock issuable upon conversion of Series B Preferred Stock owned directly by Mr. Garfinkle, and (iv) 5,632,022 shares of common stock issuable upon exercise of warrants owned directly by Mr. Garfinkle.

(7)

Consists of: (i) 493,353 shares of our common stock owned directly by Mr. Israel, (ii) 59,554 shares of common stock issuable upon conversion of Series B Preferred Stock owned directly by Mr. Israel, and (iii) 160,003 shares of our common stock issuable upon exercise of warrants owned directly by Mr. Israel.

(8)	Consists of 192,308 shares of common stock directly owned by Mr. Jeffery.

The following table presents certain information as of March 31, 2015 regarding the beneficial ownership of the Z Trim common stock held by each known 5%-or-greater shareholder of Z Trim.

 

---

(1)

Aristar Capital, Aristar GP, Aristar Ventures I, Aristar Ventures I-B, Aristar Ventures I-C (collectively, “Aristar Ventures”) and Edward Smith III jointly filed a report with the SEC on Schedule 13D/A, dated February 10, 2015, reporting shared beneficial ownership with respect to an aggregate of 68,660,798 shares of common stock held by Aristar Ventures.  Mr. Smith is the managing member of Aristar Capital, an investment management firm that serves as the investment manager of Aristar Ventures I, Aristar Ventures I-B and Aristar Ventures I-C.  Mr. Smith is also the managing member of Aristar GP, which serves as the managing member of Aristar Ventures I, Aristar Ventures I-B and Aristar Ventures I-C.  As a result of the foregoing, the shares of common stock deemed to be beneficially owned by each of (i) Aristar Ventures I, Aristar Ventures I-B and Aristar Ventures I-C are deemed to be beneficially owned by each of Aristar Capital and Aristar Capital GP and (ii) Aristar Capital and Aristar Capital GP are deemed to be beneficially owned by Mr. Smith.

The above beneficial ownership information is based on data furnished by the specified persons and is determined in accordance with Rule 13d-3 under the Securities Exchange Act. It is not necessarily to be construed as an admission of beneficial ownership for other purposes.

 

---

ITEM 13.

Certain Relationships and Related Transactions, and Director Independence.

Transactions with Certain Related Parties

None

Transactions with Members of the Board of Directors

On February 11, 2014 we entered into an agreement with Edward Smith III, our Chief Executive Officer and a Director and Shareholder, pursuant to which Mr. Smith agreed to lend us $200,000 in a convertible senior secured note.  The note matures in two years (February 11, 2016) and bears interest at 12.5% computed based on a 365-day year.  Accrued interest is payable either at maturity or quarterly at the option of Mr. Smith in shares of our common stock.  At any time on or after the date that is 90 days after the date of issuance of the note, Mr. Smith may elect to convert the aggregate principal balance and accrued interest into shares of our common stock.  The conversion price under the note is $2.25, subject to adjustment as provided in the note.  If on the maturity date of the note, the 30 day trailing average closing price of our common stock (the “Trailing Average Price”) is below $2.25, the Conversion Price on the maturity date will be reduced to the Trailing Average Price, but to not less than $1.25.  The note is secured by our assets, which security interest is expressly subordinate to the interest of Fordham Capital Partners LLC described below, pursuant to an intercreditor agreement between Mr. Smith and Fordham dated March 18, 2014.

On April 25, 2014, we entered into an agreement with Edward Smith III, a Director and Shareholder of our Company, pursuant to which Mr. Smith agreed to lend us $300,000 in a convertible subordinated secured note.  The note matures in two years (April 25, 2016) and bears interest at 14% per annum computed based on a 365-day year.  Accrued interest is payable at maturity in shares of our common stock.  At any time on or after the date that is 90 days after the date of issuance of the note, Mr. Smith may elect to convert the aggregate principal balance and accrued interest into shares of our common stock.  The conversion price under the note is $1.00.  The conversion price was greater than the closing stock price on the agreement date; therefore, no beneficial conversion feature was recorded on this note.  The note is secured by our assets, which security interest is subordinate to the security interest granted to Fordham in connection with the Equipment Loan and the Factoring Agreement.

On April 30, 2014, we issued a 14% convertible subordinated secured note to each of Morris Garfinkle, Mark Hershhorn, Brian Israel and Edward B. Smith, Directors of our Company, in the principal amount of $19,000, for director fees due and payable to them (the “Director Notes”).  Each Director Note matures in two years (April 30, 2016) and bears interest at 14% per annum computed on a 365-day year.  Accrued interest is payable at maturity in shares of our common stock.  At any time on or after the date that is 90 days after the date of issuance of the Director Note, the director may elect to convert the aggregate principal balance and accrued interest into shares of our common stock.  The conversion price under each Director Note is $1.00.  The conversion price was greater than the closing stock price on the agreement date; therefore, no beneficial conversion feature was recorded on this note.  Each Director Note is secured by our assets, which security interest is subordinate to the security interest granted to Fordham in connection with the Equipment Loan and the Factoring Agreement.

On May 12, 2014, we issued 14% convertible subordinated secured notes to both Morris Garfinkle and CKS Warehouse in the principal amount of $75,000 each.  Both notes mature in two years (May 12, 2016) and bear interest at 14% per annum computed on a 365-day year.  Accrued interest is payable at maturity in shares of our common stock.  At any time on or after the date that is 90 days after the date of issuance of each note, Mr. Garfinkle and CKS Warehouse may elect to convert the aggregate principal balance and accrued interest into shares of our common stock.  The conversion price under each note is $1.00.  The conversion price was greater than the closing stock price on the agreement date; therefore, no beneficial conversion feature was recorded on this note.  Each note is secured by our assets, which security interest is subordinate to the security interest granted to Fordham in connection with the Equipment Loan and the Factoring Agreement.

On July 15, 2014, we entered into an agreement with Edward Smith III, pursuant to which Mr. Smith agreed to lend us $64,000 in an unsecured note payable.  The note matures in 90 days (October 15, 2014) without interest payable on the unpaid principal and subject to the terms of our agreements with our secured creditors.

On August 6, 2014, we issued a 14% convertible subordinated secured note to Edward B. Smith in the principal amount of $264,000.  The note matures in two years (August 6, 2016) and bears interest at 14% per annum computed on a 365-day year.  Under this note Mr. Smith has provided $200,000 of cash as of August 6, 2014 and the parties agreed to include the unsecured funds in the amount of $64,000 provided by Mr. Smith on July 15, 2014 and include those amounts as part of this subordinated secured transaction.  The loan agreement executed by the parties on July 15, 2014 is now null and void.  Accrued interest is payable at maturity in shares of our common stock.  At any time on or after the date that is 90 days after the date of issuance of the note, Mr. Smith may elect to convert the aggregate principal balance and accrued interest into shares of our common stock.  The conversion price under this note is $1.00.  The conversion price was greater than the closing stock price on the agreement date; therefore, no beneficial conversion feature was recorded on this note.  The note is secured by our assets, which security interest is subordinate to the security interest granted to Fordham in connection with the Equipment Loan and the Factoring Agreement.

 

---

On September 29, 2014, we issued a 14% nonconvertible subordinated secured note to Edward B. Smith in the principal amount of $85,000.  The note matures in two months (November 29, 2014) and bears interest at 14% per annum computed based on a 365-day year.  Accrued interest is payable at maturity in cash.   The note is secured by our assets, which security interest is subordinate to the security interest granted to Fordham in connection with the Equipment Loan and the Factoring Agreement.

On October 23, 2014, we issued a 14% nonconvertible subordinated secured note to Edward B. Smith in the principal amount of $85,000.  The note matures in two months (December 23, 2014) and bears interest at 14% per annum computed based on a 365-day year.  Accrued interest is payable at maturity in cash.  The note is secured by our assets, which security interest is subordinate to the security interest granted to Fordham in connection with the Equipment Loan and the Factoring Agreement.

On October 30, 2014, we issued a 14% nonconvertible subordinated secured note to Edward B. Smith in the principal amount of $70,000.  The note matures in two months (December 30, 2014) and bears interest at 14% per annum computed based on a 365-day year.  Accrued interest is payable at maturity in cash.  The note is secured by our assets, which security interest is subordinate to the security interest granted to Fordham in connection with the Equipment Loan and the Factoring Agreement.

On December 3, 2014, we issued a 14% nonconvertible subordinated secured note to Edward B. Smith in the principal amount of $30,000.  The note matures in two months (February 3, 2015) and bears interest at 14% per annum computed based on a 365-day year.  Accrued interest is payable at maturity in cash.  The note is secured by our assets, which security interest is subordinate to the security interest granted to Fordham in connection with the Equipment Loan and the Factoring Agreement.

On December 19, 2014, we executed an amendment to the 14% nonconvertible subordinated secured notes (dated September 29, 2014, October 23, 2014, October 30, 2014 and December 3, 2014, respectively) whereby the maturity date for each note was extended to April 15, 2015.

In connection with the private placement offering that was consummated in January 2015, the members of our Board of Directors agreed to receive an aggregate of 96,589 Units (representing one (1) Unit for every $4.00 of debt exchanged), 826,806 Initial Warrants and 351,586 Additional Warrants in exchange for previously issued convertible notes (including principal and accrued and unpaid interest) (the “Notes”) held by the directors or affiliated entities as follows: (i) 71,211 Units, 609,566 Initial Warrants and 259,208 Additional Warrants were issued to Edward B. Smith, III, our Chief Executive Officer, in exchange for an aggregate of $284,844 of notes, (ii) 10,084 Units, 86,317 Initial Warrants and 36,705 Additional Warrants were issued to Morris Garfinkle in exchange for $40,335 of notes; (iii) 5,211 Units, 44,606 Initial Warrants and 18,968 Additional Warrants were issued to each of Mark Hershhorn and Brian Israel in exchange for an aggregate of $20,844 of notes, respectively; and (v) 4,873 Units, 41,712 Initial Warrants and 17,737 Additional Warrants were issued to CKS Warehouse, an entity in which Mr. Hershhorn owns a controlling interest, in exchange for an aggregate of $19,491of principal and interest on notes.

We do not have a written policy with respect to related party transactions.  However, all such transactions are reviewed and approved by the Board of Directors prior to finalization.

Director Independence

Under our bylaws, the composition of the Board of Directors must meet the independence requirements promulgated by the NYSE  MKT or such other requirements as may be adopted by us.  Based on these standards, the Board of Directors has determined that Messrs. Garfinkle, Jeffery and Israel are each “independent” under applicable rules and guidelines. Mr. Cohen, as our Managing Director, and Mr. Smith, as our Chief Executive and Managing Partner of Aristar Capital Management, LLC (our controlling shareholder), are not considered to be “independent.”

In determining that Messrs. Garfinkle, Jeffery and Israel are each “independent” under applicable rules and guidelines used by us to determine independence, the Board of Directors took into consideration that each of these directors has purchased convertible notes and/or preferred stock in private offerings on the same terms and conditions as was offered to persons not affiliated with us.

Our independent directors have the opportunity to meet in executive session, without the other directors or management, as part of each regular Board meeting.

 

---

ITEM 14.

Principal Accounting Fees and Services.

The following table is a summary of the fees billed to us by M&K CPAS, PLLC for professional services for the fiscal year ended December 31, 2014 and December 31, 2013, respectively:

Audit Fees. Consists of fees billed for professional services rendered for the audit of our financial statements and review of the interim financial statements included in quarterly reports and services that are normally provided by our independent registered public accounting firms in connection with statutory and regulatory filings or engagements.

Audit-Related Fees. Consists of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements and are not reported under “Audit Fees.” These services include accounting advisory services and accounting consultations in connection with financial accounting and reporting related matters.

Audit Committee Pre-Approval Policy

Our Audit Committee Charter provides that the Audit Committee shall pre-approve all auditing services, internal control-related services and permitted non-audit services (including the terms thereof) to be performed for us by our independent auditor, subject to the de minimis exceptions for non-audit services described in Section 10A(i)(1)(B) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which are approved by the Audit Committee prior to the completion of the service. The Audit Committee may also form and delegate authority to sub-committees consisting of one or more members when appropriate, including the authority to grant pre-approvals of audit and permitted non-audit services, provided that decisions of such subcommittee to grant pre-approvals shall be presented to the full Committee at its next scheduled meeting.  In accordance with the pre-approval policy, the Audit Committee has approved certain specified audit and non-audit services to be provided by M&K CPAS, PLLC for up to twelve (12) months from the date of the pre-approval. Any additional services to be provided by our independent auditors following such pre-approval require the additional pre-approval of the Audit Committee.

There were no services in fiscal 2014 or 2013 that were not approved in advance by the Audit Committee under this policy.

 

---

PART IV

ITEM 15.

Exhibits, Financial Statement Schedules.

(a)(1)

(a)(2)

Not Applicable.

(a)(3)

Exhibits.

See (b) below.

(b)

Exhibits.

See the Exhibit Index following the signature page of this report, which is incorporated herein by reference.

(c)	Financial Statements Excluded From Annual Report to Shareholders

 

Not Applicable.

 

---

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.

Z TRIM HOLDINGS, INC.

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by following persons on behalf of the Registrant and in the capacities and on the dates indicated.

 

---

Z TRIM HOLDINGS, INC.

EXHIBIT INDEX

TO

Form 10-K for Fiscal Year Ended December 31, 2014

 

 

---

 

---

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and

Stockholders of Z Trim Holdings, Inc.

We have audited the accompanying balance sheets of Z Trim Holdings, Inc. as of December 31, 2014 and 2013, and the related statements of operations, changes in stockholders' equity (deficit) and cash flows for the years then ended. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Z Trim Holdings, Inc. as of December 31, 2014 and 2013, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the Unites States of America.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company does not have enough cash on hand to meet its current liabilities and has had reoccurring losses as of December 31, 2014. These conditions raise substantial doubt about its ability to continue as a going concern. Management's plans regarding those matters also are described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

---

Z TRIM HOLDINGS, INC.

BALANCE SHEET

 

		12/31/2014				12/31/2013
Current Assets
Cash and cash equivalents		$	1,027,713			$	443,472
Accounts receivable			46,188				380,238
Inventory			709,029				544,535
Prepaid expenses and other assets			63,296				136,887
Total current assets			1,846,226				1,505,132
Long Term Assets
Note receivable		$	-			$	550,650
Other assets			15,393				11,892
Property and equipment, net			1,207,975				1,800,306
Total long term assets			1,223,368				2,362,848
TOTAL ASSETS		$	3,069,594			$	3,867,980
LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Accounts payable		$	1,033,875			$	374,566
Short-term borrowings			588,211				-
Short-term nonconvertible notes payable to related party			270,000				-
Customer deposit			70,400				-
Accrued expenses and other			367,331				194,144
Accrued liquidated damages			36,178				36,178
Derivative liabilities			20,166				95,049
Total Current Liabilities			2,386,161				699,937
Long-term convertible notes payable to related parties			990,000				-
Total Liabilities			3,376,161				699,937
Stockholders' Equity (Deficit)
Common stock, $0.00005 par value; authorized 200,000,000 shares; issued and outstanding 39,734,854 and 39,449,138 shares, December 31, 2014 and 2013, respectively			1,987				1,973
Preferred stock payable			1,010,000				-
Additional paid-in capital			131,134,645				130,039,561
Accumulated deficit			(132,453,199	)			(126,873,491	)
Total Stockholders' Equity (Deficit)			(306,567	)			3,168,043
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIT)		$	3,069,594			$	3,867,980

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

 

---

Z TRIM HOLDINGS, INC.

STATEMENTS OF OPERATIONS

The accompanying notes are an integral part of the financcial statements.

 

---

 

		Shares of Common Stock				Common Stock				Shares of Convertible Preferred Stock				Convertible Preferred Stock				Additional Paid-In Capital				Common Stock Payable				Preferred Stock Payable				Accumulated Deficit				Total
Balance at December 31, 2012			25,032,444			$	1,252				665,339			$	2,157,238			$	104,891,849			$	2,358,107			$	-			$	(113,441,230	)		$	(4,032,784	)
Stock issued for directors fees			114,944				5				-				-				199,997				-				-				-				200,002
Stock and warrants issued for services			770,000				39				-				-				630,894				-				-				-				630,933
Stock issued for cash, net of offering costs			2,711,238				136				-				-				2,172,029				-				-				-				2,172,165
Exercised warrants for cash			2,287,730				114				-				-				2,489,732				-				-				-				2,489,846
Exercised cashless warrants			3,606,157				180				-				-				(180	)			-				-				-				-
Exercised stock options for cash			91,400				5				-				-				77,729				-				-				-				77,734
Exercised cashless stock options			100,528				5				-				-				(5	)			-				-				-				-
																																			-
Stock issued for conversion of convertible preferred stock			3,859,697				193				(665,339	)			(2,157,238	)			2,690,046				(533,001	)			-				-				-
Stock based compensation - stock options			-				-				-				-				2,318,355				-				-				-				2,318,355
Equity modification on warrants exercised			-				-				-				-				5,780,457				-				-				-				5,780,457
Derivative settlement			-				-				-				-				6,963,596				-				-				-				6,963,596
Dividends declared			-				-				-				-				(56,144	)			56,144				-				-				-
Stock issued for settlement loss			875,000				44				-				-				1,881,206				(1,881,250	)			-				-				-
Net loss			-				-				-				-				-				-				-				(13,432,261	)			(13,432,261	)
Balance at December 31, 2013			39,449,138			$	1,973				-			$	-			$	130,039,561			$	-			$	-			$	(126,873,491	)		$	3,168,043
Stock issued for directors fees			285,716				14				-				-				159,987				-				-				-				160,001
Stock based compensation - stock options			-				-				-				-				935,097				-				-				-				935,097
Deposits received for issuance of convertible preferred stock			-				-				-				-				-				-				1,010,000				-				1,010,000
Net loss			-				-				-				-				-				-								(5,579,708	)			(5,579,708	)
Balance at December 31, 2014			39,734,854			$	1,987				-			$	-			$	131,134,645			$	-			$	1,010,000			$	(132,453,199	)		$	(306,567	)

FOR THE TWELVE MONTHS ENDED DECEMBER 31		2014				2013
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss		$	(5,579,708	)		$	(13,432,261	)
Adjustments to reconcile loss from continuing operations to net cash used in operating activities:
Stock based compensation - stock options vested			935,097				2,318,355
Common shares issued for director fees			160,001				200,002
Shares & warrants issued for services			-				630,933
Loss on equity modification			-				5,780,457
Depreciation			592,331				643,575
Loss on disposal of equipment			-				1,334
Loss on settlement with vendor			159,293				-
Inventory valuation reserve			-				742,168
Change in derivative liability, net of bifurcation			(74,883	)			(966,736	)
Adjustment to settlement loss accrual			-				(8,000	)
Changes in operating assets and liabilities:
Accounts receivable			334,050				(80,982	)
Inventory			(164,494	)			(817,401	)
Prepaid expenses and other assets			70,090				(60	)
Note receivable			31,644				(27,500	)
Accounts payable and accrued expenses			1,262,609				74,289
CASH USED IN OPERATING ACTIVITIES			(2,273,970	)			(4,941,827	)
CASH FLOWS FROM INVESTING ACTIVITES
Proceeds from sale of fixed assets			-				750
CASH PROVIDED BY INVESTING ACTIVITIES			-				750
CASH FLOWS FROM FINANCING ACTIVITES
Proceeds from sale of common stock, net			-				2,172,165
Proceeds from exercise of stock options			-				77,734
Proceeds from exercise of warrants			-				2,489,846
Proceeds from deposits for sale of convertible preferred stock			1,010,000				-
Borrowing on short term debt			700,000				-
Borrowing on long term convertible notes payable to related parties			990,000				-
Borrowing on short term nonconvertible notes payable to related party			270,000				-
Principal payments on debt			(111,789	)			-
CASH PROVIDED BY FINANCING ACTIVITIES			2,858,211				4,739,745
NET INCREASE (DECREASE) INCREASE IN CASH			584,241				(201,332	)
CASH AT BEGINNING OF PERIOD			443,472				644,804
CASH AT THE PERIOD ENDED DECEMBER 31		$	1,027,713			$	443,472
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for interest		$	92,408			$	-
Cashless exercise of warrants		$	-			$	180
Cashless exercise of options		$	-			$	5
Shares issued for stock payable related to settlement loss		$	-			$	1,881,250
Preferred stock conversion		$	-			$	2,690,056
Change in derivative liability due to exercise of warrants		$	-			$	4,201,908
Change in derivative liability due to conversion of preferred stock		$	-			$	2,761,688
Dividends payable declared		$	-			$	56,144

		Carrying				Fair Value Measurements Using
		Value				Level 1				Level 2				Level 3				Total
Derivative Liabilities
12/31/2013		$	95,049			$	-			$	-			$	95,049			$	95,049
Change in derivative liabilities due to settlements			-				-				-				-				-
Change in derivative liabilities valuation			(74,883	)			-				-				(74,883	)			(74,883	)
			(74,883	)			-				-				(74,883	)			(74,883	)
Derivative Liabilities
12/31/2014		$	20,166			$	-			$	-			$	20,166			$	20,166

		12/31/2014				12/31/2013
Raw materials		$	20,931			$	27,575
Packaging			5,023				8,178
Work-in-process			1,777				33,527
Finished goods			681,298				475,255
		$	709,029			$	544,535

		12/31/2014				12/31/2013
Production, engineering and other equipment		$	6,422,110			$	6,422,110
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
		$	10,069,718			$	10,069,718
Accumulated depreciation		$	(8,861,743	)		$	(8,269,412	)
Property and equipment, net		$	1,207,975			$	1,800,306

		12/31/2014				12/31/2013
Accrued payroll and taxes		$	151,741			$	51,566
Accrued settlements			102,000				102,000
Accrued interest			96,108				-
Accrued expenses and other			17,482				40,578
		$	367,331			$	194,144

		Principal				Interest
Balance at December 31, 2013		$	-			$	-
Principal advances and accrued interest			700,000				94,924
Principal payments and interest			(111,789	)			(92,408	)
Balance at December 31, 2014		$	588,211			$	2,516

Components of derivative financial instruments
		12/31/2014				12/31/2013
Common stock warrants		$	20,166			$	95,049
Embedded conversion features for convertible debt or preferred shares			-				-
Total		$	20,166			$	95,049
Beginning balance		$	95,049			$	8,025,381
Bifurcated amount			-				-
Change in derivative liability valuation			(74,883	)			(966,736	)
Change in derivative liability - settlements			-				(6,963,596	)
Total		$	20,166			$	95,049

		12/31/2014								12/31/2013
		Number of Shares				Weighted Average Exercise Price				Number of Shares				Weighted Average Exercise Price
Outstanding at beginning of year			9,583,762			$	1.16				7,728,877			$	1.01
Granted			2,372,800			$	0.58				2,176,535			$	1.67
Exercised			-			$	-				(293,650	)		$	0.98
Expired and Cancelled			(922,887	)		$	0.99				(28,000	)		$	2.18
			11,033,675								9,583,762
Outstanding, end of period			11,033,675			$	1.05				9,583,762			$	1.16
Exercisable at end of period			11,033,675			$	1.05				9,536,262			$	1.17

		12/31/2014				12/31/2013
Weighted average fair value per option granted		$	0.31 - $0.50			$	1.04
Risk-free interest rate			0.86 - 1.75%				0.65 - 0.81%
Expected dividend yield			0.00%				0.00%
Expected lives			2.6875				2.695
Expected volatility			82.11 - 98.91%				99.79 - 108%

Range of Exercise Prices		Options Outstanding				Weighted Average Remaining Contractual Life				Weighted Average Exercise Price				Options Exercisable
$0.01-$1.50			7,090,227				2.8			$	0.97				7,090,227
$1.51-$3.00			2,368,535				4.5			$	1.67				2,321,035
$3.01-$5.00			125,000				4.6			$	3.11				125,000
			9,583,762				3.3			$	1.17				9,536,262

		12/31/2014								12/31/2013
		Number of Warrants				Weighted Average Exercise Price				Number of Warrants				Weighted Average Exercise Price
Outstanding at beginning of year			16,688,265			$	1.44				23,392,811			$	1.46
Granted			-			$	-				4,010,295			$	1.18
Exercised			-			$	-				(2,287,730	)		$	1.28
Cashless Exercises			-			$	-				(8,082,535	)		$	1.43
Expired and Cancelled			(241,914	)		$	0.87				(344,576	)		$	0.88
			16,446,351								16,688,265
Outstanding, end of period			16,446,351			$	1.44				16,688,265			$	1.44
Exercisable at end of period			16,446,351			$	1.44				16,688,265			$	1.44

		12/31/2014				12/31/2013
Net operating loss		$	34,405,942			$	32,852,315
Less: Valuation allowance			(34,405,942	)			(32,852,315	)
Net deferred tax asset		$	-			$	-

Year Ended		Rentals
2015			85,444
2016			-
2017			-
2018			-
2019			-
		$	85,444