Also the Company issued a five year warrant to the landlord to purchase 171,454 shares of common stock at $0.64 per share.

 

The lease is currently on a month to month basis.  Monthly rental payments are $17,542, inclusive of property taxes.  We believe we will be successful in negotiating a new lease with the landlord.

For the three months ended March 31, 2016 and 2015, the Company recognized rent expense of $70,168 and $216,133, respectively.

On July 7, 2007, the Company and Greg Halpern, its former Chief Executive Officer in his individual capacity, were served with a complaint by Joseph Sanfilippo and James Cluck for violation of the Consumer Fraud Act and the plaintiffs are seeking damages in excess of $200,000.   The trial court has issued a default order against the Company, and has denied the Company’s 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 will vigorously defends the claim. The outcome of this matter is unknown as of the report date.  However, the Company has accrued a liability in the amount of $102,000 in respect to this litigation.

Effective January 1, 2015, the Company entered into a Consulting Agreement with Jeffery Consulting Group, LLC pursuant to which Jeffery Consulting agreed to provide assistance with operational improvements including manufacturing processes, strategic and tactical advice with respect to the Company’s sales and marketing initiatives, and provide customer introductions and strategic sales opportunities.  In consideration of services rendered by Jeffery Consulting, the Company issued a warrant to purchase 1,250,000 shares of Common Stock at $0.35 per share.  The warrant vested 500,000 shares upon the mutual execution of this agreement, and 250,000 shares each at the three month, six month, and nine month anniversaries of this agreement.  The fair value of the warrants issued is estimated on the date of grant using the Black-Scholes valuation model.  The assumptions used in the model included the historical volatility of the Company’s stock of 84.52%, and the risk-free rate for periods within the expected life of the warrant based on the U.S. Treasury yield curve in effect of 1.07%.  For the three months ended March 31, 2015 the Company recognized compensation expense of $128,880.  The Company also agreed to accrue $5,000 per month which becomes payable to Jeffery Consulting once the Company has raised $3 million in additional capital.

On January 8, 2015, the Company, 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”) In addition, the Company issued Additional Warrants exercisable for an aggregate of 946,400 shares of the Company’s 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.

In addition to the foregoing, the members of the Company’s Board of Directors agreed to receive an aggregate of 96,590 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, the Company’s 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.

 

On February 9, 2015, Edward B. Smith, III and Morris Garfinkle were issued warrants exercisable for 31,000,000 and 5,500,000 shares of common stock, respectively, in consideration of the services to be provided to the Company as Chief Executive Officer of the Company and Chairman of the Board, respectively.  The exercise price of these warrants is $0.45 per share.   The fair value of the warrants issued is estimated on the date of grant using the Black-Scholes valuation model.  The assumptions used in the model included the historical volatility of the Company’s stock of 81.99%, and the risk-free rate for periods within the expected life of the warrant based on the U.S. Treasury yield curve in effect of 0.85%.  For the three months ended March 31, 2015 the Company recognized compensation expense of $3,749,259.

On February 24, 2015, the Company issued 576,924 shares of common stock to its then three non-executive directors (192,308 shares each) Brian Israel, Morris Garfinkle and Dan Jeffery. The Company recognized a total expense of $150,000 related to these issuances.  These shares were valued based on the closing price on the grant date.

 

On March 17, 2016, the Company issued a 14% senior unsecured note to an entity controlled by Morris Garfinkle in the principal amount of $100,000.  The note matures in one year (March 17, 2017) and bears interest at 14% compounded based on a 365-day year. Accrued interest is payable at maturity in cash.  In addition, the Company issued a warrant to acquire 400,000 shares of the Company’s common stock, par value, $0.00005 per share, at an exercise price of $0.64 per share to the entity controlled by Mr. Garfinkle. 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.

On March 17, 2016, the Company issued a 14% senior unsecured note to an entity controlled by Dan Jeffery in the principal amount of $50,000.  The note matures in one year (March 17, 2017) and bears interest at 14% compounded based on a 365-day year. Accrued interest is payable at maturity in cash.  In addition, the Company issued a warrant to acquire 200,000 shares of the Company’s common stock, par value, $0.00005 per share, at an exercise price of $0.64 per share to the entity controlled by Dan Jeffery. 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.

The Company from time to time enters into certain types of contracts that contingently require the Company to indemnify parties against third party claims. These contracts primarily relate to: (i) divestiture agreements, under which the Company may provide customary indemnifications to purchasers of the Company’s businesses or assets; (ii) certain real estate leases, under which the Company may be required to indemnify property owners for environmental and other liabilities, and other claims arising from the Company’s use of the applicable premises; and (iii) certain agreements with the Company's officers, directors and employees, under which the Company may be required to indemnify such persons for liabilities arising out of their employment relationship.  The terms of such obligations vary. Generally, a maximum obligation is not explicitly stated. Because the obligated amounts of these types of agreements often are not explicitly stated, the overall maximum amount of the obligations cannot be reasonably estimated. Historically, the Company has not been obligated to make significant payments for these obligations, and no liabilities have been recorded for these obligations on its balance sheet as of December 31, 2015.

In general, the Company offers a one-year warranty for most of the products it sells.  To date, the Company has not incurred any material costs associated with these warranties.

 On April 7, 2016, the Company issued 14% senior unsecured notes to two accredited investors in the total principal amount of $100,000. The notes mature in one year (April 7, 2017) and bear interest at 14% compounded based on a 365-day year. Accrued interest is payable at maturity in cash. In addition, the Company issued warrants to acquire a total of 400,000 shares of the Company’s common stock, par value, $0.00005 per share, at an exercise price of $0.64 per share to the two accredited investors. 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.

On April 8, 2016, the Company issued a 14% senior unsecured note to an accredited investor in the principal amount of $500,000. The note matures in one year (April 8, 2017) and bears interest at 14% compounded based on a 365-day year. Accrued interest is payable at maturity in cash. In addition, the Company issued a warrant to acquire 2,000,000 shares of the Common Stock, at an exercise price of $0.64 per share to the accredited investor. 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.

On April 22, 2016, the Company purchased 4,610,178 warrants from their holders for an aggregate price of $122,805.

Cautionary Statement Regarding Forward Looking Information

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

 

In addition to the assumptions and other factors referenced specifically in connection with such statements, factors that could cause or contribute to our actual results differing materially from those discussed herein or for our stock price to be adversely affected include, but are not limited to:

- our history of operating losses and 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 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015 for a further discussion of some of the factors that could affect future results.

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

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

 

Overview

Agritech Worldwide, Inc. (formerly 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. Our primary focus and the source of substantially all of our revenue is from the sale of our all-natural products, Z Trim®, to the food industry. 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, our  ingredients can help extend the life of finished products, potentially increasing our customers’ gross margins.

We have developed products that manage moisture to help reduce production costs and improve nutritional value in finished foods, while maintaining the essential taste and mouth-feel associated with full-fat products.  The potential global market for our line of products spans the entire food and nutritional beverage industry, including fat-free, low-fat, reduced-fat and full-fat, across meats, baked goods, dairy and non-dairy products, snacks, beverages, dressings, sauces and dips.

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 our  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 our  proprietary industrial materials that could replace products such as guar and xanthan gums in drilling applications. To date, we have not derived any revenue from our industrial products division.

Going Concern

For the three months ended March 31, 2016, we incurred a net loss of $656,237 and had an accumulated deficit of $157,085,867. We incurred a net loss of $23,976,431 for the twelve months ended December 31, 2015, and had an accumulated deficit of $156,429,630.  As of March 31, 2016, we had cash and cash equivalents in the amount of $26,786 and total liabilities of $5,178,150.  As of December 31, 2015, we had cash and cash equivalents in the amount of $309,851 and total liabilities in the amount of $4,918,652. We also had a working capital deficit of $4,461,269 and $3,801,651 as of March 31, 2016 and December 31, 2015, respectively. Over the last several years, our operations have been funded primarily through the sale of both equity and debt securities. However, we still require additional financing to fully implement our business plan for the next twelve months and beyond.   As of the date of this quarterly report, we had not generated sufficient revenues to meet our cash flow needs.  As of December 31, 2015, our current cash on hand is insufficient for us to be able to maintain our operations at the current level through June 30, 2016. 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 will need to substantially revise our business plan or cease operations, which will reduce or completely eliminate the value of your investment.

Reincorporation

We were originally incorporated in the State of Illinois on May 5, 1994 under the 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. On March 23, 2016, we changed our state of incorporation by engaging in a merger (the “Reincorporation”) with and into our newly formed wholly owned subsidiary, Agritech Worldwide, Inc., a Nevada corporation, pursuant to the terms and conditions of an Agreement and Plan of Merger entered into by Z Trim and Agritech on March 18, 2016 (the “Merger Agreement”).  The Reincorporation was consummated on March 23, 2016 and was effectuated by the filing of (i) articles of merger with the Secretary of State of the State of Nevada, and (ii) articles of merger with the Secretary of State of the State of Illinois. The Reincorporation effected a change in our legal domicile form Illinois to Nevada.  Upon the effectiveness of the Reincorporation our affairs of ceased to be governed by (i) Illinois corporation laws, (ii) our Articles of Incorporation, and (iii) our Bylaws, and our affairs became subject to (a) Nevada corporation laws, (b) Agritech’s Articles of Incorporation of and (c) Agritech’s Bylaws.  The resulting Nevada corporation is (i) be deemed to be the same entity as the Illinois corporation for all purposes under the laws of Nevada, (ii) continue to have all of the rights, privileges and powers of the Illinois corporation, (iii) continue to possess all properties of the Illinois corporation, and (iv) continues to have all of the debts, liabilities and obligations of the Illinois corporation.

 

Current Trends and Recent Developments Affecting the Company

Sales and Manufacturing

Revenues for the first quarter of 2016 increased approximately 25% as compared to revenues for the first quarter of 2015 due to a change in the ordering pattern of several customers that shifted orders from the second to the first quarter of this year.

Funding Initiatives

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 Initial Warrants issued in the second closing are exercisable for 1,070,000 shares of our common stock and the Additional Warrants issued in the second closing are exercisable for an aggregate of 455,000 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.  Subsequent to February 9, 2015, we sold an additional 187,500 units, each unit consists of (i) one Preferred Share and (ii) one (1) warrant to acquire 8.56 shares of our common stock at an exercise price of $0.64 per share for aggregate cash proceeds of $750,000.

We used the net proceeds of the above-described offering (the “Offering”) for working capital and general corporate purposes, including without limitation, to repay certain loans. The Offering is part of a private placement offering in which the Company offered for sale on a “best efforts–all or none” basis up to 250,000 units (gross proceeds of $1,000,000, including the principal amount of bridge notes exchanged for Units, and on a “best efforts” basis the remaining 4,750,000 Units for a maximum of 5,000,000 Units (gross proceeds of $20,000,000).

Due to the anti-dilution provisions of some of the outstanding warrants, the exercise price on 15,512,057 warrants was reduced to $0.35 and the number of shares of common stock into which the warrants were then exercisable was adjusted such that the warrants became exercisable into 50,957,780 shares of common stock.

In addition to the foregoing, 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 and accrued interest, (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 and accrued interest; (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 and accrued interest, 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 $19,491 of principal and interest on notes and accrued interest.

After the Reincorporation, each outstanding Preferred Share continued to be an outstanding share of the Nevada corporation’s preferred stock. The following is a summary of material provisions of the Preferred Shares as set forth in the Certificate of Designations

The Preferred Shares are nonvoting, accrue dividends at the rate per annum equal to 12.5% of the sum of (i) the Stated Value (which initially is $4.00) until the Maturity Date as defined in the Statement of Resolution Establishing Preferred Shares and (ii) the amount of accrued and unpaid dividends payable, are convertible into shares of common stock at the option of the holder as described in the Statement of Resolution Establishing Preferred Shares, have anti- dilution protection, registration rights, may be redeemed under certain circumstances, liquidation preference, protective provisions and board rights under certain circumstances

 

Board of Directors and Management Changes

Effective as of January 8, 2015, Edward B. Smith, III, a member of the Board of Directors was appointed as the Chief Executive Officer of our Company. Mr. Morris Garfinkle was appointed to serve as Chairman of the Board of Directors. On March 10, 2015, Mr. Dan Jeffery was appointed to serve on the Board of Directors.  On May 6, 2015, we announced the appointment of Anthony Saguto as the Chief Financial Officer of the Company.  Mr. Saguto replaced John Elo, who retired as Chief Financial Officer of the Company effective May 18, 2015.  On November 16, 2015, Mr. Saguto resigned as Chief Financial Officer of the Company.  To replace Mr. Saguto, Donald G. Wittmer was appointed as acting Chief Financial Officer of the Company effective November 18, 2015.  On December 31, 2015, Mr. Steven J. Cohen, Managing Director, left the Company.

 

Results of Operations

Three Months Ended March 31, 2016 Compared with Three Months Ended March 31, 2015

Revenues

Revenue for the three months ended March 31, 2016 was $269,018, as compared to revenue of $214,743 for the three months ended March 31, 2015, an increase of 25%.  Our revenue for the three months ended March 31, 2016 and 2015 was entirely attributable to product sales.   The increase in sales in the current year’s period was due to customers that shifted orders from the second to the first quarter of this year.   Our ability to generate increased revenue in future reporting periods will be dependent on continued increased demand for our products from existing and new customers, and the completion of changes in our production process  to further improve our capacity and reduce costs, all of which cannot be assured.

Cost of Revenues

Cost of revenues for products sold for the three months ended March 31, 2016 and 2015 was $499,694 and $394,812, respectively, an increase of $104,882 or 27%.  The increase in costs of goods sold in the current year’s period was attributable to increased production. We believe that sustained increases in sales and monthly production volume will enable us to allocate our fixed costs over a greater number of finished goods and reduce the cost of goods sold in the future to improve margins.

Gross Margin (Loss)

Gross loss for the three months ended March 31, 2016 was $230,676, compared to a gross loss of $180,069, for the three months ended March 31, 2015.  Gross loss reflects a number of factors that can vary from period to period, including those described above.

Selling, General and Administrative Expenses

Operating expenses for the three months ended March 31, 2016 were $435,026 a decrease of $4,439,790 over the comparable period ended March 31, 2015 of $4,874,816.  The decrease was primarily due to a decrease in stock based compensation.

The components of selling, general and administrative expenses for the quarters ended March 31, 2016 and 2015 respectively are as follows:

Selling, General and Administrative Expenses:

The decrease in salary and employee benefits to $154,381 for the three months ended March 31, 2016 from $303,883 for the three months ended March 31, 2015 is attributable to fewer employees.  Stock based compensation decreased by $3,696,647 in 2016 as compared to 2015 as a result of warrants awarded as compensation, in 2015, to Morris Garfinkle, Chairman of the Board and Edward B. Smith,III, CEO of the Company. Other expenses decreased by $441,959, as a result of additional rent expense recognized in 2015 relating to preferred stock and warrants issued to the landlord and higher consulting fees relating to warrants issued to Jeffery Consulting.

 

Operating Loss

The operating loss for the three months ended March 31, 2016 decreased to $665,702 compared to a loss of $5,054,885 for the three months ended March 31, 2015 due to the reasons described above.

Other Income (Expenses)

Other income for the three months ended March 31, 2016 was $9,465 as compared to other expense of $2,647,689 for the three months ended March 31, 2015. The change was primarily due to the large expense, in 2015, related to the derivative liability valuation of $2,233,776 and the recognition, during the first three months of 2015, of a loss of $351,314 relating to the conversion of notes payable into units of preferred stock and warrants. Interest expense related to debt in the three months ended March 31, 2016 was $93,311 compared to $60,380 for the prior year.

Net Loss

As a result of the above, for the three months ended March 31, 2016, we reported a net loss of $656,237 as compared to a net loss of $7,702,574 for the three months ended March 31, 2015.

Basic and Diluted Net Loss per Share

The basic and diluted net loss per share for the three months ended March 31, 2016 was $0.01 as compared to the basic and diluted net loss per share of $0.19 for the three months ended March 31, 2015.  The per share results were impacted by the decrease in the Operating Loss and Other Expenses as discussed above and the significant increase in the average number of shares outstanding in 2016 compared to 2015.

Liquidity and Capital Resources

As of March 31, 2016, we had a cash balance of $26,786, a decrease from a balance of $309,851 at December 31, 2015.  At March 31, 2016, we had working capital deficit of $4,461,269 as compared to working capital deficit of $3,801,651 as of December 31, 2015.  The decrease in working capital primarily resulted from the decreases in cash, and increased short-term borrowings. As of May 11, 2016, we had a cash balance of $148,721.51.

Over the last several years, our operations have been funded primarily through the sale of both equity and debt securities.   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 our needs.  As of the date of our most recent audit, for the fiscal year ended December 31, 2015, we had not generated sufficient revenues to meet our cash flow needs.  Our current cash on hand is insufficient for us to be able to maintain our operations at the current level through June 30, 2016. 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 will need to substantially revise our business plan or cease operations, which will reduce or completely eliminate the value of our security holders’ investment.

 

Certain of our Preferred Shares and warrants have reset provisions to the exercise price and conversion price if the Company issues equity or other derivatives at a price less than the exercise price set forth in such preferred stock and warrants. These reset provisions result in a derivative liability in our financial statements.  Our derivative liabilities decreased to $651,955 at March 31, 2016 from $2,253,942 at March 31, 2015.  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.

The following discussion focuses on information in more detail on the main elements of the $283,065 net decrease in cash during the three months ended March 31, 2016 included in the accompanying Statements of Cash Flows. The table below sets forth a summary of the sources and uses of cash for the three month periods ended March 31:

 

Cash used in operating activities was $633,065 during the three month period ended March 31, 2016, compared to $868,150 in the three month period ended March 31, 2015.  Net losses of $656,237 and $7,702,574 for the three months ended March 31, 2016 and 2015, respectively, were the primary reasons for our negative operating cash flow in both periods.  During three months ended March 31, 2015 our negative operating cash flow was significantly offset by the effects of non-cash charges to income including stock-based compensation, shares issued for directors fees and depreciation.

No cash was provided by or used in investing activities in either period.

Cash provided by financing activities was $350,000 in the three month period ended March 31, 2016, compared to $16,789 during the three month period ended March 31, 2015.  Over the last several years, our operations have been funded primarily through the sale of both equity and debt securities and the cash conversion of warrants into equity. During the three months ended March 31, 2016, we raised $350,000 from the issuance of short term non-convertible notes. During the first three months of 2015, we raised $605,000 in the sale of Units consisting of Preferred Shares and warrants mostly offset by the payoff of short term borrowings from Fordham Capital. On March 24, 2015 we made a final payment of principal and interest in the amount of $570,449 to Fordham Capital Partners in satisfaction of the Amended and Restated Equipment Revolving Note dated July 16, 2014.

Commitments/Contingencies:

As of March 31, 2016, we had outstanding non-convertible notes in the aggregate principal amount of $607,000 due to related parties that mature within one year.

We also have a non-convertible note in the principal amount of $250,000 payable to an unrelated party that is due July 1, 2016 and a non-convertible note in the principal amount of $500,000 payable to an unrelated party that is due December 23, 2016.

In addition, we have outstanding convertible notes payable to related parties in the principal amount of $624,866 at March 31, 2016.

The amount of accrued and unpaid interest was $281,110 at March 31, 2016.

Capital Expenditures. At March 31, 2016, we have no material commitments for capital expenditures.

Lease commitments.  We lease a combined manufacturing, research and development and office facility located in Mundelein, Illinois.  The lease is on a month to month basis.  Monthly rental payments are $17,542, inclusive of property taxes.  We believe we will be successful in negotiating a new lease with the landlord.

Litigation.  In July 2007, we and Greg Halpern, its former Chief Executive Officer in his individual capacity, 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 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 the Company will vigorously defend the claim. The outcome of this matter is unknown as of the date of this report.  However, the Company has allocated a reserve of $102,000 to satisfy any liability it may incur as a result of this matter.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Critical Accounting Policies

Our financial statements have been prepared in conformity with GAAP. For a full discussion of our accounting policies as required by GAAP, refer to our Annual Report on Form 10-K for the year ended December 31, 2015. We consider certain accounting policies to be critical to an understanding of our condensed consolidated financial statements because their application requires significant judgment and reliance on estimations of matters that are inherently uncertain. The specific risks related to these critical accounting policies are unchanged at the date of this report and are described in detail in our Annual Report on Form 10-K.

Item 3.

Quantitative and Qualitative Disclosure About Market Risks

Not Applicable.

 

Item 4.

Controls and Procedures.

Evaluation of Disclosure Controls and Procedures.

 

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of March 31, 2016, the Company’s 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 Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.  This conclusion is based primarily on the material weaknesses in internal control over financial reporting that were disclosed in our Annual Report on Form 10-K for the year ended December 31, 2015, where management identified material weaknesses consisting of ineffective controls over (i) the control environment, (ii) financial statement disclosure; and (iii) financial reporting, and our failure to complete the process of remediating these weaknesses by the end of the period covered by this Quarterly Report.

Changes in Internal Control Over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting during the quarter ended March 31, 2016, that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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.

Remediation of Material Weaknesses

As discussed above, as of December 31, 2015, we identified material weaknesses in our internal control over financial reporting primarily due to us not having developed accounting policies and procedures and effectively communicating the same to our employees.  Management plans to address these weaknesses by providing future investments in the continuing education of our accounting and financial professionals.

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

PART II – OTHER INFORMATION

Item 1.

Legal Proceedings

None.

 

Item 1A.

Risk Factors

In addition to the risks and uncertainties discussed herein, particularly those discussed in the “Safe Harbor” Cautionary Statement and the other sections of Management’s Discussion and Analysis of Financial Information and Results of Operations in Part I, Item 2, see the “Risk Factors” section set forth in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2015.  Except as set forth below, there has been no material changes to the risk factors previously disclosed in Part I, Item 1A of our annual report on Form 10-K for the year ended December 31, 2015.

 

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

We incurred a net loss of $656,237 for the three months ended March 31, 2016, and had an accumulated deficit of $157,085,867.  We incurred a net loss of $23,976,431 for the twelve months ended December 31, 2015, and had an accumulated deficit of $156,429,630.

If we continue to incur significant losses, we 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.

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

As of March 31, 2016, we had cash in the amount of $26,786 and total liabilities in the amount of $5,178,150. We also had a working capital deficit of $4,461,269 as of March 31, 2016. As of December 31, 2015, we had cash in the amount of $309,851 and total liabilities in the amount of $4,918,652. We also had a working capital deficit of $3,801,651 as of December 31, 2015. Over the last several years, our operations have been funded primarily through the sale of both equity and debt securities. 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 June 30, 2016.  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 is predicated on future sales growth and generating positive cash flow from the business or securing other financing.

As of March 31, 2016, we had total liabilities of $5,178,150, which includes $2,170,646 of short term notes net of discount. As of December 31, 2015, we had total liabilities of $4,918,652, which includes $1,831,866 of short term notes.   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.  Our current cash balance as of May 11, 2016 of $148,721.51 will not be sufficient to repay the loans and support our continuing operations as planned. There are no assurances that we will secure additional debt or equity financing in order to pay off the loans and support our continuing operations as planned.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

On March 2, 2016, we issued a 14% senior unsecured note to an accredited investor in the principal amount of $100,000. The note matures in one year (March 2, 2017) and bears interest at 14% compounded based on a 365-day year. Accrued interest is payable at maturity in cash. In addition, we issued a warrant to acquire 400,000 shares of the Common Stock an exercise price of $0.64 per share to the accredited investor. 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.

On March 11, 2016, we issued a 14% senior unsecured note to an accredited investor in the principal amount of $100,000. The note matures in one year (March 11, 2017) and bears interest at 14% compounded based on a 365-day year. Accrued interest is payable at maturity in cash. In addition, we issued a warrant to acquire 400,000 shares of the Common Stock at an exercise price of $0.64 per share to the accredited investor. 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.

On March 17, 2016, we issued a 14% senior unsecured note to an entity controlled by Morris Garfinkle in the principal amount of $100,000. The note matures in one year (March 17, 2017) and bears interest at 14% compounded based on a 365-day year. Accrued interest is payable at maturity in cash. In addition, we issued a warrant to acquire 400,000 shares of the Common Stock at an exercise price of $0.64 per share to the entity controlled by Mr. Garfinkle. 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.

 

On March 17, 2016, we issued a 14% senior unsecured note to an entity controlled by Dan Jeffery in the principal amount of $50,000. The note matures in one year (March 17, 2017) and bears interest at 14% compounded based on a 365-day year. Accrued interest is payable at maturity in cash. In addition, we issued a warrant to acquire 200,000 shares of the Common Stock,at an exercise price of $0.64 per share to the entity controlled by Dan Jeffery. 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.

On April 7, 2016, we issued 14% senior unsecured notes to two accredited investors in the total principal amount of $100,000. The notes mature in one year (April 7, 2017) and bear interest at 14% compounded based on a 365-day year. Accrued interest is payable at maturity in cash. In addition, the Company issued warrants to acquire a total of 400,000 shares of the Common Stock,  at an exercise price of $0.64 per share to the two accredited investors. 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.

 

On April 8, 2016, we issued a 14% senior unsecured note to an accredited investor in the principal amount of $500,000. The note matures in one year (April 8, 2017) and bears interest at 14% compounded based on a 365-day year. Accrued interest is payable at maturity in cash. In addition, the Company issued a warrant to acquire 2,000,000 shares of the Common Stock, at an exercise price of $0.64 per share to the accredited investor. 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.

On April 28, 2016, the Company issued a 14% senior unsecured note to an entity related to Dan Jeffery in the principal amount of $50,000. The note matures in one year (April 28, 2017) and bears interest at 14% compounded based on a 365-day year. Accrued interest is payable at maturity in cash. In addition, the Company issued a warrant to acquire 150,000 shares of the Common Stock at an exercise price of $0.64 per share to the entity related to Dan Jeffery. 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.

None of the issuances of the securities described above were registered under the Securities Act of 1933, as amended (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 3.

Defaults upon Senior Securities

None.

Item 4.

Mine Safety Disclosures

Not Applicable

Item 5.

Other Information

 

None.

 

Item 6.

Exhibits

 

EXHIBIT INDEX

AGRITECH WORLDWIDE, INC.

Form 10-Q for Quarter Ended March 31, 2016

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