Attached files
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EX-3.I - RESTATED ARTICLES - Agritech Worldwide, Inc. | ex3i.htm |
EX-32.2 - EX 32.2 - Agritech Worldwide, Inc. | ex322.htm |
EX-31.2 - EX 31.2 - Agritech Worldwide, Inc. | ex312.htm |
EX-23.1 - EX23.1 - Agritech Worldwide, Inc. | ex231.htm |
EX-31.1 - EX 31.1 - Agritech Worldwide, Inc. | ex311.htm |
EX-32.1 - EX.32.1 - Agritech Worldwide, Inc. | ex321.htm |
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
10-K
[X]
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT
OF
1934
For the
fiscal year ended December 31, 2009
OR
[ ]
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF
1934
COMMISSION
FILE NUMBER: 001-32134
Z TRIM
HOLDINGS, INC.
(Exact
name of Registrant as specified in its Charter)
ILLINOIS
|
36-4197173
|
(State
or Other Jurisdiction of
Incorporation
or Organization)
|
(I.R.S. Employer
Identification
No.)
|
1011 CAMPUS DRIVE,
MUNDELEIN, ILLINOIS 60060
(Address
of Principal Executive Offices)
(847)
549-6002
(Issuer's
Telephone Number, Including Area Code)
Indicate
by check mark whether the registrant: (1) has filed
all reports required to be filed by Section 13
of 15(d) of the Exchange Act o 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 [X] No
[ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. (See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.)
Large Accelerated
Filer [ ] Accelerated
Filer
[ ]
Non-Accelerated
Filer
[ ] Smaller
Reporting
Company [
x ]
(do
not check if 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 [X]
At April
2, 2010, there were 3,535,068 shares of common stock outstanding.
The aggregate market value of the voting stock of the issuer held by
non-affiliates of the issuer as
of April 2, 2010 was $3,535,068 This aggregate
market value is estimated solely for purposes of this report and are based on
the closing price for the issuer's common stock on April 2, 2010, as reported on
the Over-the-Counter Bulletin Board. For the purpose of this report,
it has been assumed that all officers and directors of the issuer are affiliates
of the issuer. The statements made herein shall not be construed as
an admission for determining the affiliate status of any person.
1
TABLE
OF CONTENTS
|
|
|||||||||||||
PART
I
|
Page
No.
|
|||||||||||||
Item
1.
|
Business
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3
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||||||||||||
Item
2.
|
Properties
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5
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||||||||||||
Item
3.
|
Legal
Proceedings
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5
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||||||||||||
Item
4.
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Submission
of Matters to a Vote of Security Holders
|
5
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||||||||||||
PART
II
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||||||||||||||
Item
5.
|
Market
for Registrant’s Common Equity, Related Stockholder
Matters
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|||||||||||||
and
Issuer Purchases of Equity Securities
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5
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|||||||||||||
Item
6.
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Selected
Financial Data
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6
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||||||||||||
Item
7.
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Management's
Discussion and Analysis of Financial Condition and Results
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|||||||||||||
of
Operations
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7
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|||||||||||||
Item
7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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9
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||||||||||||
Item
8.
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Financial
Statements and Supplementary Data
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13
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||||||||||||
Item
9.
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Changes
in and Disagreements with Accountants on Accounting and
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|||||||||||||
Financial
Disclosure
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13
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|||||||||||||
Itme
9A.
|
Controls
and Procedures
|
13
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||||||||||||
Item
9B.
|
Other
Information
|
13
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||||||||||||
PART
III
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||||||||||||||
Item
10.
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Directors,
Executive Officers and Corporate Governance
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14
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||||||||||||
Item
11.
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Executive
Compensation
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15
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||||||||||||
Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and
|
|||||||||||||
Related
Stockholder Matters
|
18
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|||||||||||||
Item
13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
18
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||||||||||||
Item
14.
|
Principal
Accounting Fees and Services
|
19 | ||||||||||||
PART
IV
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||||||||||||||
Item
15.
|
Exhibits,
Financial Statement Schedules
|
20 | ||||||||||||
Signatures
|
20 |
PART
I
ITEM
1. DESCRIPTION OF BUSINESS.
Z Trim
Holdings, Inc. deploys technology, formulation, and product performance
solutions built around cutting-edge dietary fibers for both domestic and
international food markets.
Z
Trim®
multifunctional fiber ingredients originated from a USDA patent for
minimally processed, non-caloric functional food ingredients made from healthy
dietary fiber. With an exclusive license from the USDA, this patent is
central to the company’s intellectual property portfolio. Z Trim Holdings
subsequently evolved the processing technology and expanded the fiber sources to
create innovative ingredients with unique properties that provide
multifunctional benefits that help create value for food manufacturers around
the world. Currently, Z Trim is made from corn and oat, but it can be
produced from virtually any cellulose, the substance that makes up most of a
plant’s cell walls, and is one of the most abundant organic compounds on
earth.
The
Company’s core product portfolio of multifunctional dietary fiber food
ingredients includes corn Z Trim® and non-GMO 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, and cost control. Z
Trim® is now being used by food manufacturers, restaurants, schools, and
consumers on 6 continents, 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 fiber ingredients
can help to delight their consumers with finished products that 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. The Company’s goal is to
further enable food manufacturers to address the challenges and opportunities of
this evolution by helping them to differentiate their products, achieve their
growth objectives, and delight their consumers. Z Trim®
multifunctional fiber ingredients create value for both food manufacturers and
consumers in three primary areas: product formulation, processing improvements,
and finished product performance. Through ongoing product
applications research, the Company develops solutions that help food
manufacturers solve formulation and product challenges and capture market
opportunities with high quality, innovative products that fulfill consumer
expectations.
The
Company currently manufactures and markets 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. The Company's primary goal is
establishing Z Trim as an important ingredient in the evolution of the food
industry and consumer expectations. The Company is developing its
market through (i) direct and brokered sales to major food manufacturers, as
well as small and mid size 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. Our R&D team, in conjunction
with our customers and strategic industry partners, continues to work on the
development of additional products and applications. In addition to
direct sales, we use a network of ingredient distributors, both domestic and
international, to distribute our products.
Raw
materials are sourced principally in the United States. Approximately
70% of our raw materials consist of corn bran and oat hulls and are generally
available from a variety of suppliers. Our major suppliers include
Bunge and Didion Milling, Inc. 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 who work with marketing, product research and
development and quality control personnel to source raw materials for products
and other items.
The
Company’s customers are food manufacturers, school districts and the general
public. There were three significant customers who accounted for 20%,
20% and 14% of total sales for the year ended December 31,
2009. There were two significant customers who accounted for 37% and
13% of total sales for the year ended December 31, 2008.
Z
Trim Holdings, Inc. was incorporated in the State of Illinois on May 5, 1994
under the original name Circle Group Entertainment Ltd. The Company
has no operating subsidiaries.
Z Trim
Holdings operates within global business of food additives, which, as of 2006
was a $25 billion industry. The global hydrocolloid business - which
consists of agents used for thickening, gelling and stabilizing food and
beverage products is over $19 billion per year (http://www.sriconsulting.com/CEH/Public/Reports/582.7000/)
with food applications constituting approximately $4.2 billion of that total
(http://www.foodnavigator-usa.com/Financial-Industry/Health-and-prices-dominate-hydrocolloids-debate).
Specifically, the U.S. fat replacer and bulk dietary fiber (supplement) markets
are estimated to be just over $500 million each, with carbohydrate-based fat
replacers such as Z Trim accounting for approximately 59 percent of the market
in 2000 (http://www.frost.com/prod/servlet/market-insight-top.pag?docid=10039518).
Food
systems are complex, and in order to meet consumers’ taste and quality
expectations, various ingredients must be used to achieve the structural,
organoleptic, performance and shelf-life properties specific to a given food
product.
3
Z Trim®
ingredients compete with a wide variety of hydrocolloids and other fiber
ingredients. 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
our Company. However, we believe that the unique properties of Z Trim
multifunctional fiber ingredients pose not only significant market opportunities
for our Company, but also provide tremendous differentiation and growth
opportunities for food companies. No other single hydrocolloid or
fiber has the combined water holding and binding capacity that’s 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, 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.
The
Company protects intangible assets that includes patents pending and issued, as
well as trade secrets and know how. Central to this portfolio is an
exclusive license to US Patent No. 5,766,662, including all related
international patents, issued to Dr. George Inglett of the USDA. This
license expires upon the expiration of the underlying patent in 2015.
Additionally, the USDA patent was filed in several countries throughout the
world. Through the process of development and commercialization of
the technology, the Company has identified and sought patent protection for
improvements to the manufacturing process, product applications and is currently
developing several spin-off technologies. On December 1, 2009, we were
issued U.S. Patent No. 7,625,591 B2; such will expire in 2026 with payment of
maintenance fees. 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.
Presently,
the Company employs 25 full-time employees and one part-time
employees.
The
Company has spent $20,337 in 2009 and $10,811 in 2008 for research and
development expense, and is still innovating toward developing value-added
products to add to its core line.
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This
Annual Report on Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 ("Securities Act"), as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The
forward-looking statements are principally contained in the section entitled
"Description of Business." These statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results, performance
or achievements to differ, perhaps materially, from any future results,
performance or achievements expressed or implied by the forward-looking
statements. Forward-looking statements include, but are not limited to,
statements about:
·
|
Our
product development efforts;
|
·
|
The
commercialization of our products;
|
·
|
Anticipated
operating losses and capital
expenditures;
|
·
|
Our
estimates regarding our needs for additional
financing;
|
·
|
Our
estimates for future revenues and profitability;
and
|
·
|
Sources
of revenues and anticipated revenues, including contributions from
corporate collaborations, license agreements and other collaborative
efforts for the development and commercialization of our product
candidates, and the continued viability and duration of those agreements
and efforts.
|
In some
cases, you can identify forward-looking statements by terms such as "may,"
"will," "should," "could," "would," "expect," "plan," anticipate," "believe,"
"estimate," "project," "predict," "intend," potential" and similar expressions
intended to identify forward-looking statements. These statements reflect our
current views with respect to future events and are based on assumptions and
subject to risks and uncertainties. Given these uncertainties, you should not
place undue reliance on these forward-looking statements. We discuss
many of these risks in greater detail in the foregoing section under the heading
"Risk Factors." Also, these forward-looking statements represent our estimates
and assumptions only as of the date of this Annual Report.
You
should read this Annual Report and the documents that we reference in this
Annual Report with the understanding that our actual future results may be
materially different from what we expect. We do not intend to update
any of these statements or to publicly announce the result of any revisions to
any of these forward-looking statements. We qualify all of our
forward-looking statements by these cautionary statements.
4
ITEM
2. DESCRIPTION OF PROPERTY.
We occupy
approximately 44,000 square feet of leased space at 1011 Campus Drive,
Mundelein, Illinois. This space is leased for $26,900 per month, including
property taxes, pursuant to a non-cancelable operating lease. The
current lease term is through March 2011, and the Company has a one year
option.
ITEM
3. LEGAL PROCEEDINGS.
On July
7, 2007, the Company was served with a complaint by Joseph Sanfilippo and James
Cluck for violation of the Consumer Fraud Act and is seeking damages in excess
of $200,000. Management believes that the allegations are frivolous
and wholly without merit and will vigorously defend the claim. The Company
currently has a Motion to Dismiss pending in the Circuit Court, Twentieth
Judicial Circuit, St. Clair County, Illinois. The pleadings are still
at issue and discovery is just getting underway. Thus, the outcome is
unknown as of the report date.
On August
4, 2009, the Company was served with a complaint by Daniel Caravette, alleging
the Company breached the parties’ settlement agreement dated April 24, 2008 and
seeking damages in excess of $75,000. Management believes that the
allegations are frivolous and wholly without merit and will vigorously defend
the claim. The case is set for trial in July of 2010 before the
Circuit Court of the Nineteenth Judicial District, Lake County, Illinois. A
defense motion for summary judgement is pending and undetermined as of the
report date.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The
Company held its annual shareholders’ meeting on December 22,
2009. At that time, the shareholders voted in a new slate of
directors, as described more fully herein below at Item 6. The vote
tabulation for each director was as follows:
Cumulative
votes Votes
FOR
DIRECTORS
RECEIVED AGAINST ABST. BROKER
NON-VOTES
Steve
Cohen
1,568,098 n/a 131,158 0
Morris
Garfinkle 1,567,586 n/a
131,671
0
Brian
Israel 1,479,347
n/a
219,909 0
Mark
Hershhorn 1,567,774 n/a
131,482 0
Edward
Smith,
III
1,567,800
n/a
131,457 0
The
selection of M&K CPAs, PLLC, as independent outside auditors of the Company
for the fiscal year ending December 31, 2009 was submitted to the stockholders
for ratification in December 2009. There were 1,607,700 votes cast in favor,
33,038 votes cast against and 58,518 abstentions and broker non-votes, which
vote was sufficient for approval of M&K CPAs, PLLC as independent
accountants of the Company for the fiscal year ending December 31,
2009.
PART
II
ITEM
5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL
BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES.
The
following table sets forth, for the periods indicated, the high and low closing
prices for our common stock, as quoted for trading on the American Stock
Exchange under the symbol "ZTM" and on the Over-the-Counter Bulletin Board under
the symbol “ZTMH” and “ZTHO.” Our common stock began trading on the American
Stock Exchange on March 31, 2004. On September 16, 2008, our Company
moved from the American Stock Exchange and began trading on the Over-the-Counter
Bulletin Board. As of the close of business on February 6, 2009, the
Company effectuated a one-for-thirty (1:30) reverse stock split. All
prices in the following table reflect post-reverse split prices.
Common Stock
|
||
Quarter Ended
|
High
|
Low
|
2008
|
||
March
31, 2008
|
$14.40
|
$6.30
|
June
30, 2008
|
$10.80
|
$3.60
|
September
30, 2008
|
$6.90
|
$0.90
|
December
31, 2008
|
$4.50
|
$0.60
|
2009
|
||
March
31, 2009
|
$1.50
|
$0.25
|
June
30, 2009
|
$2.20
|
$0.99
|
September
30, 2009
|
$1.11
|
$0.79
|
December
31, 2009
|
$2.00
|
$0.62
|
2010
|
||
April
2, 2010
|
$1.95
|
$0.99
|
As of
April 2, 2010, there were 5,424 record holders of the common
stock. This number does not include shareholders whose shares are
held in securities position listings. We have never paid any
dividends on our common stock and do not anticipate paying any dividends in the
foreseeable future.
5
EQUITY
COMPENSATION PLAN INFORMATION
(AS OF
DECEMBER 31, 2009)
NUMBER
OF SHARES TO BE ISSUED UPON EXERCISE OF OUTSTANDING OPTIONS, WARRANTS AND
RIGHTS
|
WEIGHTED-AVERAGE
EXERCISE PRICE OF OUTSTANDING OPTIONS, WARRANTS AND RIGHTS
|
REMAINIG
AVAILABLE FOR FUTURE ISSUANCE UNDER EQUITY COMPENSATION PLANS (EXCLUDING
SECURITIES REFLECTED IN 1ST PLAN CATEGORY COLUMN
|
||
Equity
compensation plans approved by security holders (consisting of the 2004
Stock Incentive Plan):
|
||||
1,405,062
|
$0.66
|
18,471,605
(1)
|
(1)
Reflects 20,000,000 shares registered under the plan less the outstanding
options less 123,333 shares issued to external directors under the
Plan.
Plans not
approved by shareholders: None
ITEM
6. SELECTED FINANCIAL DATA
RESULTS
OF OPERATIONS
YEAR
ENDING DECEMBER 31, 2009 COMPARED TO THE YEAR ENDING DECEMBER 31,
2008
Revenues
Revenues
decreased 22.3% for the year ended December 31, 2009, from $720,889 for the year
ended December 31, 2008 to $559,910 for the year ended December 31,
2009. The decrease in product revenue was primarily due to the
decrease in Z Trim sales to one of our international distributors, resulting
from production limitations in the second half of the year. The following table
provides a breakdown of the revenues for the periods indicated:
Year
ended December 31,
2009 2008
----------- ------------
Products $559,910 $720,899
----------- ------------
Total
Revenues $559,910 $720,899
=======
=======
Operating
expenses
Operating
expenses consist of payroll and related costs, stock option expense, insurance,
occupancy expenses, professional fees, and general operating expenses. Total
operating expenses increased by $545,915 or 12.7% to $4,856,334 for the year
ended December 31, 2009 from $4,310,419 for the year ended December 31, 2008.
The increase in operating expenses was primarily due to increases in stock
option expense of $525,230, warrants expense of $674,240, and investor relations
of $440,784 that was partially offset by a decrease in litigation expense of
$246,892, audit fees of $ 181,460, directors’ fees of $172,800, impairment of
intangibles of $136,668 and Amex registration fees of $111,267.
Other income
(expense)
Total
other expense increased by $4,836,221 or 340%, to $6,234,008 for the year ended
December 31, 2009, from $1,397,787 for the year ended December 31,
2008. The increase in expense in 2009 was due to interest expense
(from fund-raising activities) of $2,426,032, a derivative expense of
$3,623,519, liquidated damages of $80,100, and a settlement loss of
$103,137. Further, in 2008, although there was a settlement loss for
$772,202 there was interest expense of $670,042 offset by income of
$44,978.
Net loss
The
Company incurred a net loss of $12,209,580 for the year ended December 31, 2009,
or $4.48 per share, compared to $7,416,927 for the year ended December 31, 2008
or $2.95 per share. The higher loss was due primarily to the cost of
raising funds.
6
LIQUIDITY
AND CAPITAL RESOURCES
YEAR
ENDING DECEMBER 31, 2009 COMPARED TO THE YEAR ENDING DECEMBER 31,
2008
At
December 31, 2009, we had cash and cash equivalents of $324,784, compared to
$592,696 at December 31, 2008. The Company raised $3,196,366 and
$3,615,966 in additional capital through equity and convertible debt
transactions during the year ended December 31, 2009 and 2008
respectively.
Net cash
used by operating activities decreased by $1,949,398 or 38.08%, to $3,169,632
for the year ended December 31, 2009 as compared to $5,119,030 for the year
ended December 31, 2008. The decrease resulted primarily from a
reduction in fees paid to outside professionals (including accountants, auditors
and attorneys).
Net cash
used by investing activities was $294,645 for the year ended December 31, 2009,
as compared to $340,820 for the year ending December 31, 2008. The decrease was
due to proceeds from asset disposals. The 2008 number does not
include pre-payment for equipment that was to be delivered in 2009.
Net cash
provided by financing activities was $3,196,365 for the year ended December 31,
2009, as compared to $3,615,966 for the year ended December 31, 2008. Net cash
provided by financing activities for the year ended December 31, 2009 was
primarily from the net proceeds from the sale of convertible notes and exercise
of warrants. Net cash provided by financing activities for the year
ended December 31, 2008 was primarily from the net proceeds from the sale of
convertible notes offset by a return of common stock.
As of
April 5, 2010, our cash balance was approximately $672,764.
To successfully grow our business, we must improve our cash position
through greater and sustainable sales of our product lines, increase the
productivity of the production process, as well as raise additional capital
through a combination of public or private equity offerings, strategic alliances
or debt financing to allow us to make necessary changes to our plant and to
provide working capital until we achieve profitability. The Company
estimates that it will take from 16 to 24 months to achieve
profitability. Given this estimate, the Company will likely need to
find sources of funding for both the short and long terms.
ITEM
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
THE
FOLLOWING DISCUSSION IS INTENDED TO ASSIST IN UNDERSTANDING THE FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF Z TRIM HOLDINGS, INC. YOU SHOULD READ THE
FOLLOWING DISCUSSION ALONG WITH OUR FINANCIAL STATEMENTS AND RELATED NOTES
INCLUDED ELSEWHERE IN THIS FORM 10-K. THE FOLLOWING DISCUSSION
CONTAINS FORWARD-LOOKING STATEMENTS THAT ARE SUBJECT TO RISKS, UNCERTAINTIES AND
ASSUMPTIONS. OUR ACTUAL RESULTS, PERFORMANCE AND ACHIEVEMENTS IN 2009 AND BEYOND
MAY DIFFER MATERIALLY FROM THOSE EXPRESSED IN, OR IMPLIED BY, THESE FORWARD
LOOKING STATEMENTS.
Overview
Z Trim is
a functional food ingredient company which provides custom product solutions
that help answer the food industry’s problems. Z Trim’s revolutionary
technology provides value-added ingredients across virtually all food industry
categories. Z Trim’s all-natural products, among other
things, help to reduce fat and calories, add fiber, provide
shelf-stability, prevent oil migration, and add binding capacity – all without
degrading the taste and texture of the final food products. Perhaps
most significantly, Z Trim’s products can help extend finished products, and
thereby increase its customers’ gross margins. Under the direction of
new management since December 2007, Z Trim has focused its efforts and resources
towards the manufacture, marketing and sales of its industry-changing
products.
Z Trim,
through an exclusive license to technology patented by the United States
Department of Agriculture, has developed products that both reduce fat and add
fiber, with the added benefit of maintaining taste and mouth-feel associated
with full fat products. The global market for Z Trim's line of
products spans the entire food and nutritional beverage industry, including fat
free, low-fat, reduced fat and full fat, across meats, baked goods,
dairy and non-dairy products, snacks, beverages, dressings, sauces and
dips.
As our
current facility is a prototype plant, being the first of its kind to produce
our innovative products, we are constantly seeking ways to improve efficiencies
and achieve economies of scale. We are currently re-designing the process to
make use of newer separation technologies and thereby optimize plant capacity.
In order to fully realize the potential of our business model, the Company will
eventually need to move to a larger facility, enter into strategic partnerships,
or find some other means to produce greater volumes of finished
product.
Results of
Operations
In 2009,
our revenues decreased by 22.3% from 2008. The primary reason behind
the decline in sales was our inability to produce enough product to meet
demand. We are in the process of making material changes to our
production process that we believe will be completed by the end of the second
quarter in 2010. In making these changes, we have worked with
industry specialists to improve our separation technology, as well as with
scientists from the Aveka Group (see www.aveka.com for
more information on the Aveka Group), to assist in finding ways to improve our
capacity and reduce our costs. By applying new separation technology,
in addition to the new dryer we previously purchased, we believe we will be able
to increase our capacity and meet expected demand. In 2010, we expect
demand to be approximately three times the amount of sales revenues achieved in
2009. The Company anticipates to be able to meet this demand, based
on its plans to improve production.
Additionally,
in 2009, our cost of goods sold decreased by $750,472 or 30.9% from $2,429,620
in 2008 to $1,679,148 in 2009. In 2008 our cost of goods sold
decreased by $655,708 or 21.2%, from $3,085,328 in 2007 to $2,429,620 in
2008. We continue to be more efficient in our production process,
reducing cycle times and lowering utility costs. We believe that the
trend of declining costs of goods sold will continue into 2010 and
beyond.
Significantly,
cash flows used in operating activities decreased by $1,949,397 or 38.08%, to
$3,169,633 for the year ended December 31, 2009 as compared to $5,119,030 for
the year ended December 31, 2008. Similarly, cash flows used in
operating activities decreased by 22% for the year ended December 31, 2008
compared to the year ended December 31, 2007. Since the beginning of
2008, management has made great efforts to reduce the amount of fees paid to
outside professionals, and to focus all of its limited resources on items core
to the Company’s business model. We believe the trend of decreasing
operating cash losses will continue into 2010 and beyond.
Additionally,
we have reduced our accounts payable by $170,484 in 2009, on top of a reduction
of $427,152 during 2008. On December 31, 2009, we had a total of
$373,841 in accounts payable. We expect to further reduce our
accounts payable in 2010.
Liquidity and Capital
Resources
As of
December 31, 2009, we had a cash balance of $324,784. Over the last several
years, we have been funding our operations through the sale of both equity and
debt securities. In 2008, we sold $4,457,000 in convertible
notes. These notes are convertible at $1.00, and bear interest at 8%
per year (See also Note 8 to our Financial Statements set forth
herein). These notes come due in 2010. If our note holders
choose not to convert the notes, we will either have to repay the notes, or
reach an agreement with the note holders to extend the terms
thereof. As we continue to sustain operating losses, we will need to
raise additional funds for working capital.
7
RECENT
MATERIAL DEVELOPMENTS
Potential
Liquidated Damages Relating to Registration Rights
In
connection with certain private placements of the Company’s securities (the
“Registrable Securities”) effected in 2008 the Company entered into registration
rights agreements (the “RRA”) that required the Company to file a registration
statement covering the Registrable Securities with the Securities and Exchange
Commission no later than thirty days after the final closing as contemplated in
the Private Placement Memorandum for the 2008 offering (the “Filing
Deadline”). The Company filed a registration statement on December
14, 2009. However, the statement has not been declared effective as the Company
is not S-3 eligible and will need to file an amended filing to convert the S-3
to an S-1. Management intends to file the S-1 after it files the 10-K for the
year ended December 31, 2009. Under the terms of the registration rights
agreement, as partial compensation, the Company was required to make pro rata
payments to each Investor in an amount equal to 1.5% of the aggregate amount
invested by such Investor for each 30-day period or pro rata for any portion
thereof following the Filing Deadline for which no registration statement was
filed. We obtained a release and waiver of the amounts due from 74 of
the 2008 investors. As of April 5, 2010, there are 5 investors who
have yet to sign the release and waiver. Under the terms of the RRA,
as of that date we potentially owe, and therefore recognized as liquidated
damages, the amount of $80,100.
Reverse
Stock Split
As of the
close business on February 6, 2009, the Company effectuated a one-for-thirty
(1:30) reverse stock split. As part of this split, the Company’s
stock began trading on February 9, 2009 under the symbol “ZTHO” on the
Over-the-Counter Bulletin Board.
Annual
Shareholder’s Meeting and changes to Board of Directors
On March
21, 2009, for personal reasons, Director Sheldon Drobny resigned as Director and
Audit Chair of the Company. On March 25, 2009, the Company appointed
Morris Garfinkle as Director and Audit Chair.
On
December 22, 2009, the Company held its Annual Shareholders’
meeting. The shareholders voted for a slate of five
directors: Steven Cohen, Mark Hershhorn, Brian Israel, Morris
Garfinkle and Edward Smith III. The following directors were not
re-elected: Triveni Shukla.
Key
Hires Bring Wealth of Industry Experience
Over the last 16 months, we have added
key members to our management team:
•
|
Sandi
Balco – VP/General Manager of Business
Development
|
•
|
Ms.
Balco has an MBA and an MS in food science with 25 years experience in the
food industry. She has worked for companies such as Nabisco Brands, The
NutraSweet Company, and Givaudan Flavors Corporation where she was the
director of the global sales and marketing
division.
|
•
|
Kyle
Hanah – Director of Plant
Operations
|
•
|
Mr.
Hanah, a chemical engineer, has 20 years experience in the food industry.
He joined the company in late 2008 having previously worked at Kraft
Foods, Sara Lee Corporation and ConAgra
Foods.
|
•
|
Lynda
Carroll – Director of Applications
|
•
|
Ms.
Carroll has degrees in food science and in culinary arts with 25 years
experience in the food industry. She previously contributed to
applications and quality assurance for Campbell's Soup Company and Conway
Import Co., Inc., manufactures of Conway Salad Dressings and Sauces for
foodservice.
|
•
|
Dr.
Therese Malundo – VP Science and
Technology
|
•
|
Dr.
Malundo has a PhD in food science and an MBA with over 15 years
experience, working for such companies as Pernod Ricard Americas and US
Distilled Products, Co. She brings product development, process
optimization, QA/QC and regulatory experience to our
team.
|
Applications
Highlights
Preliminary
results from recent research and development efforts point to promising growth
opportunities that address market trends and the needs of manufacturers and
consumers alike. A key market trend is convenience, as hectic
lifestyles force consumers to the grocery store freezer seeking high quality,
quick meals and snacks. Z Trim® ingredients have shown to eliminate
the hard edges during microwave cooking and reduce sogginess of frozen hand-held
microwave snacks when used in the dough and meat fillings. Another
major market driver, greater nutrition awareness, has prompted major food
companies to proactively reduce the salt, fat, and sugar content of their
standard product lines. Additionally, new legislation requires
food manufacturers and foodservice establishments to clearly communicate
nutritional profiles, including fat and calorie content. Recent
studies where Z Trim® was added to the batter and breading used to coat fried
chicken resulted in reduced oil absorption of 15% or more. This
product application represents an enormous growth opportunity with fast-food
companies as well as with manufacturers of frozen convenience
meals.
OFF-BALANCE
SHEET ARRANGEMENTS
We have
no off-balance sheet arrangements as defined in Item 303(c) of Regulation
S-X.
8
ITEM 7A. QUANTATIVE AND
QUALATATIVE DISCLOSURES ABOUT MARKET RISK
Although
we do not engage in hedging transactions, the following risks are material risks
that we face. If any of the following risks occur, the business of
the Company and its operating results could be seriously harmed.
BUSINESS
RISKS
THE
COMPANY HAS 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.
The
Company incurred a net loss of $12,209,580 for the twelve months ending December
31, 2009, and had an accumulated deficit of $86,002,406. The Company
reported a net loss of $7,416,927 for the twelve months ending December 31,
2008. At December 31, 2008, the Company reported an accumulated deficit of
$71,662,875.
If the
Company continues to incur significant losses, our cash reserves may be depleted
earlier than currently anticipated, and the Company may be required to limit our
future growth objectives to levels corresponding with our then available cash
reserves.
OUR
AUDITORS HAVE EXPRESSED SUBSTANTIAL DOUBT REGARDING OUR ABILITY TO CONTINUE AS A
GOING CONCERN.
As of the
date of our most recent audit, which included the fiscal year ended December 31,
2009, 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.
OUR
SUCCESS IS DEPENDENT ON MARKET ACCEPTANCE OF OUR PRODUCT.
The
Company has 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. The Company is relying on the current concerns over
obesity, weight-health issues, and the rising cost of health care to drive
demand for Z Trim in the marketplace. We cannot assure you that we will be able
to gain the market acceptance necessary to achieve profitability.
WE MAKE
NO PROJECTIONS REGARDING THE VIABILITY OF OUR FUNCTIONAL FOOD INGREDIENT AND WE
CANNOT ASSURE YOU THAT WE WILL ACHIEVE THE RESULTS DESCRIBED.
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 HAVE A
SIGNIFICANT PORTION OF OUR CURRENT REVENUES AND ORDER BOOKINGS WITH A SMALL
NUMBER OF CUSTOMERS.
Revenues
recognized over the past year and order bookings received to date are
concentrated with a small number of customers. 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 impact on the future revenue growth
and profitability of the Company.
WE WILL
NEED ADDITIONAL FUNDING AND SUCH FUNDING MAY NOT BE AVAILABLE. IF SUCH FUNDING
IS AVAILABLE, IT MAY NOT BE OFFERED ON SATISFACTORY TERMS.
We will
require additional financing to fund ongoing operations, as our current sales
and revenue growth are insufficient to meet our operating costs. Our inability
to obtain necessary capital or financing to fund these needs will adversely
affect our ability to fund operations and continue as a going concern. Our
inability to obtain necessary capital or financing to fund these needs could
adversely affect our business, results of operations and financial condition.
Additional financing may not be available when needed or may not be available on
terms acceptable to us. If adequate funds are not available, we may be required
to delay, scale back or eliminate one or more of our business strategies, which
may affect our overall business results of operations and financial condition.
WE FACE
LIQUIDITY ISSUES.
As of
December 31, 2009, we had a cash balance of $324,784. Over the last several
years, we have been funding our operations through the sale of both equity and
debt securities. In 2008, we sold $4,457,000 in convertible
notes. These notes are convertible at $1.00, and bear interest at 8%
per year (See Note 8 to our Financial Statements set forth
herein). These notes come due in 2010. If our note holders
choose not to convert the notes, we will either have to repay the notes, or
reach an agreement with the note holders to extend the terms
thereof. If we are unable to do either, we may face lawsuits from our
note holders.
OUR
MANUFACTURING FACILITY IS CURRENTLY OPERATING AT A LOSS.
We are
presently operating at a negative gross margin in that the cost of production
exceeds the sales price of the product. The changes that are being
made to the manufacturing process to allow us to produce at a positive gross
margin have yet to be completed and may not be successful. The
current manufacturing facility is merely a pilot plant. In order to
fully implement our business plans we will need to move the operations to a
larger facility, develop strategic partnerships or find other means to produce
greater volumes of finished product.
WE RELY
UPON A LIMITED NUMBER OF PRODUCT OFFERINGS.
The
majority of the products that we have sold as of December 31, 2009 have been
based on corn and oat. Although we will market our products, as an active food
ingredient for inclusion in other companies’ products, and in other ways, a
decline in the market demand for our products, could have a significant adverse
impact on us.
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 and oat. Historically, the costs of corn and oat are
subject to substantial fluctuations depending upon a number of factors which
affect commodity prices in general and over which the Company has 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. If we are unable to increase productivity
to offset these increased costs or increase our prices, we may experience
reduced margins and profitability. We currently do not hedge against changes in
commodity prices.
9
THE
COMPANY IS SUBSTANTIALLY DEPENDENT ON ITS MANUFACTURING FACILITIES; ANY
OPERATIONAL DISRUPTION COULD RESULT IN A REDUCTION OF THE COMPANY’S SALES
VOLUMES AND COULD CAUSE IT TO INCUR SUBSTANTIAL LOSSES.
The
Company’s revenues are and will continue to be derived from the sale of
functional food ingredients made from dietary fiber that the Company’s
manufactures at its facility. The Company’s operations may be subject to
significant interruption if its facility experiences a major accident or is
damaged by severe weather or other natural disasters. In addition, the Company’s
operations 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. The
Company’s insurance may not be adequate to fully cover the potential operational
hazards described above or that it will be able to renew this insurance on
commercially reasonable terms or at all.
THE
AGREEMENT GOVERNING THE COMPANY’S OUTSTANDING CONVERTIBLE NOTES CONTAIN VARIOUS
COVENANTS THAT LIMIT ITS ABILITY TO TAKE CERTAIN ACTIONS AND THE COMPANY’S
FAILURE TO COMPLY WITH ANY OF THE DEBT COVENANTS COULD HAVE A MATERIAL ADVERSE
EFFECT ON THE COMPANY’S BUSINESS, FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
The
agreements governing the company’s outstanding convertible notes contain a
number of significant covenants that, among other things, limit its ability to
incur additional debt or liens or redeem any of its outstanding capital
stock.
WE
FACE COMPETITION.
Competition
is intense in our targeted industries, including nutraceuticals, functional food
ingredients, oils, gums and a large number of businesses engaged in the 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 the Company have. If we are not successful in
competing in these markets, we may not be able to attain our business
objectives.
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.
We 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. The technology employed by Z Trim in its products is
licensed to the company by the United States Department of Agriculture. The USDA
patent expires 2015. Although the company has additional process patents on file
and intends to file a patent for NanoGum in the next few months, there can be no
assurance that new patents will in fact issue or that they will provide
effective protection.
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 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.
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. 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.
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.
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.
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.
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
infringement claim, whether meritorious or not, could be time consuming and
result in costly litigation, and could require us to discontinue any of our
practices that are found to be in violation of another party’s
rights. Any failure to maintain rights to our intellectual property
used in our business could adversely affect the development, functionality, and
commercial value of our products.
10
GOVERNMENT
REGULATION
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. New regulations or regulatory-based claims could adversely
affect our business. 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 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 and 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 Z
TRIM’S PRODUCTS DO NOT SATISFY CERTAIN GOVERNMENTAL
REGULATIONS, Z TRIM 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 or 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 feed
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.
As
required by Section 404 of the Sarbanes-Oxley Act of 2002, management has
conducted an evaluation of the effectiveness of our internal control over
financial reporting at December 31, 2009. We identified two material weaknesses
in our internal control over financial reporting and concluded that, as of
December 31, 2009, 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,” in this Report. 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.
If we are
unsuccessful in implementing or following our remediation plan, or fail to
update our internal control over financial reporting as our business evolves or
to integrate acquired businesses into our controls system, 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.
MARKET
RISKS
OUR STOCK
IS NO LONGER LISTED ON THE AMERICAN STOCK EXCHANGE AND NOW TRADES IN THE OTC
BULLETIN BOARD.
Since our
common stock is currently traded on the OTC Bulletin Board, 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
OTC Bulletin Board generally provides less liquidity than Amex and the Pink
Sheets generally provide less liquidity than the OTC Bulletin
Board. Stocks trading on both the OTC Bulletin Board and the Pink
Sheets may be very thinly traded and highly volatile, and quotations for Pink
Sheet companies are generally very difficult to obtain, if available at
all. Therefore, should the Company’s stock be quoted on the Pink
Sheets, holders of the Company’s 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. Also, as a result of the
Company’s withdrawal from Amex, the Company will not be required to seek, and
will, generally, not seek, shareholder approval in connection with its equity
offerings.
THE
FLUCTUATION IN OUR STOCK PRICE MAY RESULT IN A DECLINE IN THE VALUE OF YOUR
INVESTMENT.
The price
of our common stock may fluctuate widely, depending upon many factors, including
the differences between our actual financial and operating results and those
expected by investors and analysts, changes in analysts' recommendations or
projections, short selling of our stock in the market, changes in general
economic or market conditions and broad market fluctuations. 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.
From time
to time, certain of our shareholders 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, promulgated under the Securities Act, subject
to certain limitations. In general, pursuant to Rule 144, a stockholder, who is
not an affiliate of the company and who has satisfied a six-month holding period
may, under if there is current information publicly available concerning the
company,. Rule 144 also permits the sale of securities, without any limitation,
by our shareholders that are non-affiliates that have satisfied a one-year
holding period. Any substantial sale of our Common Stock pursuant to Rule 144 or
pursuant to any resale prospectus may have a material adverse effect on the
market price of the Common Stock.
11
THE
ISSUANCE OF NOTES, THE WARRANTS AND COMMON STOCK UPON EXERCISE OR CONVERSION
COULD RESULT IN PRICE REDUCTIONS IN OUTSTANDING CONVERTIBLE SECURITIES AND
SUBSTANTIAL DILUTION.
Additional
sales of substantial amounts of the Common Stock could reduce the market price
for the common stock. We will need additional equity funding to provide the
capital to achieve our objectives. Such equity issuance would cause a
substantially larger number of shares to be outstanding, thereby diluting the
ownership interest of our existing shareholders. In addition, public sales of
substantial amounts of the Common Stock after this offering could reduce the
market price for the Common Stock. If we raise capital in the future by issuing
additional equity securities, investors may experience a decline in the value of
their securities. We are authorized to issue up to 200,000,000 shares of our
common stock, of which 3,535,068were outstanding at the close of business on
April 2, 2010, and 10,000,000 shares of preferred stock, of which none were
outstanding at the close of business on April 2, 2010. Our Articles of
Incorporation (as amended to date) gives our Board of Directors authority to
issue the undesignated shares of preferred stock with such designations, rights,
preferences and limitations as the Board may determine. At the close of business
on December 31, 2009, we had outstanding the 2008 and 2009 Notes convertible
into 8,204,000 shares of our common stock (the “Notes”) and warrants to purchase
an aggregate 9,682,379 shares of our common stock, outstanding options to
purchase approximately 1,405,062 shares of our common stock. At
December 31, 2009, we also had approximately 18,471,605 shares of our common
stock reserved for future stock options under our 2004 Equity Incentive
Plan. The issuance of shares of our common stock upon conversion of
the Notes, exercise of the Warrants and exercise of outstanding options and
warrants, or in other transactions would cause dilution of existing
stockholders’ percentage ownership of the Company. Holders of our common stock
do not have preemptive rights, meaning that current shareholders do not have the
right to purchase any new shares in order to maintain their proportionate
ownership in the Company. Such stock issuances and the resulting dilution could
also adversely affect the price of our common stock.
THE
NUMBER OF SHARES OF OUR COMMON STOCK OUTSTANDING AND ISSUABLE UPON THE
CONVERSION OR EXERCISE OF THE 2008 AND 2009 NOTES AND WARRANTS HAS INCREASED
SUBSTANTIALLY AS A RESULT OF PRIVATE PLACEMENTS AND CERTAIN PURCHASERS
BENEFICIALLY OWN SIGNIFICANT BLOCKS OF OUR COMMON STOCK. UPON REGISTRATION UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, THESE SHARES WILL BE GENERALLY AVAILABLE
FOR RESALE IN THE PUBLIC MARKET.
The
aggregate number of shares issuable pursuant to convertible notes issued in 2008
and 2009 is 8,204,000. At maturity, assuming the holder elected to
receive shares instead of cash, interest on the 2008 and 2009 Notes would be
convertible into an additional 1,311,680 shares at full maturity. The
aggregate number of shares issuable pursuant to outstanding warrants, including
those issued in 2008 and 2009, is 9,682,379. We also entered into
registration rights agreements in connection with the 2008 and 2009 private
placements pursuant to which we have agreed to file with the Securities and
Exchange Commission (the “SEC”) a registration statement covering the resale of
the Common Stock underlying the Notes and the Warrants.
OUR STOCK
PRICE MAY DROP UNEXPECTEDLY DUE TO SHORT SELLING OF OUR COMMON STOCK IN THE
MARKET.
Regulation
SHO began on January 3, 2005 and was adopted to update short sale regulation in
light of numerous market developments since short sale regulation was first
adopted in 1938. 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, thereby making a profit.
We cannot assure you that short sellers will not continue to drive the stock
price down in the future, causing decline in the value of your
investment.
THE
TRADING PRICE OF THE COMMON STOCK IS VOLATILE, WHICH COULD CAUSE THE VALUE OF AN
INVESTMENT OUR SECURITIES TO DECLINE.
The
market price of shares of our Common Stock has been volatile.
The market price of our common stock has in the past been
highly volatile. In fiscal 2008, our common stock traded in the range of $14.40
to $0.60 per share; in fiscal 2009, our common stock traded in the range of
$2.20 to $0.25 per share. This volatility is likely to continue for the
foreseeable future. Factors affecting potential volatility include:
·
|
developments
and resolution of current litigation that we are a party
to;
|
·
|
our
cash resources and our ability to obtain additional
funding;
|
·
|
announcements
of private or public sales of
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;
|
·
|
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 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.
THE
IMPLEMENTATION OF CURRENT ACCOUNTING STANDARDS RELATED TO STOCK BASED
COMPENSATION HAS REDUCED AND MAY CONTINUE TO REDUCE OUR REPORTED EARNINGS, WHICH
COULD RESULT IN A DECLINE IN OUR STOCK PRICE.
As part
of our compensation to employees, directors and consultants, we issue equity
awards, primarily in the form of stock options and shares of common stock. Many
of the companies within our industry and with whom we compete for skilled
employees use stock-based compensation as a means to attract personnel, although
not all do and many do not issue the same level of awards. As a result, the
impact of the January 1, 2006 implementation of current accounting
standards relating to stock based compensation may be more significant for us as
compared to other companies. In addition, if we unexpectedly hire additional
employees or acquire another company, the impact of the implementation of
current accounting standards relating to stock based compensation may be more
significant for us than previously forecasted. To the extent investors believe
the costs incurred for current accounting standards relating to stock based
compensation by the Company are higher than those incurred by other companies,
our stock price could be negatively impacted.
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 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.
OUR
COMMON STOCK IS SUBJECT TO THE PENNY STOCK RULES.
The term
“penny stock” generally refers to low-priced, speculative securities of very
small companies. Before a broker-dealer can sell a penny stock, SEC
rules require the broker-dealer to first approve the customer for the
transaction and receive from the customer a written agreement to the
transaction. The broker-dealer must furnish the customer a document
describing the risks of investing in penny stocks. The broker-dealer
must tell the customer the current market quotation, if any, for the penny stock
and the compensation the broker-dealer and its broker will receive for the
trade. Finally, the broker-dealer must send monthly account
statements showing the market value of each penny stock held in the customer’s
account. These requirements make penny stocks more difficult to
trade. Because the Common Stock is subject to the penny stock rules,
the market liquidity of the Common Stock may be adversely affected.
12
ITEM
8. FINANCIAL STATEMENTS
See
consolidated financial statements starting on page F-1 and the related footnotes
thereto.
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On
December 22, 2009, our Shareholders approved the re-appointment of M&K CPAs,
LLC as our public accountant. There are no disagreements with our
accountant on accounting and financial disclosure.
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(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.
Our
Principal Executive Officer and Principle 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 as defined in Rule 13a- 15(f) under the
Securities Exchange Act, as amended. Management, with the
participation of the Chief Executive and Chief Financial Officers, evaluated the
effectiveness of the Company’s internal control over financial reporting as of
December 31, 2009. In making this assessment, management used the
criteria set forth by the committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal Control – Integrated Framework. 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. We
have identified the following material weaknesses:
1.
|
As
of December 31, 2009, 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, 2009, 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, 2009, 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,
2009.
|
Because
of these material weaknesses, management has concluded that the Company did not
maintain effective internal control over financial reporting as of December 31,
2009 based on the criteria established in “Internal Control-Integrated
Framework” issued by the COSO.
Changes
in Internal Control Over Financial Reporting
There
have been no changes in the Company’s internal control over financial reporting
through the date of this report or during the period ended December 31, 2009,
that materially affected, or is reasonably likely to materially affect, the
Company’s internal control over financial reporting.
Independent
Registered Accountant’s Internal Control Attestation
This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the Company to provide only
management’s report in this annual report.
Corrective
Action
Management
plans to provide future investments in the continuing education of our
accounting and financial professionals.
ITEM
9B. OTHER INFORMATION
None.
13
PART
III
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
In
determining whether to nominate each of the current directors for another term
(or new directors for a first term), the Board’s Nominating Committee, composed
of two independent directors, considered a candidate’s knowledge of the
Company’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 Company. The Nominating Committee concluded that
each of the current directors standing for re-election possesses unique talents,
backgrounds, perspectives, attributes and skills that will enable each of them
to continue to provide valuable insights to Company management and play an
important role in helping the Company achieve its long-term goals and
objectives. As described below in the experience and qualifications of each of
our directors, each director has achieved an extremely high level of success in
his career.
AGE
|
NAME
|
POSITION
|
|||
53
|
Steve
J. Cohen
|
Director
and President
|
|||
39
|
Brian
Chaiken
|
Chief
Financial Officer
|
|||
60
|
Mark
Hershhorn
|
Director
|
|||
52
|
Brian
Israel
|
Director
|
|||
34
|
Edward
Smith III
|
Director
|
|||
61
|
Morris
Garfinkle
|
Director
|
|||
66
|
Triveni
Shukla
|
Former
Director and Executive VP
|
STEVE J. COHEN, the Company's President has been employed by Z Trim since 2002 when he was hired as its director of investor relations. He was promoted to Vice President of Corporate Development in 2003 and to President in March of 2006 when he also began serving on the Board of Directors. In August of 2007 Mr. Cohen assumed the role of chief executive officer. Prior to joining Z Trim, Mr. Cohen had 25 years' experience at the Chicago Mercantile Exchange where he worked in various brokerage house positions as well as a trader. Mr. Cohen attended college at the University of Illinois and Oakton Community College. Mr. Cohen was a member of the U.S. Olympic team at the 1988 Olympics in Seoul and was a coach for the U.S. Olympic Team at the 2000 Olympics in Sydney Australia.
BRIAN
CHAIKEN, J.D., was hired by the Company to serve as General Counsel and Vice
President of Business Development in July of 2006. In January of
2008, Mr. Chaiken was appointed to be the Company’s Chief Financial
Officer. In January of 2009, Mr. Chaiken was appointed the role of
Chief Legal Officer as well. He received his Bachelor of Science in
Accountancy from the University of Illinois, Champaign-Urbana and passed the CPA
examination on his first sitting. Mr. Chaiken obtained his Juris Doctor from DePaul
University, and is a member of the Illinois and Florida Bars, as well as those
of the Northern District Court of Illinois, United States Court of Appeals of
the 11th Circuit and the Southern District Court of Florida. Prior to
joining Z Trim, Mr. Chaiken spent five years as the Executive Vice-President of
Legal Affairs for Supra Telecommunications and Information Systems, Inc., a
Competitive Local Exchange Carrier (telecommunications provider) in South
Florida. There, Mr. Chaiken was a senior executive for a company with
more than 300 employees in Florida, Costa Rica and the Dominican
Republic. He was instrumental in helping the company grow annual
revenues from $10 million to approximately $150 million over an 18 month
period. He successfully litigated and arbitrated multi-million dollar
disputes involving trademark, anti-trust, fraud, bankruptcy and complex
commercial transactions.
BRIAN S.
ISRAEL was appointed on May 23, 2007 to fill a vacancy on the
Company’s Board of Directors. He presently serves as Chairman of the
Compensation and Nominating Committees. Mr. Israel spent more than 20
years in the real estate finance industry, during which he managed teams
responsible for production, operations, risk management, product and policy
development, technology and project management functions for a major national
lender and a large regional commercial bank. In his most recent position, he
served From March 1989 to January 2004 as Vice President and
Division Administrator for the Residential Mortgage Division of Harris
Trust and Savings Bank's Consumer lending Center.
Since
retiring from the corporate world in January of 2004, he has devoted his time
and energy primarily to Community Service in the non-profit sector. He currently
serves as a member of the Executive Commitee of the River North Residents'
Association, which works to protect and enhance the quality of life for nearly
10,000 members through advocacy for responsible development and commerce,
improvements to infrastructure, and the creation and improvement of public open
space; as a Mentor and a member of the Advisory Council of Big Brothers Big
Sisters of Metropolitan Chicago; as a Partner in the Federal Reserve Bank
of Chicago's Money Smart program, which delivers financial literacy education to
consumers; and as a member of the Ely Chapter of Lambda Alpha International, an
honorary society dedicated to the advancement of land economics. He also
provides strategic planning, training and project management services to
businesses and non-profit entities as an independent consultant and serves
as President of North Shore Custom Homes, Ltd., a developer of residential real
estate.
MARK
HERSHHORN has a background in the marketing and operations of nutrition systems,
food industry marketing and transactional television. Mark was
appointed to the Company’s Board of Directors at the shareholder meeting, held
on December 19, 2007. From August 1998 to present, Mark has served as
President and co-owner of CKS & Associates Management LLC; President and CEO
of CKS & Associates; CEO of Midwest Real Estate Investment LLC; General
Partner of New Horizons West LLP, and CEO of New Horizons Real Estate Holdings
LLC. During much of the 1990’s, Mark served as President, CEO
and director of National Media Corporation (NYSE-NMC) and as Chairman of the
company’s international subsidiary, Quantum International Ltd. Prior
to that, Mark served as Senior Vice President of food operations and joint
ventures for Nutri/System, Inc. During the 1980’s, Mark was Chief
Financial Officer, Treasurer, Vice President and director of the Franklin
Mint. Mark has also held positions with companies such as
Price-Waterhouse, Pfizer Diagnostics, and Wallace and Wampole
Laboratories. Mark received his BS Degree in Economics from Rutgers
University and an MBA from the Wharton School of Finance, University of
Pennsylvania.
MORRIS
GARFINKLE is the Founder, President and CEO of GCW Consulting, a consulting firm
based out of Arlington, Virginia. He received his Juris Doctor from
Georgetown University and his B.S. in Economics (cum Laude) from the Wharton
School of Finance & Commerce, University of Pennsylvania. He was
appointed to the Board in March of 2009, and reelected by the shareholders at
the December 22, 2009 shareholders’ meeting. Mr. Garfinkle has over
35 years of experience in restructuring, mergers and acquisitions, investment
assessment, competitive positioning, strategic planning and capital
raising. His clients have included United Airlines Creditors' Committee,
Pension Benefit Guaranty Corporation, Air China and Dallas-Fort Worth
International Airport, among many others. He also served on the Board of
Directors of HMSHost from 2000 - 2006.
EDWARD
SMITH III is Managing Partner of Brightline Capital Management, LLC (“BCM”), a
New York-based investment firm founded in 2005. BCM is the investment manager of
Brightline Ventures I, LLC and Brightline Capital Partners, LP. Prior to
founding BCM, Mr. Smith worked at Gracie Capital, GTCR Golder Rauner and Credit
Suisse First Boston. Mr. Smith holds a Bachelor of Arts in Social Studies
from Harvard College and a Masters in Business Administration from Harvard
Business School. Mr. Smith was elected to the Board at the shareholders’ meeting
held on December 22, 2009.
TRIVENI
P. SHUKLA, Ph.D. is currently a Special Advisor to the President of the
Company. Previously he served as a Director and as the Executive Vice
President, Manufacturing & Technology for Z Trim Holdings, Inc., and has
been with the Company since January 1, 2004, and was appointed to serve as a
director on December 19, 2007. Prior to joining Z Trim, Dr. Shukla
was the President of F.R.I. Enterprises LLC from 1985 through March 2003.
Dr. Shukla served as Corporate Manager, R&D, Technical Service, and
Engineering for the Krause Milling Company, which became part of ADM in 1985,
from 1973 through 1984. Dr. Shukla served as Associate Director, Research
and Planning, for Phelco-Land O’Lake from 1969 through 1973. He was in charge of
quality control for the National Dairy Research Institute, India and was the
youngest gazetted Officer approved by Union Public Service Commission,
India. Dr. Shukla was a third party expert for International Finance
Corporation/Word Bank from 1991 through 2001. Dr. Shukla has provided
advisory services to the following companies around the globe: US Feed Grains
Council, Indian Council of Agricultural Research, Winrock International, Labbat
Anderson Group, Anheuser-Busch, A.E. Staley, American Maize Co.,
Bimbo (Mexico), Cedarburg Dairy/Kemp, Cargill, ConAgra, Experience Inc., Frigo
Cheese Co./Unigated Ltd., Grupo Minsa s.a. de c.v. (Mexico), Heinz Co./Ore-Ida
Foods, Heinz Co./Foodways Natl., Hershey Foods Corporation, Illinois Cereal
Mills, Kraft-General Foods, Mexican Accent Inc., Monsanto Company, Nabisco
Brands, National Honey Board, Nagarjuna Chemicals and Vertilizers, India, Oscar
Meyer Foods/Philip Morris, Procter & Gamble, Quaker Oats, Sigma
Alimentos/Grupo Alpha (Mexico), Group Minsa of Mexico and Matrix Group of
Malaysia. Dr. Shukla’s advisory services have been of the nature of
privatization, business planning, innovation and R&D, plant start-up, and
management of intangible assets. Dr. Shukla has designed turnkey
facilities in Colombia, India, Malaysia, and Taiwan. Dr. Shukla received
his B.Sc. (Agricultural Engineering) from the University of Gorakhpur, India,
First in the University, and his M.Sc. (Food/ Engineering) from Agra University,
India, First in the Faculty of Agriculture, and his Ph.D. (Food/Dairy
Technology) from University of Illinois, Urbana-Champaign.
The term
of office of each director expires at each annual meeting of stockholders and
upon the election and qualification of his successor. Other than with Edward
Smith III, there are/were no arrangements with any director or officer regarding
their election or appointment. There are no family relationships
between any of our directors or executive officers.
14
AUDIT
COMMITTEE
The Board
of Directors has an Audit Committee composed of one director, Morris Garfinkle,
who is considered an “independent director" under the rules of the American
Stock Exchange and the Securities and Exchange Commission. The Board
of Directors has determined that Morris Garfinkle qualifies as an "audit
committee financial expert" under SEC rules. 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.
SECTION
16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Pursuant
to Section 16(a) of the Exchange Act and the rules promulgated thereunder,
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 the
Company 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, 2009 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, 2009,
complied with all Section 16(a) filing requirements applicable to such
individuals.
ITEM
11. EXECUTIVE COMPENSATION.
Corporate
Governance and Related Disclosures
Code
of Ethics and Business Conduct
The
members of our Board of Directors also are required to comply with a Code of
Ethics and Business Conduct (the “Code”). The Code is intended to focus the
Board 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 employees of the
Company.
The
full text of both Z Trim’s Code of Ethics and Business Conduct 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.
Committees of the
Board of Directors
Our
business, property and affairs are managed under the direction of our Board of
Directors. Members of our Board are kept informed of our business through
discussions with our Chief Executive Officer and other officers, by reviewing
materials provided to them, by visiting our offices and plants and by
participating in meetings of the Board and its Committees.
All
Board members are expected to attend our Annual Meeting of Shareholders, unless
an emergency prevents them from doing so. At our 2008 and 2009 Annual Meetings,
all of our directors standing for election attended.
Our Board
of Directors currently has three Committees. Those Committees consisted of an
Audit Committee, a Compensation Committee and a Nominating
Committee.
Compensation
Committee
The
Compensation Committee, composed entirely of independent directors, administers
the Company’s executive compensation program. The role of the Committee is to
oversee Z Trim’s compensation and benefit plans and policies, administer its
stock plans (including reviewing and approving equity grants to elected
officers) and review and approve annually all compensation decisions for elected
officers including those for the Chairman and CEO and the other executive
officers named in the Summary Compensation Table (the “Named Executive
Officers”). The Committee submits its compensation decisions for the CEO to the
Board for ratification. Z Trim’s Compensation Committee Charter is
available online at
http://www.ztrim.com/pages/compensation_committee_charter/41.php.
Brian
Israel was appointed to serve as chairman of the Compensation Committee in April
of 2007. On December 19, 2007, Michael Donahue was appointed to serve as a
member of the Compensation Committee. On September 19, 2008, Mark Hershhorn was
appointed to replace Michael Donahue as a member of the Compensation Committee.
Brian Israel and Mark Hershhorn each qualifies as an “independent director”
under the rules of the American Stock
Exchange.
The
Compensation Committee, pursuant to its Charter, is responsible for the
following:
1.
|
Review
and approve corporate goals and objectives relevant to the compensation of
the Company’s Chief Executive Officer (“CEO”), evaluate the CEO’s
performance in light to those goals and objectives, and either as a
committee or together with the other independent directors (as directed by
the Board), determine, or recommend to the Board for determination, the
CEO’s compensation level based on this evaluation. In determining or
recommending the long-term incentive component of CEO compensation, the
Committee shall consider, among other factors, the Company’s performance
and relative shareholder return, the value of similar incentive awards to
CEO’s at comparable companies, the awards given to the CEO in past years,
and such other factors as the Committee shall so
determine.
|
2.
|
Either
as a committee or together with the other independent directors (as
directed by the Board), determine, or recommend to the Board for
determination, the compensation of all other officers of the
Company.
|
3.
|
Make
recommendations to the Board with respect to the Company’s incentive
compensation plans and equity-based plans, oversee the activities of the
individuals and committees responsible for administering these plans, and
discharge any responsibilities imposed on the Committee by any of these
plans.
|
4.
|
In
consultation with management, oversee regulatory compliance with respect
to compensation matters, including overseeing the Company’s policies on
structuring compensation programs to preserve tax deductibility, and, as
and when required, establishing performance goals and certifying that
performance goals have been attained for purposes of Section 162 (m) of
the Internal Revenue Code.
|
5.
|
To
review and approve any severance or similar termination payments proposed
to be made to any current or former officer of the
Company.
|
6.
|
Prepare
an annual Report of the Compensation Committee on Executive Compensation
for inclusion in the Company’s annual proxy statement in accordance with
applicable SEC rules and
regulations.
|
7.
|
Periodically
review and assess the adequacy of this charter and recommend any proposed
changes to the Board for approval, including changes concerning the
structure and operations of the
Committee.
|
8.
|
Perform
any other duties or responsibilities expressly delegated to the Committee
by the Board from time to time relating to the Company’s compensation
programs.
|
15
Compensation
Committee Report
The Z
Trim Compensation Committee of the Board of Directors has reviewed and discussed
with Z Trim management the Compensation Discussion and Analysis and, based on
that discussion, recommended it to the Z Trim’s Board of Directors for inclusion
in this Form 10-K.
The
Committee, with the assistance of Z Trim’s Human Resource functions, completed
an assessment of the risks associated with Z Trim’s compensation policies and
practices.
At the
end of the risk assessment process, the Committee concluded that (1) the
Senior Executive Officer (SEO) compensation programs do not encourage
excessive and unnecessary risk taking; (2) other employee compensation
plans do not encourage unnecessary or excessive risk taking, threaten the value
of the Company, or reward short-term results to the detriment of long-term value
creation; and (3) Z Trim’s compensation programs do not encourage the
manipulation of reported earnings.
THE
COMPENSATION COMMITTEE
Brian
Israel (Committee Chairman)
|
Mark
Hershhorn
|
The
Compensation Committee is composed entirely of persons who are neither
Associates nor former or current officers of the Company. There is not, nor was
there during fiscal 2009, any compensation committee interlock or insider
participation on the Compensation Committee.
Compensation
Discussion & Analysis
Z Trim’s compensation philosophy has
been, and continues to be, that compensation should drive long-term value
creation for our shareowners. Total compensation for each employee should be
based on individual and Company performance, market practice, and the value of
the employee’s position at Z Trim. 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 2004 Equity Incentive
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. The Company does
not believe that its employee compensation policies are reasonably likely to
have a material adverse effect on the Company.
The
following table summarizes the compensation earned in the fiscal
years ended December 31, 2009 and 2008 by our
chief executive officer and the two most highly
paid executive officers whose
total salary and bonus awards exceeded $100,000
for the fiscal years ended December 31, 2009 and 2008. In this
document, we refer to these individuals as our "named executive
officers."
SUMMARY
COMPENSATION TABLE
NAME
AND PRINCIPAL
|
||||||
POSITION
|
YEAR
|
SALARY
|
BONUS
|
OPTION
AWARDS
|
||
Steve
J. Cohen
|
2009
|
$141,181
|
--
|
210,000
|
||
Director
and President
|
2008
|
$143,367
|
--
|
--
|
||
Triveni
Shukla
|
2009
|
$141,153
|
--
|
210,000
|
||
Former
Director and VP
|
2008
|
$137,100
|
--
|
--
|
||
Brian
Chaiken
|
2009
|
$114,751
|
--
|
210,000
|
||
Chief
Financial Officer
|
2008
|
$113,000
|
--
|
--
|
OPTION
GRANTS
The
following table contains information concerning the grant of options to purchase
shares of our common stock to each of the named executive officers during the
fiscal year ended December 31, 2009. The percentage of total options granted to
employees set forth below is based on an aggregate of 100,000 shares subject to
options granted in 2009. All options are fully vested and
exercisable.
16
OPTION GRANTS IN LAST
FISCAL YEAR
INDIVIDUAL
GRANTS
-------------------------------------------------------------------------------------------------------------------------------
PERCENT
OF
NUMBER
OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE
OR
OPTIONS EMPLOYEES BASE
PRICE EXPIRATION
NAME GRANTED IN
2009 ($/SHARE) DATE
-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Steve J.
Cohen 210,000 15.9% $0.4725 2/18/14
Triveni
P.
Shukla 210,000 15.9% $0.45 2/18/14
Brian
Chaiken 210,000 15.9% $0.45 2/18/14
OUTSTANDING
EQUITY AWARDS AT DECEMBER 31, 2009
The
following table contains information regarding outstanding equity awards held at
December 31, 2009, by the named executive officers.
Name
|
Number
of securities underlying unexercised options (#)
exercisable
|
Option
Exercise Price
|
Option
expiration date
|
|
Steve
Cohen
|
210,000
|
$0.475
|
2/18/2014
|
|
Triveni
Shukla
|
210,000
|
$0.45
|
2/18/2014
|
|
Brian
Chaiken
|
210,000
|
$0.45
|
2/18/2014
|
2009
Director Compensation
Employee
directors do not receive any separate compensation for their Board activities.
Non-employee directors receive $1,500 per in-person meeting in which they
attend, 30,000 shares of common stock with
a maximum 35% tax gross up not to exceed $10,000 per board member.
Non-employee
directors are reimbursed for travel expenses incurred in conjunction with their
duties as directors. Furthermore, the Company will provide the broadest form of
indemnification under Illinois law under which liabilities may arise as a result
of their role on the Board and payments for reimbursements for expenses incurred
by a director in defending against claims in connection with their role, and the
director satisfies the statutory standard of care.
The
following table provides compensation for non-employee directors who served
during fiscal 2009.
2009 Compensation of Non-Employee
Directors
|
||||||||
Name
|
Fees
Earned
|
Stock
Awards
|
All
Other
|
Total
($)
|
||||
or
Paid in Cash ($)
|
($)(1)
|
Compensation
($)(2)
|
||||||
Morris
Garfinkle
|
$3,000
|
$19,200
|
$0
|
$22,200
|
||||
Mark
Hershhorn
|
$0
|
$13,500
|
$19,000
|
$32,500
|
||||
Edward
Smith III
|
$1,500
|
$0
|
$0
|
$1,500
|
||||
Brian
Israel
|
$0
|
$13,500
|
$19,000
|
$32,500
|
(1)
Mark Hershhorn and Brian Israel received 30,000 shares of stock on
February 27, 2009, at which time the fair value of the stock was $0.45 per
share. Morris Garfinkle received 30,000 shares of common stock
on March 24, 2009, at which time the fair value of the stock was $0.64 per
share.
|
(2)
Mark Hershhorn and Brian Israel converted their respective $10,000 tax
gross ups plus an additional $9,000 in fees earned for attendance at
in-person meetings into investments in the Company's 2009 Convertible Debt
Private Placement Offering, as described in the Company’s April 21, 2009
Form 8-K. The Company prepaid $1,000 in fees to each of these
Directors, which was used to purchase units in the Company’s 2009
Convertible Debt Private Placement
Offering.
|
17
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The following table sets forth information regarding the beneficial
ownership of our common stock as of April
2, 2010, by the following
individuals, entities or groups:
o each person
or entity who we know beneficially owns more
than five percent of our outstanding common stock;
o each
of the named executive officers;
o each
director and nominee; and
o all
directors and executive officers as a group.
Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission and includes voting or investment power with respect to the
shares. In computing the number of shares beneficially owned by a person and
the percentage ownership of
that person, shares of common stock
subject to options and warrants held by
that person that are currently
exercisable or convertible or will become exercisable or
convertible within 60 days after April
2, 2010
are deemed outstanding, while the shares are
not deemed outstanding for purposes of
computing percentage ownership of any other
person. Except as otherwise indicated, and subject to applicable
community property laws, the persons named in the table have sole voting and
investment power with respect to all shares of common stock held by
them.
Applicable
percentage ownership in the following table is based on
3,535,068 shares of common stock outstanding as
of April 2, 2010. Except as provided below, the address
for each stockholder listed in the table is c/o Z Trim Holdings, Inc., 1011
Campus Drive, Mundelein, Illinois 60060.
NUMBER
OF
|
PERCENTAGE
OF
|
||||||
NAME
OF
|
SHARES
|
SHARES
|
|||||
BENEFICIAL OWNER
|
BENEFICIALLY OWNED
|
BENEFECIALLY OWNED
|
|||||
BENEFICIAL
OWNERS
|
|||||||
Brightline
Ventures I, LLC (1)
1120
Avenue of the Americas, Suite 1505
New
York, NY 10036
|
9,531,250
|
75.00%
|
|||||
FORMER
DIRECTORS AND EXECUTIVE OFFICERS
|
|||||||
Sheldon
Drobny (2)
1535
Lake Cook Rd., Suite 110
Northbrook,
IL 60062
|
382,852
|
10.74%
|
|||||
Triveni
Shukla (3)
1011
Campus Dr., Mundelein, IL 60060
|
290,000
|
8.35%
|
|||||
CURRENT
DIRECTORS AND EXECUTIVE OFFICERS
All
such addresses are:
1011
Campus Dr., Mundelein, IL 60060
|
|||||||
Steve
J. Cohen (4)
|
420,003
|
11.66%
|
|||||
Mark
Hershhorn (5)
|
271,056
|
7.85%
|
|||||
Brian
Israel (6)
|
123,332
|
3.73%
|
|||||
Mo
Garfinkle (7)
|
185,000
|
5.50%
|
|||||
Brian
Chaiken (8)
|
420,000
|
11.66%
|
|||||
Ed
Smith (1)(9)
|
40,000
|
1.24%
|
|||||
Total
of All Current Directors and Executive Officers
|
|||||||
1,459,391
|
41.64%
|
||||||
(1)
Brightline Capital Management, LLC, a Delaware limited liability company
("Brightline Capital"), Nick Khera, and Brightline Ventures I,
LLC, a Delaware limited liability company ("Brightline Ventures"), each
are deemed to beneficially own 75.0% of the Company’s Common Stock, par
value $0.00005 per share (the "Shares"), and (ii) Edward B. Smith, III,
beneficially owns 1.24% of the Shares. Messrs. Khera and Smith
are the managing members of Brightline Capital, an investment management
firm that serves as the investment manager of Brightline Ventures.
Brightline Venture holds promissory notes convertible into 3,812,500
shares of common stock initially at $1.00 per share and warrants to
purchase 9,531,250 shares of the company’s common stock at an exercise
price of $1.50 per share (the "Note Units"). Mr. Smith owns an
additional 40,000 Shares in a personal account. Messrs. Khera and Smith,
through their roles at Brightline Capital, exercise investment discretion
over Brightline Ventures.
|
|||||||
(2)
Includes ownership of notes and warrants to purchase 382,852 shares of
common stock
|
|||||||
(3) Includes
290,000 options to purchase shares of common
stock
|
|||||||
(4)
Includes 420,000 options to purchase shares of common
stock
|
|||||||
(5)
Includes ownership of notes convertible into 120,000 shares of common
stock and warrants to purchase 84,390 shares of common
stock
|
|||||||
(6)
Includes ownership of notes, warrants and options to purchase or
convertible into 56,666 shares of common stock
|
|||||||
(7) Includes
ownership of notes convertible into 50,000 shares of common stock and
warrants to purchase 75,000 shares of common stock
|
|||||||
(8)
Includes ownership of notes and warrants convertible into 26,890 shares of
common stock
|
|||||||
(9)
Mr. Smith is a Managing Partner of Brightline Ventures I, LLC -- see Note
(1) above
|
ITEM 13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The
Company's independent directors are: Mark Hershhorn, Brian Israel, Morris
Garfinkle, and Edward Smith, III. In compliance with the American Stock
Exchange's rules for director independence, more than 50% of the Company's
directors are independent. Each of these directors has purchased
convertible notes pursuant to a private placement offering, and such purchases
are reflected in the table set forth in Item 12 above.
18
ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The
following is a summary of the fees billed to us by Blackman Kallick, LLP for
professional services rendered for the fiscal year ended December 31, 2009 and
December 31, 2008, respectively:
FEE
CATEGORY 2009 2008
-------------------------- -----------------
-----------------
-------------------------- -----------------
-----------------
Audit
Fees
(1)
$13,011 $326,451
-------------------------- -----------------
-----------------
Audit-Related
Fees
(2) -- --
-------------------------- -----------------
-----------------
Tax
Fees
(3) -- --
-------------------------- -----------------
-----------------
All
Other Fees
(4)
-- --
-------------------------- -----------------
-----------------
Total
Fees
$13,011 $326,451
-------------------------- ------------------
-----------------
The
following is a summary of the fees billed to us by M&K, CPAs, PLLC for
professional services rendered for the fiscal year ended December 31, 2009 and
December 31, 2008, respectively:
FEE
CATEGORY 2009 2008
-------------------------- -----------------
-----------------
-------------------------- -----------------
-----------------
Audit
Fees
(1) $89,484 $50,700
-------------------------- -----------------
-----------------
Audit-Related
Fees
(2) -- --
-------------------------- -----------------
-----------------
Tax
Fees
(3)
-- --
-------------------------- -----------------
-----------------
All
Other Fees
(4)
-- --
-------------------------- -----------------
-----------------
Total
Fees
$89,484 $50,700
-------------------------- ------------------
-----------------
(1) Audit
Fees consist of fees billed for professional services rendered for the audit of
our financial statements and
for reviews of the interim financial statements
included in our quarterly reports on Form 10-Q.
(2)
Audit-Related Fees consist of fees billed for professional services rendered
for audit-related services, including consultation on
SEC filings and the
issuance of consents and consultations on
other financial accounting and reporting
related matters.
(3) Tax
Fees consists of fees billed for professional services relating to tax
compliance and other tax advice.
(4) All
Other Fees consist of fees billed for all other services.
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, which
are approved by the Committee prior
to the completion of the service. The 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.
19
PART
IV
ITEM
15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
A list of
the exhibits required to be filed as part of this report are presented in the
Exhibit Index.
SIGNATURES
In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized as of April 9, 2010.
Z
TRIM HOLDINGS, INC.
By:
/s/ Steven J. Cohen
--------------------------
Steven
J. Cohen
Director,
and
Chief
Executive Officer
In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities as of April
9, 2010.
/s/
Steven J. Cohen
----------------------
Steven J.
Cohen
Director
and Chief Executive Officer
(principal
executive officer)
/S/ Brian
Chaiken
--------------------
Brian
Chaiken
Chief
Financial Officer
(principal
financial
or
accounting officer)
/S/ Mark
Hershhorn
----------------------
Mark
Hershhorn
Director
/S/ Brian
Israel
---------------------
Brian
Israel
Director
/S/
Edward Smith III
----------------------
Edward
Smith III
Director
/S/
Morris Garfinkle
----------------------
Morris
Garfinkle
Director
20
INDEX OF
EXHIBITS
EXHIBIT
NO. DESCRIPTION
3(i)
*
|
Restated
Articles of Incorporation of Z Trim Holdings,
Inc.
|
3(ii)
|
Bylaws
of Z Trim Holdings, Inc., as amended (filed as Exhibit 2.2 to the
Company’s Registration Statement on Form 10-SB, Exhibit 3(ii) to the
Company’s Form 8-K filed on November 2, 2007, and as Exhibit 3(ii) to the
Company’s Form 8-K filed on November 16, 2007, and incorporated herein by
reference).
|
3(iii)
|
Amendment
to Bylaws of Z Trim Holdings, Inc. (filed as Exhibit 3.2 to the Company’s
Form 8-K filed on September 23, 2008, and incorporated herein by
reference).
|
4.1
|
Specimen
Certificate for common stock (filed as Exhibit 3.1 to the Company's Form
10-SB filed on August 21, 2000, and incorporated herein by
reference).
|
4.2
|
Form
of Subscription Agreement (filed as Exhibit 4.1 to the Company's Form 8-K
filed on March 30, 2006 and incorporated herein by
reference).
|
4.3
|
Form
of Warrant to Purchase Common Stock (filed as Exhibit 4.2 to the Company's
Form 8-K filed on March 30, 2006 and incorporated herein by
reference).
|
4.4
|
Form
of Registration Rights Agreement (filed as Exhibit 4.3 to the Company's
Form 8-K filed on March 30, 2006 and incorporated herein by
reference).
|
4.5
|
Form
of Subscription Agreement (filed as Exhibit 4.5 to the Company’s Form
10-KSB filed on April 2, 2007 and incorporated herein by
reference).
|
4.6
|
Form
of Warrant to Purchase Common Stock (filed as Exhibit 4.6 to the Company’s
Form 10-KSB filed on April 2, 2007 and incorporated herein by
reference).
|
4.7
|
Form
of Registration Rights Agreement (filed as Exhibit 4.7 to the Company’s
Form 10-KSB filed on April 2, 2007 and incorporated herein by
reference).
|
10.1
|
Steve
Cohen Employment Agreement (filed as Exhibit 10.12 to the Company’s Form
10-QSB for the quarter ending June 20, 2006 and incorporated herein by
reference).
|
10.2
|
Brian
Chaiken Employment Agreement, dated October 17, 2007 (filed as Exhibit
10.2 to the Company’s Form 10-KSB filed on April 14, 2008 and incorporated
herein by reference).
|
10.3
|
Z
Trim Holdings, Inc. 2004 Equity Incentive Plan (filed as Appendix C to the
Z Trim's Proxy Statement for its Annual Meeting conducted on June 16, 2004
and approved by its Shareholders on that date and incorporated herein by
reference).
|
23.1*
|
Consent
of M&K CPAs, LLC.
|
31.1*
|
Statement
Under Oath of Principal Executive Officer of the Company pursuant to
Section 302 of Sarbanes-Oxley Act of
2002.
|
31.2*
|
Statement
Under Oath of Principal Financial Officer of the Company pursuant to
Section 302 of Sarbanes-Oxley Act of
2002.
|
32.1*
|
Statement
Under Oath of Principal Executive Officer of the Company pursuant to
Section 906 of Sarbanes-Oxley Act of
2002.
|
32.2*
|
Statement
Under Oath of Principal Financial Officer of the Company pursuant to
Section 906 of Sarbanes-Oxley Act of
2002.
|
----------------------
*Filed
herewith
21
INDEX TO
FINANCIAL STATEMENTS
Page
|
|||||||||||
Report
of Independent Registered Public Accounting
Firm
|
F-2
|
||||||||||
Consolidated
Balance Sheets for the years ended December 31, 2009 and
2008
|
F-3
|
||||||||||
Consolidated
Statements of Operations for the years ended December 31, 2009 and
2008
|
F-5
|
||||||||||
Consolidated
Statements of Stockholders' Equity (Deficit) for the years
ended
|
|||||||||||
December
31, 2009 and
2008
|
F-6
|
||||||||||
Consolidated
Statements of Cash Flows for the years ended December 31, 2009 and
2008
|
F-7
|
||||||||||
Notes
to Consolidated Financial
Statements
|
F-8
|
F-1
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and
Stockholders
of Z Trim Holdings, Inc.
We have
audited the accompanying consolidated balance sheets of Z Trim Holdings, Inc. as
of December 31, 2009 and 2008, and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for the year then
ended. These consolidated financial statements are the responsibility of the
company's management. Our responsibility is to express an opinion on these
consolidated 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, 2009 and 2008, 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 consolidated financial statements have been prepared assuming that
the company will continue as a going concern. As discussed in Note 2
to the consolidated financial statements, the company has suffered recurring
losses from operations and requires additional financing to continue in
operation. These conditions raise substantial doubt about its ability
to continue as a going concern. Management’s plans in regard to these
matters are also described in Note 2. The consolidated financial
statements do not include any adjustments that might result from the outcome of
the uncertainty.
/s/
M&K CPAs,PLLC
Houston,
Texas
April
9, 2010
|
F-2
Z
TRIM HOLDINGS, INC.
|
||||
CONSOLIDATED
BALANCE SHEETS
|
||||
DECEMBER 31, 2009 and
2008
|
||||
ASSETS
|
||||
12/31/2009
|
12/31/2008
|
|||
Current
Assets
|
||||
Cash
and cash equivalents
|
$ 324,784
|
$ 592,696
|
||
Accounts
receivable (net of allowance of $0 and $10,067
|
||||
as
of December 31, 2009 and December 31,
2008)
|
96,024
|
206,231
|
||
Inventory
|
118,979
|
182,971
|
||
Prepaid
expenses and other assets
|
97,802
|
86,445
|
||
Total
current assets
|
637,589
|
1,068,343
|
||
Property
and equipment, net
|
3,545,344
|
4,061,436
|
||
Long
Term Assets
|
||||
Deposit
on Fixed Asset
|
-
|
240,000
|
||
Other
Assets
|
||||
Prepaid
Loan Cost - Long Term, Net
|
368,171
|
880,650
|
||
Deposits
|
15,003
|
14,453
|
||
Total
other assets
|
383,174
|
895,103
|
||
TOTAL
ASSETS
|
$ 4,566,107
|
$ 6,264,882
|
||
The accompany notes are an integral part of the
consolidated financial statements.
F-3
Z
TRIM HOLDINGS, INC.
|
||||
CONSOLIDATED
BALANCE SHEETS
|
||||
DECEMBER 31, 2009 and
2008
|
||||
LIABILITIES
AND STOCKHOLDERS' EQUITY (DEFICIT)
|
||||
12/31/2009
|
12/31/2008
|
|||
Current
Liabilities
|
||||
Accounts
payable
|
$ 373,841
|
$ 544,325
|
||
Accrued
expenses and other
|
700,830
|
335,718
|
||
Accrued
Liquidated Damages
|
80,100
|
-
|
||
Derivative
Liabilities
|
10,285,578
|
-
|
||
Convertible
Notes Payable, Net
|
4,008,950
|
2,559,736
|
||
Total
Current Liabilities
|
15,449,299
|
3,439,779
|
||
Total
Liabilities
|
15,449,299
|
3,439,779
|
||
Stockholders'
Equity (Deficit)
|
||||
Common
stock, $0.00005 par value; authorized 200,000,000
|
||||
shares;
issued and outstanding 2,806,878 and
|
||||
2,597,879
shares, December 31, 2009 and December 31, 2008
|
140
|
130
|
||
respectively
|
||||
Additional
paid-in capital
|
75,119,074
|
74,487,848
|
||
Accumulated
deficit
|
(86,002,406)
|
(71,662,875)
|
||
Total
Stockholders' Equity (Deficit)
|
(10,883,192)
|
2,825,103
|
||
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
|
$ 4,566,107
|
$ 6,264,882
|
||
The accompany notes are an integral part of the
consolidated financial statements.
F-4
Z
TRIM HOLDINGS, INC.
|
|||
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|||
FOR
THE YEAR ENDED DECEMBER 31
|
2009
|
2008
|
|
REVENUES:
|
|||
Products
|
$ 559,910
|
$ 720,899
|
|
Services
|
-
|
-
|
|
Total
revenues
|
559,910
|
720,899
|
|
COST
OF REVENUES:
|
|||
Products
|
1,679,148
|
2,429,620
|
|
Total
cost of revenues
|
1,679,148
|
2,429,620
|
|
GROSS
MARGIN
|
(1,119,238)
|
(1,708,721)
|
|
OPERATING
EXPENSES:
|
|||
Selling,
general and administrative
|
4,729,683
|
4,245,405
|
|
Impairment
of intangible assets
|
-
|
136,668
|
|
Amortization
of intangible assets
|
-
|
3,333
|
|
Loss(Gain)
on asset disposals, net
|
126,651
|
(74,987)
|
|
Total
operating expenses
|
4,856,334
|
4,310,419
|
|
OPERATING
LOSS
|
(5,975,572)
|
(6,019,140)
|
|
OTHER
INCOME (EXPENSES):
|
|||
Rental
and other income
|
3,826
|
24,451
|
|
Interest
income
|
901
|
20,526
|
|
Interest
expense
|
(5,947)
|
(520)
|
|
Interest
expense - Note Payable
|
(2,426,032)
|
(670,042)
|
|
Liquidated
Damages
|
(80,100)
|
-
|
|
Derivative (loss)
gain
|
(3,623,519)
|
-
|
|
Settlement
(loss) gain
|
(103,137)
|
(772,202)
|
|
Total
other income (expenses)
|
(6,234,008)
|
(1,397,787)
|
|
NET
LOSS
|
$ (12,209,580)
|
$ (7,416,927)
|
|
Deemed
Dividend
|
-
|
(74,863)
|
|
NET
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS
|
$ (12,209,580)
|
$ (7,491,790)
|
|
NET
LOSS PER SHARE - BASIC AND DILUTED
|
$ (4.48)
|
$ (2.95)
|
|
Weighted
Average Number of Shares Basic and Diluted
|
2,727,793
|
2,540,032
|
The accompany notes are an integral part of the
consolidated financial statements.
F-5
Z
TRIM HOLDINGS, INC. AND SUBSIDIARIES
|
||||||
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
|
||||||
Shares
of
|
Additional
|
|||||
Common
|
Common
|
Paid-In
|
Unamortized
|
Accumulated
|
||
Stock
|
Stock
|
Capital
|
Expenses
|
Deficit
|
Total
|
|
Balance
at December 31, 2007 (Restated)
|
2,401,879
|
$ 3,600
|
$
69,603,639
|
$ -
|
$ (64,171,085)
|
$ 5,436,154
|
Common
Stock issued for settlement loss
|
208,167
|
312
|
1,353,388
|
1,353,700
|
||
Stock
issued for directors fees
|
33,333
|
50
|
229,950
|
230,000
|
||
Cancellation
of retired shares in process
|
10
|
149,990
|
150,000
|
|||
Rescinded
Shares
|
(45,500)
|
(68)
|
(74,432)
|
(74,500)
|
||
Warrants
issued for settlement loss
|
524,665
|
524,665
|
||||
Warrants
issued for placement fees
|
309,547
|
309,547
|
||||
Discount
on convertible debt
|
2,247,784
|
2,247,784
|
||||
Deemed
Dividend
|
74,863
|
(74,863)
|
-
|
|||
Stock
Based Compensation
|
40,613
|
40,613
|
||||
Options
issued for compensation
|
24,067
|
24,067
|
||||
Net
loss
|
(7,416,927)
|
(7,416,927)
|
||||
Balance
at December 31, 2008
|
2,597,879
|
3,904
|
$
74,484,074
|
$ -
|
$ (71,662,875)
|
$ 2,825,103
|
Common
Stock reduced due to split
|
(3,774)
|
3,774
|
-
|
|||
Stock
issued for accounts payable
|
60,000
|
2
|
104,399
|
104,401
|
||
Stock
issued for directors fees
|
90,000
|
5
|
46,196
|
46,201
|
||
Exercised
warrants or options
|
4,365
|
0
|
4,365
|
4,365
|
||
Exercised
cashless warrants
|
51,927
|
3
|
(3)
|
-
|
||
Stock
Based Compensation
|
565,848
|
565,848
|
||||
Initial
valuation of the derivative liabilities
|
(89,579)
|
(2,129,951)
|
(2,219,530)
|
|||
Rounding
due to reverse stock split
|
2,707
|
0
|
-
|
|||
Net
loss
|
(12,209,580)
|
(12,209,580)
|
||||
Balance
at December 31, 2009
|
2,806,878
|
140
|
75,119,074
|
-
|
(86,002,406)
|
(10,883,192)
|
The accompany notes are an integral part of the
consolidated financial statements.
F-6
Z
TRIM HOLDINGS, INC.
|
|||
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|||
FOR
THE YEARS ENDED DECEMBER 31
|
2009
|
2008
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|||
Net
loss
|
(12,209,580)
|
(7,416,927)
|
|
Adjustments
to reconcile loss from continuing operations to
|
|||
net
cash used in operating activities:
|
|||
Depreciation
|
922,321
|
1,228,335
|
|
Loss
on asset disposal
|
128,416
|
-
|
|
Change
in Derivative Liability, net of bifurcation
|
3,623,519
|
-
|
|
Stock
based compensation
|
565,848
|
40,613
|
|
Shares
issued for director fees
|
46,201
|
230,000
|
|
Shares
issued for debt
|
44,401
|
-
|
|
Warrants
issued for services
|
632,982
|
-
|
|
Warrants
issued for accounts payable
|
62,547
|
-
|
|
Amortization
on discounts on debt
|
1,449,214
|
-
|
|
Loan
Cost Amortization
|
512,479
|
-
|
|
Impairment
of intangible assets
|
-
|
136,668
|
|
Stock
and warrant settlements
|
-
|
582,219
|
|
BCF
Amortization
|
350,520
|
||
Changes
in operating assets and liabilities
|
|||
Accounts
receivable
|
110,207
|
(198,708)
|
|
Inventory
|
63,991
|
409,695
|
|
Prepaid
expenses and other assets
|
(3,907)
|
66,637
|
|
Increase/(Decrease)
in:
|
|||
Accounts
payable and accrued expenses
|
801,629
|
(548,082)
|
|
Accrued
Liquidated Damages
|
80,100
|
-
|
|
CASH
USED FOR OPERATING ACTIVITIES
|
(3,169,632)
|
(5,119,030)
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|||
Purchase
of Fixed Assets
|
(389,145)
|
(340,820)
|
|
Proceeds
from asset disposals
|
94,500
|
-
|
|
CASH
USED FOR INVESTING ACTIVITIES
|
(294,645)
|
(340,820)
|
|
CASH
FLOWS FROM FINANCING ACTIVITES
|
|||
Loan
Costs
|
-
|
(766,535)
|
|
Rescinded
Shares
|
-
|
(74,499)
|
|
Borrowing
on debt
|
3,192,000
|
4,457,000
|
|
Exercise
of options and warrants for cash
|
4,365
|
-
|
|
CASH
PROVIDED BY FINANCING ACTIVITIES
|
3,196,365
|
3,615,966
|
|
NET
(DECREASE)INCREASE IN CASH
|
(267,912)
|
(1,843,884)
|
|
CASH
AT BEGINNING OF YEAR
|
592,696
|
2,436,580
|
|
CASH
AT THE YEARS ENDED DECEMBER 31
|
324,784
|
592,696
|
|
Supplemental
Disclosures of Cash Flow Information:
|
|||
Issuance
of common stock for issuance of stock
|
|||
Deferred
Loan Costs
|
309,547
|
||
Discount
on Convertible Debentures
|
3,747,000
|
2,247,784
|
|
Warrants
issued for settlement loss - Zaghi
|
368,822
|
||
Common
Stock issued for settlement - Zaghi
|
839,850
|
||
Warrants
issued for settlement loss-Basic Investors
|
87,324
|
||
Common
Stock issued for stock payable
|
149,990
|
||
Deemed
Dividend
|
74,863
|
||
Options
issued for compensation
|
24,067
|
||
Transfer
from Deposit on Fixed Assets to Construction in Progress
|
240,000
|
||
Cummulative
Effect - Adoption of EITF07-5
|
2,219,530
|
||
Convertible
Debt issued for Settlement of AP
|
555,000
|
The accompany notes are an
integral part of the consolidated financial statements.
F-7
Z Trim
Holdings, Inc.
Notes To
Consolidated Financial Statements
December
31, 2009
NOTE 1 – NATURE OF
BUSINESS
Nature of
Business
Z Trim
Holdings, Inc. (the “Company”) manufactures a line of functional food
ingredients that can be used to reduce costs, manage moisture, replace fats and
deliver fiber to a wide variety of foods. The Company’s products can
be used by food manufacturers and processors, restaurants, schools, and the
general public worldwide. The Company continues to explore all available options
for its other Z Trim technologies and related assets.
The
Company owns an exclusive license to Z Trim, a natural, agriculture-based
functional food ingredient.
NOTE 2 – GOING
CONCERN
The
Company's consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the settlement
of liabilities and commitments in the normal course of business. In
the near term, the Company expects operating costs to continue to exceed funds
generated from operations. As a result, the Company expects to
continue to incur operating losses and may not have enough capital to grow its
business in the future or continue as a going concern. The Company
can give no assurance that it will achieve profitability or be capable of
sustaining profitable operations. As a result, operations in the near
future are expected to continue to use working capital.
To
successfully grow the business, the Company must decrease its cash outflows,
improve its cash position and its revenue base, and succeed in its ability to
raise additional capital through a combination of primarily public or private
equity offerings or strategic alliances.
The
Company is currently in the process of trying to obtain additional financing for
its current operations.
NOTE 3 – SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
Use of
Estimates
The
preparation of the accompanying consolidated financial statements in conformity
with accounting principles generally accepted in the United States (U.S. GAAP)
requires management to make certain estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Revenue
Recognition
The
Company generally recognizes product revenue when persuasive evidence of an
arrangement exists, delivery has occurred, the fee is fixed or determinable, and
collectability is probable. In instances where the final acceptance of the
product is specified by the customer, revenue is deferred until all acceptance
criteria have been met. No provisions were established for estimated product
returns and allowances based on the Company’s historical
experience.
Allowance for Doubtful
Accounts
Management
of the Company makes judgments as to its ability to collect outstanding
receivables and provide allowances for the portion of receivables when
collection becomes doubtful. Provisions are made based upon a specific review of
all significant outstanding invoices. For those invoices not specifically
reviewed, provisions are provided at differing rates, based upon the age of the
receivable. In determining these percentages, management analyzes its historical
collection experience and current economic trends. If the historical data the
Company uses to calculate the allowance for doubtful accounts does not reflect
the future ability to collect outstanding receivables, additional provisions for
doubtful accounts may be needed and the future results of operations could be
materially affected. As of December 31, 2009, the allowance for doubtful
accounts was $0. As of December 31, 2008 the allowance for doubtful
accounts was $10,067.
Cash and cash
equivalents
For
purposes of the statement of cash flows, the Company considers all highly liquid
investments with a maturity of three months or less to be cash
equivalents. There were no cash equivalents as of December 31, 2009
and 2008.
Inventory
Inventory
is stated at the lower of cost or market, using the first-in, first-out
method.
Property and
Equipment
Property
and equipment are stated at cost. Maintenance and repair costs are
expensed as incurred. Depreciation is calculated on the accelerated
and straight-line methods over the estimated useful lives of the assets.
Estimated useful lives of five to ten years are used for machinery and
equipment, office equipment and furniture, and automobile. Estimated useful
lives of up to five years are used for computer equipment and related software.
Depreciation and amortization of leasehold improvements are computed using the
term of the lease.
F-8
Z Trim
Holdings, Inc.
Notes to
Consolidated Financial Statements
December 31,
2009
NOTE 3 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES Cont.
Deferred Loan
Costs
Loan
acquisition costs are amortized over the life of the applicable indebtedness
using the effective interest method.
Intangible
Assets
Intangible
assets are carried at the purchased cost less accumulated amortization.
Amortization is computed over the estimated useful lives of the respective
assets, generally from fifteen to twenty years.
Impairment of Long-Lived
Assets
Long-lived
assets and certain identifiable intangible assets to be held and used are
reviewed for impairment whenever events or changes in circumstance indicate that
the carrying amount of such assets may not be recoverable. Determination of
recoverability is based on an estimate of undiscounted future cash flows
resulting from the use of the asset and its eventual disposition. Measurement of
an impairment loss for long-lived assets and certain identifiable intangible
assets that management expects to hold and use is based on the fair value of the
asset. Long-lived assets and certain identifiable intangible assets to be
disposed of are reported at the lower of carrying amount or fair value less
costs to sell.
Income
Taxes
The
Company and its subsidiaries are included in the consolidated federal income tax
return filed by the Parent. The amount of current and deferred taxes
payable or refundable is recognized as of the date of the financial statements,
utilizing currently enacted tax laws and rates. Deferred tax expenses
or benefits are recognized in the financial statements for the changes in
deferred tax liabilities or assets between years.
Principle of Consolidation
and Presentation
The
accompanying consolidated financial statements include the accounts of Z Trim
Holdings, Inc. and its subsidiaries after elimination of significantly all
intercompany accounts and transactions.
Accounting for Derivative
Instruments
All
derivatives have been recorded on the balance sheet at fair value based on the
lattice model calculation. These derivatives, including embedded derivatives in
the Company’s warrants and its Convertible 8% Senior Secured Notes issued in
2008 and 2009, which have reset provisions to the exercise price and conversion
price if the Company issues equity or other derivatives at a price less than the
exercise price set forth in such warrants and notes, are separately valued and
accounted for on the Company’s balance sheet. Fair values for exchange traded
securities and derivatives are based on quoted market prices. Where market
prices are not readily available, fair values are determined using market based
pricing models incorporating readily observable market data and requiring
judgment and estimates.
Lattice Valuation
Model
The
Company valued the conversion features and warrants in their convertible notes
using a lattice valuation model, with the assistance of a valuation consultant.
The lattice model values these instruments based on a probability weighted
discounted cash flow model. The Company uses the model to develop a set of
potential scenarios. Probabilities of each scenario occurring during the
remaining term of the debentures are determined based on management's
projections. These probabilities are used to create a cash flow projection over
the term of the instruments and determine the probability that the projected
cash flow will be achieved. A discounted weighted average cash flow for each
scenario is then calculated and compared to the discounted cash flow of the
instruments without the compound embedded derivative in order to determine a
value for the compound embedded derivative.
Fair Value of Financial
Instruments
The
Company’s financial instruments consist of cash and cash equivalents, accounts
receivable, inventory, accounts payable, accrued liabilities and long-term debt.
The estimated fair value of cash, accounts receivable, accounts payable and
accrued liabilities approximate their carrying amounts due to the short-term
nature of these instruments. The carrying value of long-term debt also
approximates fair value since their terms are similar to those in the lending
market for comparable loans with comparable risks. None of these instruments are
held for trading purposes.
The
Company utilizes various types of financing to fund its business needs,
including convertible debt with warrants attached. The Company reviews its
warrants and conversion features of securities issued as to whether they are
freestanding or contain an embedded derivative and, if so, whether they are
classified as a liability at each reporting period until the amount is settled
and reclassified into equity with changes in fair value recognized in current
earnings. At December 31, 2009, the Company had convertible debt and warrants to
purchase common stock, the fair values of which are classified as a liability.
Some of these units have embedded conversion features that are treated as a
discount on the notes. Such financial instruments are initially recorded at fair
value and amortized to interest expense over the life of the debt using the
effective interest method.
Inputs
used in the valuation to derive fair value are classified based on a fair value
hierarchy which distinguishes between assumptions based on market data
(observable inputs) and an entity’s own assumptions (unobservable inputs). The
hierarchy consists of three levels:
·
|
Level
one — Quoted market prices in active markets for identical assets or
liabilities;
|
·
|
Level two — Inputs other than level one inputs that are either directly or
indirectly observable; and
|
·
|
Level
three — Unobservable inputs developed using estimates and assumptions,
which are developed by the reporting entity and reflect those assumptions
that a market participant would
use.
|
Determining
which category an asset or liability falls within the hierarchy requires
significant judgment. The Company evaluates its hierarchy disclosures each
quarter. The Company’s only asset or liability measured at fair value on a
recurring basis is its derivative liability associated with the units consisting
of convertible debt and warrants to purchase common stock (discussed above). The
Company classifies the fair value of these warrants under level three. The fair
value of the derivative liability at December 31, 2009 was $10,285,578, and the
loss due to valuation for the twelve months ended December 31, 2009 was
$3,623,519.
Advertising
Costs
The
Company expenses all advertising costs as incurred. The amount for
the year ended December 31, 2009 and 2008 was $13,953 and $55,981
respectively.
Income (Loss) Per Common
Share
Basic net
income (loss) per share includes no dilution and is computed by dividing net
income (loss) available to common stockholders by the weighted average number of
common stock outstanding for the period. Diluted earnings per share is computed
by dividing net income by the weighted average number of shares outstanding and,
when diluted, potential shares from options and warrants to purchase common
stock using the treasury stock method. Diluted net loss per common share does
not differ from basic net loss per common share since potential shares of common
stock are anti-dilutive for all periods presented.
F-9
Z Trim
Holdings, Inc.
Notes to
Consolidated Financial Statements
December 31,
2009
NOTE 3 – SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES Cont.
Cashless Exercise of
Warrants
The
Company has issued warrants to purchase common stock where the holder is
entitled to exercise the warrant via a cashless exercise. The Company accounts
for the issuance of common stock on the cashless exercise of warrants on a net
basis.
Stock Based
Compensation
The Company estimates the fair value of
share-based payment awards made to employees and directors, including stock
options, restricted stock and employee stock purchases related to employee stock
purchase plans, on the date of grant using an option-pricing model. The
value of the portion of the award that is ultimately expected to vest is
recognized as an expense ratably over the requisite service
periods. We estimate the fair value of each share-based 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.
The Company recognized
pre-tax compensation expense related to stock options of $565,848 and $40,613for
the year ended December 31, 2009 and 2008, respectively.
Reverse
Split
Effective
February 6, 2009, we had a 30 to 1 reverse stock split. All
information in this Form 10-K has been retrospectively adjusted to reflect the
reverse stock split as it took place as of the earliest period
presented.
New Accounting
Pronouncements
In
October 2009, the Financial Accounting Standards Board (“FASB”) issued new
revenue recognition standards for arrangements with multiple deliverables, where
certain of those deliverables are non-software related. The new standards permit
entities to initially use management’s best estimate of selling price to value
individual deliverables when those deliverables do not have Vendor Specific
Objective Evidence (“VSOE”) of fair value or when third-party evidence is not
available. Additionally, these new standards modify the manner in which the
transaction consideration is allocated across the separately identified
deliverables by no longer permitting the residual method of allocating
arrangement consideration. These new standards are effective for annual periods
ending after June 15, 2010 and early adoption is permitted. The Company is
currently evaluating the impact of adopting this standard on the Company’s
consolidated financial position, results of operations and cash
flows.
In June
2009, the FASB issued guidance establishing the Codification as the source of
authoritative U.S. Generally Accepted Accounting Principles (“U. S. GAAP”)
recognized by the FASB to be applied by non-governmental entities. Rules and
interpretive releases of the Securities and Exchange Commission (“SEC”) under
authority of federal securities laws are also sources of authoritative U.S. GAAP
for SEC registrants. The Codification supersedes all existing non-SEC accounting
and reporting standards. All other non-grandfathered non-SEC accounting
literature not included in the Codification will become non-authoritative. The
FASB will no longer issue new standards in the form of Statements, FASB Staff
Positions, or Emerging Issues Task Force Abstracts. Instead, the FASB will issue
Accounting Standards Updates, which will serve only to update the Codification,
provide background information about the guidance and provide the bases for
conclusions on changes in the Codification. All content in the Codification
carries the same level of authority, and the U.S. GAAP hierarchy was modified to
include only two levels of U.S. GAAP: authoritative and non-authoritative. The
Codification is effective for the Company’s interim and annual periods beginning
with the Company’s year ending December 31, 2009. Adoption of the Codification
affected disclosures in the Consolidated Financial Statements by eliminating
references to previously issued accounting literature, such as SFASs, EITFs and
FSPs.
In
June 2009, the FASB issued amended standards for determining whether to
consolidate a variable interest entity. These new standards amend the
evaluation criteria to identify the primary beneficiary of a variable interest
entity and require ongoing reassessment of whether an enterprise is the primary
beneficiary of the variable interest entity. The provisions of the new standards
are effective for annual reporting periods beginning after November 15, 2009 and
interim periods within those fiscal years. The adoption of the new standards
will not have an impact on the Company’s consolidated financial position,
results of operations and cash flows.
In May
2009, the FASB issued guidance establishing general standards for accounting for
and disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued and shall be
applied to subsequent events not addressed in other applicable generally
accepted accounting principles. This guidance, among other things, sets forth
the period after the balance sheet date during which management should evaluate
events or transactions that may occur for potential recognition or disclosure in
the financial statements, the circumstances under which an entity should
recognize events or transactions occurring after the balance sheet date in its
financial statements and the disclosures an entity should make about events or
transactions that occurred after the balance sheet date. The adoption of this
guidance had no impact on the Company’s consolidated financial position, results
of operations and cash flows.
The
Emerging Issue Task Force released a pronouncement related to determining
whether an instrument (or imbedded Feature) is indexed to an entity’s own
stock. This became effective for the Company on March 31,
2009. The Company’s warrants and its Convertible 8% Senior Secured
Notes issued in 2008 have reset provisions to the exercise price and conversion
price if the Company issues equity or other derivatives at a price less than the
exercise price set forth in such warrants and notes. The adoption of
the pronouncement on January 1, 2009, the company recorded a cumulative effect
of a change in accounting principle resulting in a reclassification of the
Company’s outstanding warrants from stockholders’ equity to liabilities, which
required the warrants to be fair valued at each reporting period, with the
changes in fair value recognized in the Company’s consolidated statement of
operations. At December 31, 2009, the Company recorded a derivative
liability of $10,285,578 and a change in the fair value – derivative liability
for the year ended December 31, 2009 of ($3,623,519).
NOTE 4 –
INVENTORY
At
December 31, inventory consists of the following:
12/31/2009
|
12/31/2008
|
||
Raw
materials
|
$ 23,773
|
$ 35,471
|
|
Packaging
|
1,010
|
1,114
|
|
Work-in-process
|
7,437
|
1,879
|
|
Finished
goods
|
80,299
|
133,649
|
|
Other
Inventory
|
6,461
|
10,858
|
|
Total
inventory
|
$ 118,979
|
$ 182,971
|
|
F-10
Z Trim
Holdings, Inc.
Notes to
Consolidated Financial Statements
December 31,
2009
NOTE 5 – PROPERTY AND
EQUIPMENT, NET
At
December 31, property and equipment, net consists of the following:
12/31/2009
|
12/31/2008
|
|||
Production,
engineering and other equipment
|
$5,651,279
|
$5,301,635
|
||
Leasehold
improvements
|
$2,822,834
|
$2,801,053
|
||
Office
equipment and furniture
|
$577,226
|
$598,860
|
||
Computer
equipment and related software
|
$140,246
|
$140,245
|
||
Construction
in process - Equipment
|
$72,177
|
$53,361
|
||
Construction
in process - Leasehold Impr
|
$0
|
$18,855
|
||
$9,263,762
|
$8,914,009
|
|||
Accumulated
depreciation
|
($5,718,418)
|
($4,852,573)
|
||
Property
and equipment, net
|
$3,545,344
|
$4,061,436
|
Depreciation
expense was $922,321 and $1,228,335 for the years ended December 31, 2009 and
2008, respectively. During the year ended December 31, 2009, the
Company sold three fixed assets with a combined net book value of $221,151 in
exchange for cash of 94,500 and recorded a loss on sale of $126,651. During the
year ended December 31, 2008, the Company did not dispose of any fixed
assets.
NOTE 6 – INTANGIBLE
ASSETS
During
2009, no significant intangible assets were acquired and in 2008 certain
software license rights were impaired as management deemed no future economic
benefit and wrote off $136,668.
License
Rights to
|
||||
Website
|
2009
|
2008
|
||
Gross
Carrying Amount
|
$ -
|
$ 200,000
|
||
Accumulated
Amortization
|
$ -
|
$ (200,000)
|
||
Net
|
$ -
|
$ -
|
Amortization
of intangibles was $0 and $3,333 for the years ended December 31, 2009 and 2008,
respectively.
A
reduction of intangible assets in the amount of $136,668 was taken in the first
quarter of 2008. For the year ended December 31, 2008, the Company sold an
intangible asset, which was previously impaired during fiscal year ended
December 31, 2006, for cash in the amount of $74,987 and recorded a gain on sale
of $74,987.
NOTE 7 – ACCRUED
EXPENSES
At
December 31, accrued expenses consist of the following:
12/31/2009
|
12/31/2008
|
||
Accrued
legal
|
$ -
|
$ -
|
|
Accrued
payroll and taxes
|
4,787
|
31,795
|
|
Accrued
settlements
|
-
|
100,000
|
|
Accrued
Interest
|
575,357
|
124,090
|
|
Accrued
expenses and other
|
120,686
|
79,833
|
|
Total
accrued expenses & other
|
$ 700,830
|
$ 335,718
|
|
F-11
Z Trim
Holdings, Inc.
Notes to
Consolidated Financial Statements
December 31,
2009
F-16
NOTE 8–CONVERTIBLE NOTES
PAYABLE
2009 Convertible
Notes
On April
15, 2009, we entered into private placement subscription agreements pursuant to
which we sold 24.2 units consisting of convertible notes and warrants, for an
aggregate offering price of $242,000. Each of the units (individually, a "Unit"
and collectively, the "Units") consists of a $10,000 24-month senior secured
promissory note (each a "Note" and collectively the "Notes") convertible at the
rate of $1.00 per share into 10,000 shares of our common stock, $.00005 par
value (the "Common Stock"), bearing interest at the rate of 8% per annum, which
interest is accrued annually in Common Stock at the rate of $1.00 per share. The
Notes will be secured by a first lien on all assets of the Company for so long
as the Notes remain outstanding pursuant to the form of Security Agreement filed
as an exhibit to this report. The Notes are convertible into a total of 242,000
shares of Common Stock. The interest is payable upon maturity of the Notes.
Investors of each Unit also received one five-year warrant, one to purchase
15,000 shares of Common Stock per unit with an exercise price of $1.50 per share
("Warrants"). The total warrants issued to the note-holders were
383,000.
As part
of the aggregate, two of the Company's external Directors, Mark Hershhorn and
Brian Israel each agreed to apply $20,000 of unpaid Directors' fees (80% of
which is past due), to the purchase of Units pursuant to the terms of the
offering set forth above. Further, our third external director, Morris
Garfinkle, also invested $50,000 in the offering.
As a
result of the conversion rate being set at $1.00 for these agreements, the
conversion rate for the convertible notes and $4.80 warrants entered into by the
company in June, September and November of 2008 are automatically reset to
$1.00. The impact of this change is that the number of shares that could be
obtained by converting the June, September and November 2008 notes increases
from 928,541 to 4,456,997, and the interest shares (if the holders elect to be
paid in shares instead of cash) on such notes increases from 148,566 to
713,117.
We
determined that all of the securities sold and issued in the private placement
were exempt from registration under the Securities Act of 1933, as amended (the
"Act") pursuant to Section 4(2) of the Act and Rule 506 of Regulation D
promulgated under the Act. We based this determination on the non-public manner
in which we offered the securities and on the representations of the persons
purchasing such securities, which included, in pertinent part, that such persons
were "accredited investors" within the meaning of Rule 501 of Regulation D
promulgated under the Act, and that such persons were acquiring such securities
for investment purposes for their own respective accounts and not as nominees or
agents, and not with a view to resale or distribution, and that each such person
understood such securities may not be sold or otherwise disposed of without
registration under the Act or an applicable exemption therefrom.
On April
27, 2009, the Company entered into an Investment Banking Agreement with Legend
Securities, Inc. ("Legend"), pursuant to which Legend agreed to provide business
advisory services to us for a period of up to twelve months. In exchange for
Legend's services, we agreed to issue Legend a warrant to purchase 350,000
shares of our common stock at an exercise price per share equal to $1.10 per
share. The warrant will vest as to 87,500 of the warrant shares upon issuance,
and then at a rate of 87,500 shares per quarter starting on the quarterly
anniversary of issuance, and will be exercisable for a period of five years.
Under the Investment Banking Agreement, we also agreed to give Legend unlimited
"piggy back" registration rights with respect to the shares of our common stock
underlying the warrant in any registration statement filed by us in connection
with an underwritten offering of our common stock. The Company recorded the fair
value of the above warrants as warrant expense in the amount of $243,238 using
the lattice valuation model. The amount is included in selling,
general, and administrative expenses of $4,729,683 at December 31, 2009. The
Company also included the warrants in the derivative liabilities valuation as
they contained a reset provision to the exercise and conversion
prices.
We
determined that all of the securities issued pursuant to the agreement were
exempt from registration under the Securities Act of 1933, as amended (the
"Act") pursuant to Section 4(2) of the Act and Rule 506 of Regulation D
promulgated under the Act. We based this determination on the non-public manner
in which we offered the securities and on the representations of the persons
purchasing such securities, which included, in pertinent part, that such persons
were "accredited investors" within the meaning of Rule 501 of Regulation D
promulgated under the Act, and that such persons were acquiring such securities
for investment purposes for their own respective accounts and not as nominees or
agents, and not with a view to resale or distribution, and that each such person
understood such securities may not be sold or otherwise disposed of without
registration under the Act or an applicable exemption therefrom.
Between
May 1 and May 14, 2009, we entered into private placement subscription
agreements pursuant to which we sold 38.5 units consisting of convertible notes
and warrants, for an aggregate offering price of $385,000. Each of the units
(individually, a "Unit" and collectively, the "Units") consists of a $10,000
24-month senior secured promissory note (each a "Note" and collectively the
"Notes") convertible at the rate of $1.00 per share into 10,000 shares of our
common stock, $.00005 par value (the "Common Stock"), bearing interest at the
rate of 8% per annum, which interest is accrued annually in Common Stock at the
rate of $1.00 per share. The Notes will be secured by a first lien on all assets
of the Company for so long as the Notes remain outstanding pursuant to the form
of Security Agreement filed as an exhibit to this report. The Notes are
convertible into a total of 385,000 shares of Common Stock. The interest is
payable upon maturity of the Notes. Investors of each Unit also received one
five-year warrant, one to purchase 15,000 shares of Common Stock per unit with
an exercise price of $1.50 per share ("Warrants"). The total warrants issued to
the note-holders were 577,500. The terms of the offering are identical to those
announced on the Company's Form 8-K, dated April 21, 2009. The description of
the terms of sale of the securities described in this report is qualified in its
entirety by reference to the full text of the underlying documents which have
been filed as exhibits to the April 21, 2009 Form 8-K.
On May 1,
2009, we entered into private placement subscription agreements pursuant to
which we sold 6 units consisting of shares of common stock and warrants, for an
aggregate offering price of $60,000. Each of the units (individually, a "Unit"
and collectively, the "Units") consists of 10,000 shares of unregistered common
stock plus one five-year warrant, one to purchase 15,000 shares of Common Stock
per unit with an exercise price of $1.50 per share ("Warrants"). A total of
60,000 shares of common stock and 90,000 warrants are to be issued pursuant to
the terms of this offering. All such Units were sold pursuant to an agreement
with an equipment supplier whereby the Company agreed to apply $60,000 of unpaid
and past due amounts towards the purchase and installation of two boilers, to
the purchase of the 6 Units. The equipment supplier agreed to accept such Units
as payment for the $60,000 of unpaid and past due amounts.
On May
13, 2009, the Company entered into a Material Definitive Agreement with its
patent litigation counsel, whereby the Company agreed to apply $350,000 of
unpaid and past due legal fees owed to such counsel, to the purchase of 35 Units
pursuant to the terms of the offering set forth above. The patent litigation
counsel agreed to accept such Units as payment for the $350,000 of unpaid and
past due legal fees. These Units are included in the totals set forth in the
first paragraph above.
We
determined that all of the securities sold and issued in the private placement
were exempt from registration under the Securities Act of 1933, as amended (the
"Act") pursuant to Section 4(2) of the Act and Rule 506 of Regulation D
promulgated under the Act. We based this determination on the non-public manner
in which we offered the securities and on the representations of the persons
purchasing such securities, which included, in pertinent part, that such persons
were "accredited investors" within the meaning of Rule 501 of Regulation D
promulgated under the Act, and that such persons were acquiring such securities
for investment purposes for their own respective accounts and not as nominees or
agents, and not with a view to resale or distribution, and that each such person
understood such securities may not be sold or otherwise disposed of without
registration under the Act or an applicable exemption therefrom.
F-12
Z Trim
Holdings, Inc.
Notes to
Consolidated Financial Statements
December 31,
2009
NOTE 8–CONVERTIBLE NOTES
PAYABLE Cont.
Between
May 18 and July 15, 2009, we entered into private placement subscription
agreements pursuant to which we sold 49.75 units consisting of convertible notes
and warrants, for an aggregate offering price of $497,500. Each of the units
(individually, a "Unit" and collectively, the "Units") consists of a $10,000
24-month senior secured promissory note (each a "Note" and collectively the
"Notes") convertible at the rate of $1.00 per share into 10,000 shares of our
common stock, $.00005 par value (the "Common Stock"), bearing interest at the
rate of 8% per annum, which interest is accrued annually in Common Stock at the
rate of $1.00 per share. The Notes will be secured by a first lien on all assets
of the Company for so long as the Notes remain outstanding pursuant to the form
of Security Agreement filed as an exhibit to to the April 21, 2009 Form
8-K. The Notes are convertible into a total of 497,500 shares of
Common Stock. The interest is payable upon maturity of the Notes. Investors of
each Unit also received one five-year warrant, one to purchase 15,000 shares of
Common Stock per unit with an exercise price of $1.50 per share ("Warrants").
The total warrants issued to the note-holders were 746,250. The terms of the
offering are identical to those announced on the Company's Form 8-K, dated April
21, 2009. The description of the terms of sale of the securities described in
this report is qualified in its entirety by reference to the full text of the
underlying documents which have been filed as exhibits to the April 21, 2009
Form 8-K.
On June
29, 2009, the Company entered into a Material Definitive Agreement with its
landlord, whereby the Company agreed to apply $130,000 of unpaid and past due
rent owed to such landlord, to the purchase of 13 Units pursuant to the terms of
the offering set forth above. The landlord agreed to accept such Units as
payment for the $130,000 of unpaid and past due rent. These Units are included
in the totals set forth in the paragraph above.
We
determined that all of the securities sold and issued in the private placement
were exempt from registration under the Securities Act of 1933, as amended (the
"Act") pursuant to Section 4(2) of the Act and Rule 506 of Regulation D
promulgated under the Act. We based this determination on the non-public manner
in which we offered the securities and on the representations of the persons
purchasing such securities, which included, in pertinent part, that such persons
were "accredited investors" within the meaning of Rule 501 of Regulation D
promulgated under the Act, and that such persons were acquiring such securities
for investment purposes for their own respective accounts and not as nominees or
agents, and not with a view to resale or distribution, and that each such person
understood such securities may not be sold or otherwise disposed of without
registration under the Act or an applicable exemption therefrom.
On
October 15, 2009, we entered into a private placement subscription agreement
with Brightline Ventures I, LLC, a Delaware Limited Liability Company(the
"purchaser" or "Brightline") pursuant to which we sold 185.25 units consisting
of convertible notes and warrants, for an aggregate offering price of
$1,852,500. Furthermore, since July 14, 2009, we had sold an additional 75.3
units for an aggregate offering price of $753,000, including a total of $660,000
sold to affiliates of Brightline. Each of the units (individually, a "Unit" and
collectively, the "Units") consists of a $10,000 24-month senior secured
promissory note (each a "Note" and collectively the "Notes") convertible at the
rate of $1.00 per share into 10,000 shares of our common stock, $.00005 par
value (the "Common Stock"), bearing interest at the rate of 8% per annum, which
interest is accrued annually in Common Stock at the rate of $1.00 per share. The
Notes will be secured by a first lien on all of our assets for so long as the
Notes remain outstanding pursuant to the form of Security Agreement filed as an
exhibit to this report (the "Security Agreement"). The Notes are convertible
into a total of 2,605,500 shares of Common Stock. The interest is payable
quarterly or upon maturity of the Notes. The Investors also received one
five-year warrant for each Unit purchased, to purchase 15,000 shares of Common
Stock per unit with an exercise price of $1.50 per share ("Warrants"). The total
warrants issued to the purchaser and its affiliates were 3,768,750. The Company
has agreed to pay a finder cash commissions aggregating 8% of the gross proceeds
of the offering sold to an investor introduced by that finder up to a maximum of
250 Units purchased by such investor and an equal amount of five year warrants
at an exercise price of $1.50 per share (for example, if the finder's fee equals
$200,000, then the finder will also receive 200,000 warrants with an exercise
price of $1.50). The Company has reserved the right to negotiate a lower
commission for any Units above the 250 purchased by such investor. The terms and
conditions of the Units are substantially identical to the terms and conditions
and constitute a part of the units previously sold by us in 2009 and reported on
a Form 8-K filed by us on April 21, 2009 (the "2009 Units"). The amount of Units
purchased by Brightline and its affiliates, represents at least a majority of
all of the Units and the 2009 Units taken as a whole, and, consequently, under
the terms of the Notes, the purchaser has the ability, together with us to amend
the Notes and Security Agreements comprising the Units and the 2009 Units. In
consideration of Brightline's (and its affiliates') purchase of Note Units in
the amount of $2,512,500 pursuant to the terms of the Note Memorandum, the
Company granted to Brightline, the right to purchase additional Note Units
and/or Preferred Stock Units, as available, up to an additional aggregate amount
of $2,487,500.
Pursuant
to the terms of the subscription agreement we agreed with the Purchaser to amend
the Units (the "Amended Units") to reflect the terms and conditions of the Units
sold by us in 2008 (the "2008 Units") as described in our Current Reports on
Form 8-K filed on June 24 and September 2, 2008 which include among other things
a full ratchet anti-dilution formulation with respect to the adjustments to the
conversion price of the Notes and the exercise price of the Warrants instead of
the weighted average anti-dilution formula contained in the Units and the
payment of interest on the Notes, at the option of the holder, quarterly or at
maturity rather than just at maturity. As a result of the amendment, all of the
Notes and the 2009 Notes and corresponding Security Agreements will be amended
to read as set forth in Exhibits 4.2 and 4.4 attached hereto. The Warrants sold
to the purchaser have also been amended. We also agreed to offer to amend the
warrants and to offer a registration rights agreement to the noteholders under
the 2009 Units on terms identical to those granted to the purchaser. The Notes,
the Amended and Restated Notes (including the Notes issued as part of the 2009
Units) and Notes issued as part of the 2008 Units rank pari passu with each
other.
We also
entered into registration rights agreements substantially similar to the
registration rights agreement entered into with the purchasers of the 2008 Units
pursuant to which we have agreed to file with the Securities and Exchange
Commission a registration statement covering the resale of the Common Stock
underlying the Amended and Restated Notes and the Amended and Restated
Warrants.
The
descriptions herein are qualified in their entirety by reference to the copies
of the forms of the Subscription Agreement, the Amended and Restated Notes, the
Amended and Restated Warrant, the Amended and Restated Security Agreements and
the Registration Rights Agreement which are attached as exhibits to the Form 8-K
filed with the SEC on October 16, 2009.
We
determined that all of the securities sold and issued in the private placement
were exempt from registration under the Securities Act of 1933, as amended (the
"Act") pursuant to Section 4(2) of the Act and Rule 506 of Regulation D
promulgated under the Act. We based this determination on the non-public manner
in which we offered the securities and on the representations of the persons
purchasing such securities, which included, in pertinent part, that such persons
were "accredited investors" within the meaning of Rule 501 of Regulation D
promulgated under the Act, and that such persons were acquiring such securities
for investment purposes for their own respective accounts and not as nominees or
agents, and not with a view to resale or distribution, and that each such person
understood such securities may not be sold or otherwise disposed of without
registration under the Act or an applicable exemption therefrom.
For the
period ending December 31, 2009, the 2009 Notes have a debt discount
in the amount of $3,747,000. The warrants value and the beneficial
conversion value are discounted against the Notes and are being amortized as
interest expense using the effective interest method over the term of the
Notes. The warrant and beneficial conversion feature exceeded the
face value of the note and the total amortization for the twelve months ending
December 31, 2009 is $479,412 resulting in a remaining discount of
$3,267,588.
2008 Convertible
Notes
On June
18, 2008, the Company issued 8% Convertible Senior Secured Notes in the
aggregate principal amount of $1,400,000 (“Notes”). On September 2,
2008, the Company entered into private placement subscription agreements
pursuant to which we sold 23.7 units consisting of convertible notes and
warrants, for an aggregate offering price of $2,370,000. On November
12, 2008, we entered into private placement subscription agreements pursuant to
which we sold 6.87 units consisting of convertible notes and warrants, for an
aggregate offering price of $687,000. The Notes mature in two years
from date of issuance. The Notes and accrued interest are payable in
full at maturity. All amounts due under the Notes may be converted at
any time, in part or in whole, at the written election of the holder thereof,
into shares of the Company’s common stock at a conversion price of $1.00 per
share. The Notes are secured by a first priority perfected interest
in all the assets of the Company.
We
determined that all of the securities issued pursuant to the agreement were
exempt from registration under the Securities Act of 1933, as amended (the
“Act”) pursuant to Section 4(2) of the Act and Rule 506 of Regulation D
promulgated under the Act. We based this determination on the non-public manner
in which we offered the securities and on the representations of the persons
purchasing such securities, which included, in pertinent part, that such persons
were "accredited investors" within the meaning of Rule 501 of Regulation D
promulgated under the Act, and that such persons were acquiring such securities
for investment purposes for their own respective accounts and not as nominees or
agents, and not with a view to resale or distribution, and that each such person
understood such securities may not be sold or otherwise disposed of without
registration under the Act or an applicable exemption there from.
For the
period ending December 31, 2009, the 2008 Notes have a beneficial
conversion feature, which have a value of $1,897,264. The warrants value
and the beneficial conversion value are discounted against the Notes and are
being amortized as interest expense using the effective interest method over the
term of the Notes. The warrant and beneficial conversion feature
exceeded the face value of the note and the total amortization for the twelve
months ending December 31, 2009 is $969,802 resulting in a remaining discount of
$927,462.
F-13
Z Trim
Holdings, Inc.
Notes to
Consolidated Financial Statements
December 31,
2009
NOTE 8–CONVERTIBLE NOTES
PAYABLE Cont.
Amortization on Convertible
Notes
For the
twelve months ending December 31, 2009, the Company recognized debt discount
amortization in the amount of $1,449,214. For the twelve months
ending December 31, 2008, the Company recognized debt discount amortization in
the amount of $350,520.
The
convertible note payable balance as of December 31, 2009 of $8,204,000,
excluding the debt discount of $4,195,050, matures as follows:
Year
Ended Principal
2010 4,457,000
2011 3,747,000
2012 -
2013 -
2014 -
Total 8,204,000
NOTE 9- LIQUIDATED
DAMAGES
Liquidated
Damages
In
connection with certain private placements of the Company’s securities (the
“Registrable Securities”) effected in 2008 the Company entered into registration
rights agreements (the “RRA”) that required the Company to file a registration
statement covering the Registrable Securities with the Securities and Exchange
Commission no later than thirty days after the final closing as contemplated in
the Private Placement Memorandum for the 2008 offering (the “Filing
Deadline”). The Company filed a registration statement on December
14, 2009. However, the statement has not been declared effective as the Company
is not S-3 eligible and will need to file an amended filing to convert the S-3
to an S-1. Management intends to file the S-1 after it files the 10-K for the
year ended December 31, 2009. Under the terms of the
registration rights agreement, as partial compensation, the Company was required
to make pro rata payments to each Investor in an amount equal to 1.5% of the
aggregate amount invested by such Investor for each 30-day period or pro rata
for any portion thereof following the Filing Deadline for which no registration
statement was filed. We obtained a release and waiver of the amounts
due from 74 of the 2008 investors. As of April 5, 2010, there are 5
investors who have yet to sign the release and waiver. Under the
terms of the RRA, as of that date we potentially owe, and recognized as
liquidated damages, the amount of $80,100.
NOTE 10 –DERIVATIVE
LIABILITIES
The
Company’s warrants and its Convertible 8% Senior Secured Notes issued in 2008
and 2009 have reset provisions to the exercise price and conversion price if the
Company issues equity or other derivatives at a price less than the exercise
price set forth in such warrants and notes. This ratchet provision results in a
derivative liability in our financial statements.
Our
derivative liabilities increased from $0 at December 31, 2008 to $10,285,578 at
December 31, 2009. As of January 1, 2009, the fair value of these warrants of
$2,219,530 was recognized and resulted in a cumulative effect adjustment to
accumulated deficit of $86,002,406. The change in fair value during the year
ended December 31, 2009 of $4,319,048. $3,623,519 is recorded as a derivative
loss, $632,982 is included in selling, general, and administrative expenses for
warrants issued for services, and $62,547 is included in settlement loss for
warrants issued for accounts payable.
The
following tabular presentation reflects the components of derivative financial
instruments on the Company’s balance sheet at December 31, 2009 and December 31,
2008:
December
31, 2009
|
December
31, 2008
|
|||||
Common
stock warrants
|
5,387,788
|
-
|
||||
Embedded
conversion features –part of note discount
|
4,897,790
|
-
|
||||
Total
|
$
|
10,285,578
|
$
|
-
|
December
31, 2009
|
|||
Cumulative
Effect
|
2,219,530 | ||
Bifurcated
Amount
|
3,747,000 | ||
Change
in Derivative Liability
|
4,319,048 | ||
Total
|
$ 10,285,578 |
F-14
Z Trim
Holdings, Inc.
Notes to
Consolidated Financial Statements
December 31,
2009
NOTE
11–EQUITY
Common Stock Issued for
Settlement
On May 1,
2009, we entered into private placement subscription agreements pursuant to
which we sold 6 units consisting of shares of common stock and warrants, for an
aggregate offering price of $60,000. Each of the units (individually, a
"Unit" and collectively, the "Units") consists of 10,000 shares of unregistered
common stock plus one five-year warrant, one to purchase 15,000 shares of Common
Stock per unit with an exercise price of $1.50 per share ("Warrants"). A
total of 60,000 shares of common stock and 90,000 warrants are to be issued
pursuant to the terms of this offering. All such Units were sold pursuant
to an agreement with an equipment supplier whereby the Company agreed to apply
$60,000 of unpaid and past due amounts towards the purchase and installation of
two boilers, to the purchase of the 6 Units. The equipment supplier agreed
to accept such Units as payment for the $60,000 of unpaid and past due
amounts.
We
determined that all of the securities issued pursuant to the agreement were
exempt from registration under the Securities Act of 1933, as amended (the
“Act”) pursuant to Section 4(2) of the Act and Rule 506 of Regulation D
promulgated under the Act. We based this determination on the non-public manner
in which we offered the securities and on the representations of the persons
purchasing such securities, which included, in pertinent part, that such persons
were "accredited investors" within the meaning of Rule 501 of Regulation D
promulgated under the Act, and that such persons were acquiring such securities
for investment purposes for their own respective accounts and not as nominees or
agents, and not with a view to resale or distribution, and that each such person
understood such securities may not be sold or otherwise disposed of without
registration under the Act or an applicable exemption there
from.
During
2008, the Company issued 208,167 shares of common stock pursuant to three
settlement agreements, more fully described in Note 12 herein.
Common Stock Issued for
Services
In 2009,
the Board of Directors approved a grant of 30,000 shares of common stock to each
of the Company’s three external directors. A tax gross up of up to
35% was included, not to exceed $10,000. 60,000 shares were granted
on February 27, 2009, with a fair market value of $27,000 based on the closing
price of stock on the grant date, and 30,000 shares were issued on March 24,
2009, with a fair market value of $19,200 based on the closing price of stock on
the grant date.
On
January 3, 2008, the Board of Directors approved a compensation plan that
includes a grant of 6,666.67 shares of common stock to each of the five external
directors. A tax gross up of up to 35% was included, not to exceed
$10,000. These shares were issued on May 15, 2008. The
fair market value of the stock on, 2008 was $.23 or $6.90 on a post-reverse
split basis, which results in a total cost of $230,000 for the shares
granted. No additional or bonus shares were granted to any
Director.
Common Stock Issued on the
Exercise of Warrants and/or Options
During
2009, 4,365 stock warrants were exercised, and no options were
exercised. In 2008, no stock warrants or options were
exercised.
Common Stock Issued on the
Cashless Exercise of Warrants
During
2009, the company issued 51,927 shares of common stock on the cashless exercise
of warrants. No shares of common stock were issued on the cashless
exercise of warrants in 2008.
Rescinded/Retired Shares of
Common Stock
The
Company did not rescind or retire any shares of common stock during
2009.
During
2008, the Company rescinded 34,666 shares of common stock, relating to the
return of stock received by virtue of the exercise of stock options by the
Company’s former CEO, Greg Halpern and 10,833 shares were retired relating to
Wexler, Willow Cove, and David Dabney. As of December 31, 2008, a
total of 45,500 shares were rescinded and/or retired.
NOTE 12 – STOCK OPTION PLAN
AND WARRANTS
Exercising of Stock Warrants
and Options
During
2009, 4,365 stock warrants were exercised, and no options were
exercised. In 2008, no stock warrants or options were
exercised. During 2009, the company issued 51,927 shares of common
stock on the cashless exercise of warrants. No shares of common stock
were issued on the cashless exercise of warrants in 2008.
A summary
of the status of the warrants issued by the Company as of December 31, 2009 and
2008 are as follows:
Year Ended
|
Year Ended
|
|||||||||
12/31/2009
|
12/31/2008
|
|||||||||
Number
of Warrants
|
Weighted
Average Exercise Price
|
Number
of Warrants
|
Weighted
Average Exercise Price
|
|||||||
Outstanding
at beginning of year
|
1,084,368
|
$ 7.55
|
319,641
|
$ 26.46
|
||||||
Granted
|
8,801,455
|
$ 1.46
|
1,196,770
|
$ 4.20
|
||||||
Exercised
for cash
|
(4,365)
|
$ 1.00
|
-
|
$ -
|
||||||
Cashless
|
(57,051)
|
$ 0.09
|
-
|
|||||||
Expired
and Cancelled
|
(142,027)
|
$ 4.55
|
(432,043)
|
$ 12.24
|
||||||
Outstanding,
end of period
|
9,682,380
|
$ 1.61
|
1,084,368
|
$ 7.55
|
||||||
Unexercisable
at end of period
|
(87,500)
|
$ 1.10
|
0
|
|||||||
Exercisable
at end of period
|
9,594,880
|
$ 1.61
|
1,084,368
|
$ 7.55
|
As of
December 31, 2009 and 2008, the Company has warrants outstanding to purchase
9,594,880 and 1,084,368 shares of the Company’s common stock, respectively, at
prices ranging from $0.01 to $36.00 per share. These warrants expire
at various dates through December of 2014. There were 7,278,400
and 3,167,469 warrants issued in 2009 and 2008 respectively. Included
in the numbers for 2008, were 103,750 warrants issued pursuant to settlement
agreements as set forth in more detail in Note 12 below, as well as 223,281
warrants issued to our placement agent as a result of our private placement as
set forth in Note 8 above.
F-15
Z Trim
Holdings, Inc.
Notes to
Consolidated Financial Statements
December 31,
2009
NOTE 12 – STOCK OPTION PLAN AND
WARRANTS Cont.
Stock Option
Plan
The
Company has a Stock Option Plan (the Plan) effective January 2, 1999 and amended
in 2002 and 2004, which provides for the issuance of qualified options to all
employees and non-qualified options to directors, consultants and other service
providers.
A summary
of the status of stock options issued by the Company as of December 31, 2009 and
2008 are as follows:
12/31/2009
|
12/31/2008
|
|||||
Weghted
|
Weghted
|
|||||
Number
|
Average
|
Number
|
Average
|
|||
of
|
Exercise
|
of
|
Exercise
|
|||
Shares
|
Price
|
Shares
|
Price
|
|||
Outstanding
at beginning of year
|
431,073
|
$ 32.04
|
553,184
|
$ 31.20
|
||
Granted
|
1,320,000
|
$ 0.45
|
3,333
|
$ 8.10
|
||
Exercised
|
-
|
$ -
|
-
|
$ -
|
||
Expired
and Cancelled
|
(346,011)
|
$ 31.24
|
(125,435)
|
$ 27.71
|
||
Outstanding
at end of period
|
1,405,062
|
$ 2.56
|
431,082
|
$ 32.04
|
||
Exercisable
at end of period
|
1,405,062
|
$ 0.66
|
429,415
|
$ 32.13
|
||
At
December 31, 2009, the aggregate intrinsic value of all outstanding options was
$787,800 of which 1,405,062 outstanding options are currently exercisable at a
weighted average exercise price of $ .66 and a weighted average remaining
contractual term of 1.2 years.
The fair
value of each stock option granted is estimated on the date of grant using the
Black-Scholes option valuation model. This model uses the assumptions
listed in the table below. Expected volatilities are based on the
historical volatility of the Company’s stock. The risk-free rate for
periods within the expected life of the option is based on the U.S. Treasury
yield curve in effect at the time of grant.
2009
|
2008
|
||
Weighted
average fair value per option granted
|
$ 0.43
|
$ 0.90
|
|
Risk-free
interest rate
|
1.99
- 2.99%
|
3
- 4.6 %
|
|
Expected
dividend yield
|
0.00%
|
0.00%
|
|
Expected
lives
|
1
- 2.5
|
1
- 1.5
|
|
Expected
volatility
|
130.25
- 250.50%
|
86.32
- 130.22%
|
On
February 27, 2009, the Company granted 1,320,000 options to
employees. 96% of the options were fully vested at the grant
date. The remaining 4% vested every three months with the options
becoming fully vested September 15, 2009. At December 31, 2009, the
Company recognized a total of $565,844 in stock based compensation related to
the options granted above.
As of
December 31, 2009, the Company had reserved 18,471,605 million shares of Common
Stock to be issued upon the exercise of qualified options issued under the
Plan. As of December 31, 2009 the Company had 6,117,536 million
shares available for grant under the Plan.
Stock
options outstanding at December 31, 2009 are as follows:
Weighted
|
||||||||
Average
|
Weighted
|
|||||||
Range
of
|
Remaining
|
Average
|
||||||
Exercise
|
Options
|
Contractual
|
Exercise
|
Options
|
||||
Prices
|
Outstanding
|
Life
|
Price
|
Exercisable
|
||||
$0.01-$1.50
|
1,320,000
|
4.2
|
$ 0.42
|
1,320,000
|
||||
$3.01
& over
|
85,062
|
0.6
|
$ 2.14
|
85,062
|
||||
1,405,062
|
3.9
|
$ 0.53
|
1,405,062
|
|||||
F-16
Z Trim
Holdings, Inc.
Notes to
Consolidated Financial Statements
December 31,
2009
NOTE 13 – SETTLEMENT
LOSSES
On May 1,
2009, we entered into private placement subscription agreements pursuant to
which we sold 6 units consisting of shares of common stock and warrants, for an
aggregate offering price of $60,000. Each of the units (individually, a
"Unit" and collectively, the "Units") consists of 10,000 shares of unregistered
common stock plus one five-year warrant, one to purchase 15,000 shares of Common
Stock per unit with an exercise price of $1.50 per share ("Warrants"). A
total of 60,000 shares of common stock and 90,000 warrants are to be issued
pursuant to the terms of this offering. All such Units were sold pursuant
to an agreement with an equipment supplier whereby the Company agreed to apply
$60,000 of unpaid and past due amounts towards the purchase and installation of
two boilers, to the purchase of the 6 Units. The equipment supplier agreed
to accept such Units as payment for the $60,000 of unpaid and past due
amounts.
On June
29, 2009, the Company entered into a Material Definitive Agreement with its
landlord, whereby the Company agreed to apply $130,000 of unpaid and past due
rent owed to such landlord, to the purchase of 13 Units pursuant to the terms of
the offering set forth above. The landlord agreed to accept such Units as
payment for the $130,000 of unpaid and past due rent.
The
amount of the settlement losses for the twelve months ended December 31, 2009
was $103,137, comprised of the fair value of the investments, above the debts
owed by the Company, made by the equipment supplier and landlord as set forth
above.
The
Company executed an agreement with Farhad Zaghi on February 8,
2008. Pursuant to the agreement, 100,000 shares of the Company’s
common stock were issued at a fair value of $840,000 and 83,333 warrants are to
be issued with a fair value of $400,549 as of March 31, 2008. These
losses were record in 2007, as the shares and warrants were originally issued in
2007.
In April
2008, the Company settled a case with a former employee, Daniel
Caravette. The Company agreed to pay $50,000 cash, and to provide
8,166 shares of unrestricted common stock with a fair value of $63,700 and 6,666
three-year warrants at a strike price of $7.80, with a fair value of $33,326, in
exchange for a release of all claims.
On
September 2, 2008, the Company announced an update with respect to its ongoing
litigation with George Foreman Enterprises. The parties have settled
all outstanding litigation on amicable terms. Pursuant to the Agreement,
both Parties are obligated to dismiss with prejudice all existing claims between
them, in both the Federal and State courts after Z-Trim satisfies all of its
obligations in the Agreement. Z Trim is obligated to pay to George
Foreman Enterprises a total sum of $300,000 with $150,000 payable on September
3, 2008, and three additional payments of $50,000 each on January 1, 2009,
February 1, 2009 and March 1, 2009, respectively. Z Trim has further
agreed to issue to George Foreman Enterprises a total of 100,000 shares of the
Company's common stock with a fair value of $480,000 and to register such shares
on a best efforts basis. All other obligations between the parties have
been mutually resolved and neither party has admitted wrong-doing or
liability of any kind.
The
amount of the settlement losses for the twelve months ended December 31, 2008
was $772,202 for the three afore-mentioned agreements.
NOTE 14 – INCOME
TAXES
During
2009 and 2008, the Company incurred net losses, and therefore had no tax
liability. The net deferred tax asset generated by the loss carry
forward has been fully reserved. The cumulative net loss carry
forward is approximately $64,822,705 and $52,613,125 for the years ended
December 31, 2009 and 2008 respectively, and will expire in the years 2019
through 2028.
At
December 31, 2009, the net deferred tax asset consisted of the
following:
Net
Operating
Loss $18,727,333
Less: Valuation
allowance ($18,272,333)
Net
Deferred tax
asset $_____0_____
After
evaluating our own potential tax uncertainties, the Company has determined that
there are no material uncertain tax positions that have a greater than 50%
likelihood of reversal if the Company were to be audited. Our tax
return for the year ended December 31, 2009 may be subject to IRS
audit.
NOTE 15 – MAJOR CUSTOMERS
AND CONCENTRATIONS
The
Company’s customers are food manufacturers, school districts and the general
public. There were three significant customers who accounted for 20%,
20% and 14% of total sales for the year ended December 31,
2009. There were two significant customers who accounted for 37% and
13% of total sales for the year ended December 31, 2008. Further, two
significant customers accounted for 78% and 11% of the total accounts receivable
for the year ended December 31, 2009. Two significant customers
accounted for 80% and 6% of the total accounts receivable for the year ended
December 31, 2008.
The
Company maintains cash deposits with major banks, which from time to time may
exceed federally insured limits. At December 31, 2009 and 2008,
$324,874 and $492,696 a, respectively, were in excess of federally insured
limits. The Company periodically assesses the financial condition of
the institutions and believes that the risk of any loss is minimal.
NOTE 16 –
COMMITMENTS
Building
Lease
The
Company leases a combined production and office facility located in Mundelein,
Illinois. The facility is approximately 44,000 square
feet. The Company extended the lease until March 2010 and the
required monthly rental payments increased to $21,000, exclusive of property
taxes. The Company also is responsible for payment of all
property taxes. Insurance and maintenance are billed when
due. If we were to lose this lease or not be able to extend our lease
due to the specific requirements of our Company, the outcome to our operations
could be substantial.
The
Company also leased a 5,000 square foot warehouse in Mundelein,
Illinois. The lease commenced on August 1, 2007 and was terminated in
October of 2009. The monthly net rent was $2,834.
The
Company recognizes escalating lease expense on a straight line basis in
accordance with current accounting standards.
The
future minimum annual rental payments and sub-lease income for the years ended
December 31 under the lease terms are as follows:
Year Ended
|
Rentals
|
2010
|
252,000
|
2011
|
63,000
|
2012
|
-
|
2013
|
-
|
$ 315,000
|
|
The total
rent expense for the years ended December 31, 2009 and 2008, respectively, was
$351,472 and $286,415.
F-17
Z Trim
Holdings, Inc.
Notes to
Consolidated Financial Statements
December 31,
2009
NOTE 17– PENDING LITIGATION/
CONTINGENT LIABILITY
On July
7, 2007, the Company was served with a complaint by Joseph Sanfilippo and James
Cluck for violation of the Consumer Fraud Act and is seeking damages in excess
of $200,000. Management believes that the allegations are frivolous
and wholly without merit and will vigorously defend the claim. The Company
currently has a Motion to Dismiss pending in the Circuit Court, Twentieth
Judicial Circuit, St. Clair County, Illinois. The pleadings are still at issue
and discovery is just getting underway, however, a potential loss is
unlikely.
On August
4, 2009, the Company was served with a complaint by Daniel Caravette, alleging
the Company breached the parties’ settlement agreement dated April 24, 2008 and
seeking damages in excess of $75,000. Management believes that the
allegations are frivolous and wholly without merit and will vigorously defend
the claim. The case is set for trial in July of 2010 before the
Circuit Court of the Nineteenth Judicial District, Lake County,
Illinois. A defense motion for summary judgement is pending and a
potential loss is unlikely.
NOTE 18 –
GUARANTEES
The
Company from time to time enters into certain types of contracts that
contingently require the Company to indemnify parties against third party
claims. These contracts primarily relate to: (i) divestiture agreements, under
which the Company may provide customary indemnifications to purchasers of the
Company’s businesses or assets; (ii) certain real estate leases, under which the
Company may be required to indemnify property owners for environmental and other
liabilities, and other claims arising from the Company’s use of the applicable
premises; and (iii) certain agreements with the Company's officers, directors
and employees, under which the Company may be required to indemnify such persons
for liabilities arising out of their employment relationship. The
terms of such obligations vary. Generally, a maximum obligation is not
explicitly stated. Because the obligated amounts of these types of agreements
often are not explicitly stated, the overall maximum amount of the obligations
cannot be reasonably estimated. Historically, the Company has not been obligated
to make significant payments for these obligations, and no liabilities have been
recorded for these obligations on its consolidated balance sheet as of December
31, 2009.
In
general, the Company offers a one-year warranty for most of the products it
sold. To date, the Company has not incurred any material costs
associated with these warranties.
NOTE 19 – RELATED PARTY
TRANSACTIONS
Two of
the Company’s external Directors, Mark Hershhorn and Brian Israel each agreed to
apply $20,000 of unpaid Directors’ fees (80% of which is past due), to the
purchase of Units pursuant to the terms of the convertible notes set forth in
Note 8 hereinabove. Further, our third external director, Morris
Garfinkle, also invested $50,000 in the offering.
NOTE 20 – SUBSEQUENT
EVENTS
Subsequent
events were evaluated through the date of filing, April 9,
2010.
Subsequent
to December 31, 2009, the Company has issued 237,428 shares of its common stock
for the cashless exercise of warrants.
On
January 4, 2010, a convertible note holder elected to convert principal of
$20,000 and interest of $762 at a conversion price of $1.00 into 20,762 shares
of common stock.
On
January 4, 2010, the Board of Directors approved a grant of 30,000 shares of
common stock to four of the five Company’s board of directors for a total of
120,000 shares of common stock. The total fair value of the common
stock is $234,000 based at the closing price at date of grant.
On
January 7, 2010 the Legend and Z Trim agreed to mutually terminate that
agreement, and to cancel the Company's obligation to issue the 350,000 warrants.
In return, the Company has agreed to issue Legends 100,000 shares of Common
Stock. The total value of the common stock is $140,000 based at the
closing price at date of grant.
Also on
January 7, 2010, the parties entered into a new Investment Banking Agreement
with Legend, pursuant to which Legend agreed to provide business advisory
services for us for a period of up to twelve months. In exchange for Legend's
services, we agreed to pay Legend the sum of $6,250 per month, as well as a
one-time fee of 250,000 shares of Common Stock valued at $350,000 based on the
closing price on January 7, 2010. Under the Investment Banking Agreement, we
also agreed to give Legend unlimited "piggy back" registration rights with
respect to the shares of our common stock in any registration statement filed by
us in connection with an underwritten offering of our common stock.
On
January 15, 2010, we entered into a private placement subscription agreement
with Brightline Ventures I, LLC, a Delaware Limited Liability Company(the
"purchaser" or "Brightline") pursuant to which we sold 130 units consisting of
convertible notes and warrants, for an aggregate offering price of $1,300,000.
The Company has agreed to extend Brightline's right to invest an additional
$1,200,000 on substantially similar terms until February 28, 2010. Since October
15, 2009, we have sold an additional 1.7 units for an aggregate offering price
of $17,000, of which $12,000 was in return for forgiveness of rent owed to our
landlord. Each of the units (individually, a "Unit" and collectively, the
"Units") consists of a $10,000 24-month senior secured promissory note (each a
"Note" and collectively the "Notes") convertible at the rate of $1.00 per share
into 10,000 shares of our common stock, $.00005 par value (the "Common Stock"),
bearing interest at the rate of 8% per annum, which interest is accrued annually
in Common Stock at the rate of $1.00 per share. The Notes will be secured by a
first lien on all of our assets for so long as the Notes remain outstanding
pursuant to the form of Security Agreement (the "Security Agreement"). The Notes
are convertible into a total of 1,317,000 shares of Common Stock exclusive of
interest. The interest is payable in additional shares of the Company's Common
Stock, quarterly or upon maturity of the Notes. The Investors also received one
five-year warrant for each Unit purchased, to purchase 15,000 shares of Common
Stock per unit with an exercise price of $1.50 per share ("Warrants"). The total
warrants issued to the purchasers were 1,975,500. The terms and conditions of
the Units are substantially identical to the terms and conditions and constitute
a part of the units previously sold by us in 2009 and reported on a Form 8-K
filed by us on October 16, 2009 (the "2009 Units").
On
January 19, 2010, the Company issued 1,377,000 employee stock
options. On January 25, 2010, the Company issued an additional
115,000 employee stock options.
Between February
1 and April 1, 2010, we entered into a series of private placement
subscription agreements with accredited investors (the “purchasers”)
pursuant to which we sold 39.9 units consisting of convertible notes and
warrants, for an aggregate offering price of $399,000. Each of the
units (individually, a “Unit” and collectively, the “Units”) consists of a
$10,000 24-month senior secured promissory note (each a “Note” and collectively
the “Notes”) convertible at the rate of $1.00 per share into 10,000 shares of
our common stock, $.00005 par value (the “Common Stock”), bearing interest at
the rate of 8% per annum, which interest is accrued annually in Common Stock at
the rate of $1.00 per share. The Notes will be secured by a first
lien on all of our assets for so long as the Notes remain outstanding pursuant
to the form of Security Agreement (the “Security Agreement”). The
Notes are convertible into a total of 399,000 shares of Common Stock
exclusive of interest. The interest is payable in additional shares
of the Company's Common Stock, quarterly or upon maturity of the
Notes. The Investors also received one five-year warrant for each
Unit purchased, to purchase 15,000 shares of Common Stock per unit with an
exercise price of $1.50 per share (“Warrants”). The total warrants
issued to the purchasers were 598,500. The terms and conditions
of the Units are substantially identical to the terms and conditions and
constitute a part of the units previously sold by us in 2009 and reported on a
Form 8-K filed by us on October 16, 2009 (the “2009 Units”).
We also
entered into registration rights agreements substantially similar to the
registration rights agreement entered into with the purchasers of the 2008 Units
pursuant to which we have agreed to file with the Securities and Exchange
Commission a registration statement covering the resale of the Common Stock
underlying the Notes and the Warrants.
The
descriptions herein are qualified in their entirety by reference to the copies
of the forms of the Subscription Agreement, the Notes, the Warrant,
the Security Agreements and the Registration Rights Agreement which
are attached as exhibits to our Form 8-K filed on October 16, 2009.
We
determined that all of the securities sold and issued in the private placement
were exempt from registration under the Securities Act of 1933, as amended (the
“Act”) pursuant to Section 4(2) of the Act and Rule 506 of Regulation D
promulgated under the Act. We based this determination on the
non-public manner in which we offered the securities and on the representations
of the persons purchasing such securities, which included, in pertinent part,
that such persons were “accredited investors” within the meaning of Rule 501 of
Regulation D promulgated under the Act, and that such persons were acquiring
such securities for investment purposes for their own respective accounts and
not as nominees or agents, and not with a view to resale or distribution, and
that each such person understood such securities may not be sold or otherwise
disposed of without registration under the Act or an applicable exemption
therefrom.
F-18