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EX-32.2 - EXHIBIT 32.2 - Agritech Worldwide, Inc.ex32_2.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q
(Mark One)

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

For the quarterly period ended September 30, 2015

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

For the transition period from __________ to __________.

Commission File Number:   001-32134

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

1011 Campus Drive, Mundelein, Illinois
 
60060
(Address of principal executive offices)
 
(Zip Code)
     
(847) 549-6002
(Registrant’s telephone number, including area code)
 
     
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes      No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes      No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer 
Accelerated filer
Non-accelerated filer    (Do not check if smaller reporting company)    
Smaller reporting a company ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes      No
 
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date:
 
Class
Outstanding at November 18, 2015
Common Stock, $0.00005 par value
93,797,501
 


Z TRIM HOLDINGS, INC.

FORM 10-Q QUARTERLY REPORT

Table of Contents
 
Item
 
Page
 
   
PART I
   
     
Item l.
Financial Statements
 
     
 
3
     
 
4
     
 
5
     
 
6
     
Item 2.
25
     
Item 3.
37
     
Item 4.
37
     
PART II
 OTHER INFORMATION
 
     
Item 1.
39
     
Item 1A.
39
     
Item 2.
39
     
Item 3.
39
     
Item 4.
39
     
Item 5.
39
     
Item 6.
40
     
41
 
PART I – FINANCIAL INFORMATION
 
Item 1. Financial Statements.

Z TRIM HOLDINGS, INC.
BALANCE SHEET
 
ASSETS
 
   
(Unaudited)
9/30/2015
   
12/31/2014
 
         
Current Assets
       
Cash and cash equivalents
 
$
284,567
   
$
1,027,713
 
Accounts receivable
   
196,453
     
46,188
 
Inventory
   
402,966
     
709,029
 
Prepaid expenses and other assets
   
98,660
     
63,296
 
                 
Total current assets
   
982,646
     
1,846,226
 
                 
Long Term Assets
               
Other assets
   
15,393
     
15,393
 
Property and equipment, net
   
493,261
     
1,207,975
 
             
 
 
                 
Total long term assets
   
508,654
     
1,223,368
 
                 
TOTAL ASSETS
 
$
1,491,300
   
$
3,069,594
 
                 
LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIT)
 
                 
Current Liabilities
               
Accounts payable
 
$
1,002,716
   
$
1,033,875
 
Dividends payable
   
194,302
     
-
 
Short-term borrowings
   
250,000
     
588,211
 
Nonconvertible notes payable to related party
   
457,000
     
270,000
 
Convertible notes payable to related parties
   
624,866
     
-
 
Customer deposit
   
-
     
70,400
 
Accrued expenses and other
   
530,539
     
367,331
 
Accrued liquidated damages
   
36,178
     
36,178
 
Short term capital lease payable
   
140,769
     
-
 
Derivative liabilities
   
832,969
     
20,166
 
Total Current Liabilities
   
4,069,339
     
2,386,161
 
                 
Long-term capital lease payable
   
361,211
     
-
 
Long-term convertible notes payable to related parties
   
-
     
990,000
 
                 
Total Liabilities
   
4,430,550
     
3,376,161
 
                 
Stockholders' Equity (Deficit)
               
Common stock, $0.00005 par value; authorized 200,000,000 shares; issued and outstanding 93,797,501 and 39,734,854 shares, September 30, 2015 and December 31, 2014, respectively
   
4,690
     
1,987
 
Convertible preferred stock, Series B, $0.01 par value; authorized 3,000,000 shares; issued and outstanding 609,625 and 0 shares, September 30, 2015 and December 31, 2014, respectively
   
6,096
     
-
 
Preferred stock payable
   
-
     
1,010,000
 
Additional paid-in capital
   
152,379,740
     
131,134,645
 
Accumulated deficit
   
(155,329,776
)
   
(132,453,199
)
                 
Total Stockholders' Equity (Deficit)
   
(2,939,250
)
   
(306,567
)
                 
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIT)
 
$
1,491,300
   
$
3,069,594
 

The accompanying notes are an integral part of the financial statements.
 
Z TRIM HOLDINGS, INC.
STATEMENTS OF OPERATIONS (Unaudited)
 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2015
   
2014
   
2015
   
2014
 
REVENUES:
               
Products
 
$
218,732
   
$
360,710
   
$
834,563
   
$
889,334
 
Total revenues
   
218,732
     
360,710
     
834,563
     
889,334
 
                                 
COST OF REVENUES:
                               
Products
   
445,936
     
349,946
     
1,420,476
     
879,898
 
Total cost of revenues
   
445,936
     
349,946
     
1,420,476
     
879,898
 
                                 
GROSS MARGIN
   
(227,204
)
   
10,764
     
(585,913
)
   
9,436
 
                                 
OPERATING EXPENSES:
                               
Research and development costs
   
-
     
365,345
     
-
     
1,161,712
 
Selling, general and administrative
   
772,957
     
1,035,514
     
6,881,428
     
3,257,427
 
Total operating expenses
   
772,957
     
1,400,859
     
6,881,428
     
4,419,139
 
                                 
OPERATING LOSS
   
(1,000,161
)
   
(1,390,095
)
   
(7,467,341
)
   
(4,409,703
)
                                 
OTHER INCOME (EXPENSES):
                               
Rental and other income
   
-
     
-
     
-
     
200
 
Interest income
   
-
     
6,741
     
-
     
20,299
 
Interest expense - other
   
(21,518
)
   
(1,986
)
   
(26,194
)
   
(4,369
)
Interest expense - debt
   
(35,743
)
   
(64,362
)
   
(128,006
)
   
(112,660
)
Change in fair value - derivative
   
66,561
     
36,742
     
(1,355,747
)
   
71,125
 
Loss on sale and leaseback transaction
   
(574,331
)
   
-
     
(574,331
)
       
Loss on settlement with vendor
   
-
     
-
     
(13,990
)
   
-
 
Loss on debt conversion
   
-
     
-
     
(351,314
)
   
-
 
Loss on exchange of warrants
   
-
     
-
     
(12,959,654
)
   
-
 
Settlement gain
   
-
     
-
     
-
     
10,000
 
Total other income (expenses)
   
(565,031
)
   
(22,865
)
   
(15,409,236
)
   
(15,405
)
                                 
NET  LOSS
 
$
(1,565,192
)
 
$
(1,412,960
)
 
$
(22,876,577
)
 
$
(4,425,108
)
                                 
Less: Preferred Dividends
   
67,462
     
-
     
194,302
     
-
 
                                 
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS
 
$
(1,632,654
)
 
$
(1,412,960
)
 
$
(23,070,879
)
 
$
(4,425,108
)
NET LOSS PER SHARE - BASIC AND DILUTED
 
$
(0.03
)
 
$
(0.04
)
 
$
(0.48
)
 
$
(0.11
)
                                 
Weighted Average Number of Shares Basic and Diluted
   
47,517,640
     
39,734,854
     
47,313,497
     
39,731,697
 
 
The accompanying notes are an integral part of the financial statements.
 
Z TRIM HOLDINGS, INC.
STATEMENTS OF CASH FLOWS (Unaudited)
 
FOR THE NINE MONTHS ENDED SEPTEMBER 30
 
2015
   
2014
 
         
CASH FLOWS FROM OPERATING ACTIVITIES
       
Net loss
 
$
(22,876,577
)
 
$
(4,425,108
)
Adjustments to reconcile loss from continuing operations to net cash used in operating activities:
               
Stock based compensation - stock options and warrants vested
   
4,534,849
     
992,450
 
Common stock issued for director fees
   
150,000
     
160,001
 
Common stock & warrants issued for services
   
104,000
     
-
 
Preferred stock issued for services
   
258,731
     
-
 
Preferred stock to be issued for services
   
-
     
-
 
Warrants issued expense
   
259,662
     
-
 
Depreciation
   
154,250
     
495,468
 
Change in derivative liability, net of bifurcation
   
1,355,747
     
(71,125
)
Loss on exchange of warrants
   
12,959,654
     
-
 
Loss on debt conversion
   
351,314
     
-
 
Loss os sale and leaseback transaction
   
574,331
     
-
 
Loss on settlement with vendor
   
13,990
     
-
 
Changes in operating assets and liabilities:
               
Accounts receivable
   
(150,265
)
   
273,225
 
Inventory
   
306,611
     
(203,995
)
Prepaid expenses and other assets
   
(19,564
)
   
(262,145
)
Note receivable
   
-
     
14,701
 
Accounts payable and accrued expenses
   
228,421
     
948,801
 
CASH USED IN OPERATING ACTIVITIES
   
(1,794,846
)
   
(2,077,727
)
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Net cash received from the sale of fixed assets
   
172,911
     
-
 
CASH PROVIDED BY INVESTING ACTIVITIES
   
172,911
     
-
 
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Proceeds for the purchase of convertible preferred stock
   
880,000
     
-
 
Borrowing on short term debt
   
400,000
     
785,000
 
Borrowing on short term notes payable to related party
   
187,000
     
-
 
Borrowing on long term convertible notes payable to related parties
   
-
     
990,000
 
Principal payments on debt
   
(588,211
)
   
(70,751
)
CASH PROVIDED BY FINANCING ACTIVITIES
   
878,789
     
1,704,249
 
NET DECREASE IN CASH
   
(743,146
)
   
(373,478
)
                 
CASH AT BEGINNING OF PERIOD
   
1,027,713
     
443,472
 
CASH AT THE PERIOD ENDED SEPTEMBER 30
 
$
284,567
   
$
69,994
 
                 
Supplemental Disclosures of Cash Flow Information:
               
Cash paid during the period for interest
 
$
53,596
   
$
58,177
 
                 
Non-cash Investing and Financing Activities:
               
Preferred stock issued for preferred stock payable
 
$
1,010,000
   
$
-
 
Capital lease for fixed assets
 
$
514,707
   
$
-
 
Dividends payable declared
 
$
194,302
   
$
-
 
Warrants exchanged for common stock
 
$
542,944
   
$
-
 
Conversion of debt and interest into preferred stock
 
$
386,375
   
$
-
 
 
The accompanying notes are an integral part of the financial statements.
 
Z TRIM HOLDINGS, INC.
Notes to Financial Statements
September 30, 2015
(Unaudited)
 
NOTE 1 – NATURE OF BUSINESS
 
Z Trim Holdings, Inc. (the “Company”) is an agri-tech company that owns existing, and has developed new products and processes to make use of biomass for uses in the food and industrial markets.  The Company’s food division currently sells a line of products to the food industry that can help food manufacturers reduce their costs and help them solve many production problems.  The Company’s technology provides value-added ingredients across virtually all food industry categories.  The Company’s all-natural products, among other things, help to reduce fat and calories, add fiber, provide shelf-stability, prevent oil migration, and add binding capacity without degrading the taste and texture of the final food products.  Perhaps most significantly, Z Trim’s products can help extend the life of finished products, and thereby increase its customers’ gross margins.  The Company’s industrial division, opened in 2012, plans to sell eco-friendly ingredients to oil drilling, hydraulic fracturing, petroleum coke, steel/aluminum, paper and other industries.  The Company’s industrial ingredients are highly functional in applications for adhesives, binders, viscofiers and emulsifiers.
 
NOTE 2 – GOING CONCERN
 
These financial statements have been prepared on a going concern basis, which implies the Company will continue to realize its assets and discharge its liabilities in the normal course of business. The Company had an accumulated deficit equal to $155,329,776 as of September 30, 2015. This factor raises substantial doubt regarding the ability of the Company to continue as a going concern. The continuation of the Company as a going concern is dependent upon the continued financial support from its shareholders, the ability of the Company to obtain necessary debt and equity financings, and the ability of the Company to improve operating margins. These financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
 
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Presentation of Interim Information

The financial information at September 30, 2015 is unaudited, but includes all adjustments (consisting only of normal recurring adjustments) that the Company considers necessary for a fair presentation of the financial information set forth herein, in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information, and with the instructions to Form 10-Q. Accordingly, such information does not include all of the information and footnotes required by U.S. GAAP for annual financial statements. For further information, refer to the financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

The results for the nine months ended September 30, 2015 may not be indicative of results for the year ending December 31, 2015 or any future periods.

Use of Estimates
 
The preparation of the accompanying financial statements in conformity with 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 September 30, 2015 and December 31, 2014 the allowance for doubtful accounts was $0.
 
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 convertible preferred stock 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 convertible preferred stock, 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 warrants and the conversion features in its formerly outstanding convertible notes and preferred stock 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 instruments are determined based on management's projections and the expert’s calculations. These probabilities are used to create a cash flow projection over the term of the instruments and determine the probability that the projected cash flow will be achieved. A discounted weighted average cash flow for each scenario is then calculated and compared to the discounted cash flow of the instruments without the compound embedded derivative in order to determine a value for the compound embedded derivative.
 
Cash and cash equivalents
 
For purposes of the statement of cash flows, the Company considers all highly liquid investments with a maturity of three months or less to be cash equivalents. There was $284,567 in cash at September 30, 2015 and $1,027,713 at December 31, 2014.
 
Fair value of financial instruments
 
The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, inventory, accounts payable and accrued liabilities. 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.  None of these instruments are held for trading purposes.
 
The Company has utilized various types of financing to fund its business needs, including convertible debt and convertible preferred stock with warrants attached. The Company reviews its warrants and any 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 September 30, 2015, the Company had warrants to purchase common stock outstanding, the fair values of which are classified as a liability.
 
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 warrants and convertible preferred stock to purchase common stock. The Company classifies the fair value of these warrants under level three. The fair value of the derivative liability at September 30, 2015 was $832,969 compared to $20,166 as of December 31, 2014.  The increase in fair value for the nine months ended September 30, 2015 was $1,355,747 compared to a decrease of $71,125 for the nine months ended September 30, 2014.  Below is a hierarchy table of the components of the derivative liability:

   
Carrying
   
Fair Value Measurements Using
 
   
Value
   
Level 1
   
Level 2
   
Level 3
   
Total
 
   
   
   
   
   
 
Derivative Liabilities
 
   
   
   
   
 
12/31/2014
 
$
20,166
   
$
-
   
$
-
   
$
20,166
   
$
20,166
 
                                         
Change in derivative liabilities due to settlements
   
(542,944
)
   
-
     
-
     
(542,944
)
   
(542,944
)
Change in derivative liabilities valuation
   
1,355,747
     
-
     
-
     
1,355,747
     
1,355,747
 
     
812,803
     
-
     
-
     
812,803
     
812,803
 
                                         
Derivative Liabilities
                                       
9/30/2015
 
$
832,969
   
$
-
   
$
-
   
$
832,969
   
$
832,969
 

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

Impairment of Long-Lived Assets
 
Long-lived assets and certain identifiable intangible assets to be held and used are reviewed for impairment whenever events or changes in circumstance indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. Measurement of an impairment loss for long-lived assets and certain identifiable intangible assets that management expects to hold and use is based on the fair value of the asset. Long-lived assets and certain identifiable intangible assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell.
 
Income Taxes
 
The amount of current and deferred taxes payable or refundable is recognized as of the date of the financial statements, utilizing currently enacted tax laws and rates.  Deferred tax expenses or benefits are recognized in the financial statements for the changes in deferred tax liabilities or assets between years.
 
Advertising Costs
 
The Company expenses all advertising costs as incurred.  The amounts for the nine months ended September 30, 2015 and 2014 were $0 and $90, 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.
 
Cashless Exercise of Warrants/Options
 
The Company has issued warrants to purchase common stock where the holder is entitled to exercise the warrant via a cashless exercise, when the exercise price is less than the fair value of the common stock. The Company accounts for the issuance of common stock on the cashless exercise of warrants on a net basis.
 
Stock-Based Compensation

The Company estimates the fair value of share-based payment awards made to employees, directors and related parties, including stock options, restricted stock, employee stock purchases related to employee stock purchase plans and warrants, 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 the Company’s stock price. The Company recognized pre-tax compensation expense related to stock compensation awards of $5,047,580 and $1,152,451 for the nine months ended September 30, 2015 and 2014, respectively.

New Accounting Pronouncements

Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period
 
In June 2014, the FASB issued an accounting standard which provides new guidance that requires share-based compensation to meet a specific performance target to be achieved in order for employees to become eligible to vest in the awards and that could be achieved after an employee completes the requisite service period be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. Compensation costs should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The requisite service period ends when the employee can cease rendering service and still be eligible to vest in the award if the performance target is achieved. This new guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2015. Early adoption is permitted. Entities may apply the amendments in this Update either (a) prospectively to all awards granted or modified after the effective date or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. The adoption of ASU 2014-12 is not expected to have a material impact on our financial position or results of operations.
 
Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities
 
In June 2014, the FASB issued guidance to improve financial reporting by reducing the cost and complexity associated with the incremental reporting requirements of development stage entities. The amendments in this update remove all incremental financial reporting requirements from U.S. GAAP for development stage entities, thereby improving financial reporting by eliminating the cost and complexity associated with providing that information. The amendments in this Update also eliminate an exception provided to development stage entities in Topic 810, Consolidation, for determining whether an entity is a variable interest entity on the basis of the amount of investment equity that is at risk. The amendments to eliminate that exception simplify U.S. GAAP by reducing avoidable complexity in existing accounting literature and improve the relevance of information provided to financial statement users by requiring the application of the same consolidation guidance by all reporting entities. The elimination of the exception may change the consolidation analysis, consolidation decision, and disclosure requirements for a reporting entity that has an interest in an entity in the development stage. The amendments related to the elimination of inception-to-date information and the other remaining disclosure requirements of Topic 915 should be applied retrospectively except for the clarification to Topic 275, which shall be applied prospectively. For public companies, those amendments are effective for annual reporting periods beginning after December 15, 2014, and interim periods therein. Early adoption is permitted. The adoption of ASU 2014-10 is not expected to have a material impact on our financial position or results of operations.
 
Disclosures of Uncertainties about an Entity’s Ability to Continue as a Going Concern
 
In August 2014, the FASB issued an accounting standard that requires management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, the standard (1) provide a definition of the term substantial doubt, (2) require an evaluation every reporting period including interim periods, (3) provide principles for considering the mitigating effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) require an express statement and other disclosures when substantial doubt is not alleviated, and (6) require an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). The standard in this Update is effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter.  Early application is permitted.  The adoption of ASU 2014-15 is not expected to have a material impact on our financial position or results of operations.
 
Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity
 
In November 2014, the FASB issued new guidance for determining when separation of certain embedded derivative features in a hybrid financial instrument is required. That is, an entity will continue to evaluate whether the economic characteristics and risks of the embedded derivative feature are clearly and closely related to those of the host contract, among other relevant criteria. The amendments clarify how current GAAP should be interpreted in evaluating the economic characteristics and risks of a host contract in a hybrid financial instrument that is issued in the form of a share. The effects of initially adopting the amendments in this Update should be applied on a modified retrospective basis to existing hybrid financial instruments issued in the form of a share as of the beginning of the fiscal year for which the amendments are effective. Retrospective application is permitted to all relevant prior periods.  The adoption of ASU 2014-16 is not expected to have a material impact on our financial position or results of operations.
 
Pushdown Accounting
 
In November 2014, the FASB issued guidance to provide an acquired entity with an option to apply pushdown accounting in its separate financial statements upon occurrence of an event in which an acquirer obtains control of the acquired entity.  After the effective date, an acquired entity can make an election to apply the guidance to future change-in-control events or to its most recent change-in-control event. However, if the financial statements for the period in which the most recent change-in-control event occurred already have been issued or made available to be issued, the application of this guidance would be a change in accounting principle. The amendments in this Update are effective on November 18, 2014.  The adoption of ASU 2014-17 is not expected to have a material impact on our financial position or results of operations.
 
NOTE 4 – INVENTORY
 
At September 30, 2015 and December 31, 2014, inventory consists of the following:
 
   
9/30/2015
   
12/31/2014
 
Raw materials
 
$
26,666
   
$
20,931
 
Packaging
   
8,755
     
5,023
 
Work-in-process
   
-
     
1,777
 
Finished goods
   
367,545
     
681,298
 
                 
   
$
402,966
   
$
709,029
 
 
NOTE 5 – PROPERTY AND EQUIPMENT, NET
 
At September 30, 2015 and December 31, 2014, property and equipment, net consists of the following:

   
9/30/2015
   
12/31/2014
 
Production, engineering and other equipment
 
$
-
   
$
6,422,110
 
Leasehold improvements
   
-
     
2,904,188
 
Office equipment and furniture
   
-
     
603,182
 
Computer equipment and related software
   
-
     
140,238
 
Capital lease asset
   
514,707
     
-
 
   
$
514,707
   
$
10,069,718
 
                 
Accumulated depreciation
 
(21,446
)
 
(8,861,743
)
                 
Property and equipment, net
 
$
493,261
   
$
1,207,975
 
 
Depreciation expense was $154,250 and $495,468 for the nine months ended September 30, 2015 and 2014, respectively.   On July 17, 2015, the Company completed a sale and leaseback transaction with Fordham Capital.  In the transaction the Company sold all of its production equipment, furniture and fixtures for $500,000.  From the proceeds of the sale, the company repaid outstanding borrowings of $200,000 due to Fordham Capital plus accrued interest of $3,112, franchise taxes of $96,542 and a security deposit of $15,800 related to the equipment lease.  The Company recognized a loss of 574,331.  During the nine months ended September 30, 2014, the Company did not sell any equipment.
 
NOTE 6 – NOTE RECEIVABLE
 
On October 17, 2011, the Company entered into a Custom Processing Agreement (the “Agreement”) with AVEKA Nutra Processing, LLC (“ANP”), part of the AVEKA Group, in order to provide the Company with a partner for future manufacturing initiatives.
 
The Agreement provided that ANP perform certain services related to the Company’s dietary fiber product, including manufacturing, processing, packaging and storage/warehousing for an initial term of three years.  The Agreement automatically renewed at the end of the initial term for an additional two year term unless either party provided written notice to the other within the specified time frame.  Production pursuant to the Agreement began in November 2012 and provided for minimum production volumes of 40,000 pounds per month and average volumes of 100,000 pounds per month, with the ability to increase future production volume to potentially as much as 1,000,000 pounds per month.
 
In addition, the Company agreed to make available to ANP a $500,000 line of credit (which includes $10,000 that the Company loaned ANP to assist it with the purchase of its Waukon, Iowa facility) at an interest rate of 5.5%.  The line of credit was only permitted to be used by ANP for operating costs which excludes capital expenditures of equipment in excess of $5,000.  ANP was not entitled to draw down on the line of credit more than $75,000 in any given thirty day period.  The loan was to be paid back to the Company in the form of discounts on production pricing commencing either two years after the first draw by ANP on the line of credit (other than the $10,000 the Company loaned ANP to assist it with the purchase of its Waukon, Iowa facility) or the first month after the Company has ordered 80,000 pounds of product for three consecutive months, whichever shall occur first.  All of ANP’s obligations under the line of credit, as well as the Agreement, were specifically guaranteed by its parent company, AVEKA Inc.
 
On March 28, 2014 the Company entered into an amendment to the custom processing agreement with ANP relating to the repayment of the line of credit advances made by the Company plus interest.  Commencing on April 1, 2014, ANP agreed to begin paying the Company $5,000 per month to be applied to the advances made and accrued interest.
 
On January 1, 2015 the Company and ANP entered into a new Custom Processing Agreement (the “New CPA”) replacing the Agreement from October 17, 2011.  The term of the New CPA is one year.  The New CPA automatically renews at the end of the initial term for an additional two year term unless either party provides written notice to the other within the specified time frame.  The New CPA provides that the Company and ANP mutually agree to release each other from the original Agreement.  Also agreed to was the Company absolution to ANP of any responsibility to pay the balance of line of credit in the amount of $459,608 and accrued interest of $59,398.  ANP further agreed to release the Company from any responsibility to pay $359,713 owed to ANP relating to the original Agreement.  The Company further agrees to remove from ANP’s premises any BioFiber Gum product and all remaining product and raw materials.  As a result of the New CPA the Company recognized a settlement loss of $159,293 as of December 31, 2014.
 
The New CPA further stipulates that ANP will provide custom product processing services in the future on an order-by-order basis provided ANP has the available capacity to produce the Company’s products.  The Company agreed to give ANP purchase orders for a minimum of 40,000 pounds of product per order.
 
On September 2, 2015 ANP notified the Company that the New CPA will not be renewed.  The Company is in negotiations with another manufacturer and has increased its capacity at the Mundelein facility.  The Company does not believe that the termination of the New CPA will have an adverse effect.
 
NOTE 7 – ACCRUED EXPENSES AND OTHER
 
At September 30, 2015 and December 31, 2014 accrued expenses consist of the following:
 
   
9/30/2015
   
12/31/2014
 
Accrued payroll and taxes
 
$
247,893
   
$
151,741
 
Accrued settlements
   
102,000
     
102,000
 
Accrued interest
   
168,131
     
96,108
 
Accrued expenses and other
   
12,515
     
17,482
 
   
$
530,539
   
$
367,331
 
 
NOTE 8 – SHORT-TERM BORROWINGS
 
On March 24, 2014, Fordham Capital Partners, LLC (“Fordham”) extended a $500,000 revolving loan (the “Equipment Loan”) to Z Trim Holdings, Inc. (the “Company”) evidenced by an Equipment Revolving Note (the “Note”) issued by the Company to Fordham.  The Note requires monthly payments of principal of $10,417 plus interest, commencing on April 24, 2014 and continuing until February 24, 2015, followed by a final balloon payment of the entire unpaid principal balance of the Note and all accrued and unpaid interest on March 24, 2015.  The interest on the Note is calculated at a fixed rate of 20% per annum.  The Note may be prepaid in full at any time; provided that if the Company prepays the Note prior to September 24, 2014 (such six-month period, the “Guaranteed Interest Period”), it must pay a prepayment penalty equal to the amount by which (i) the aggregate interest that Fordham would have received on the Note during the Guaranteed Interest Period had there been no prepayment exceeds (ii) the aggregate interest paid by the Company prior to the date of prepayment.
 
Pursuant to the Security Agreement, dated March 24, 2014, between the Company and Fordham (the “Security Agreement”), the Equipment Loan is secured by a first priority security interest in all of the Company’s equipment (as more specifically defined in the Security Agreement, the “Collateral”).  The Security Agreement also contains customary restrictive covenants, including without limitation, covenants prohibiting the Company from (i) granting additional liens in the Collateral, (ii) selling, leasing or transferring the Collateral, (iii) entering into certain merger, consolidation or other reorganization transactions, and (iv) creating, incurring or assuming additional indebtedness, in each case subject to certain exceptions.  The Security Agreement also contains customary events of default.  If an event of default under the Security Agreement occurs and is continuing, Fordham may declare any outstanding obligations under the Credit Agreement immediately due and payable.  After an event of default, interest on the Note would accrue at a rate of 25% per annum.
 
Additionally, pursuant to the Factoring Agreement, dated March 24, 2014, between the Company and Fordham, Fordham may purchase any Accounts of the Company (the “Factoring Agreement”).  To secure payment and performance of the Company’s liabilities and obligations to Fordham, including obligations under the Factoring Agreement, the Company granted Fordham a security interest in all of the Company’s (i) Accounts, (ii) Inventory, (iii) Chattel Paper, Deposit Accounts, Documents, Equipment, Financial Assets, Fixtures, General Intangibles, Instruments, Investment Property, Letter-of-Credit Rights, Securities, Software and Supporting Obligations, (iv) books and records of Seller which relate to Accounts, (v) all amounts owing to the Company under the Factoring Agreement, and (vi) Proceeds of the foregoing.  The Factoring Agreement terminates at any time that the Equipment Loan is paid in full.
 
On July 16, 2014, the Company and Fordham Capital Partners, LLC entered into an Amended and Restated Equipment Revolving Note (the “Amended Note”) in the amount of $582,842.  The Amended Note requires monthly payments of principal of $12,143 plus interest, commencing on July 24, 2014 and continuing until February 24, 2015, followed by a final balloon payment of the entire unpaid principal balance of the Amended Note and all accrued and unpaid interest on March 24, 2015.  The interest on the Amended Note is calculated at a fixed rate of 22% per annum.
 
Also on July 16, 2014, the Company and Fordham Capital Partners, LLC entered into a First Amendment to Security Agreement pursuant to which the Amended Note is secured by a first priority security interest in all of the Company’s equipment under substantially the same terms and covenants as stated in the original Security Agreement indicated above.
 
On July 25, 2014, the Company and Fordham Capital Partners, LLC entered into an Amended and Restated Equipment Revolving Note (the “Second Amended Note”) in the amount of $668,750.  The Second Amended Note requires one monthly payment of principal of $12,143 plus interest, commencing on July 25, 2014 followed by successive monthly installments of principal of $13,679 plus interest and continuing until February 24, 2015, followed by a final balloon payment of the entire unpaid principal balance of the Second Amended Note and all accrued and unpaid interest on March 24, 2015.  The interest on the Second Amended Note is calculated at a fixed rate of 22% per annum.
 
Also on July 25, 2014, the Company and Fordham Capital Partners, LLC entered into a Second Amendment to Security Agreement pursuant to which the Second Amended Note is secured by a first priority security interest in all of the Company’s equipment under substantially the same terms and covenants as stated in the original and the First Security Agreement indicated above.
 
On March 24, 2015 the Company made a final payment of principal and interest in the amount of $570,449 to Fordham Capital Partners in satisfaction of the Amended and Restated Equipment Revolving Note dated July 16, 2014.
 
On May 28, 2015, the Company and Fordham Capital Partners, LLC entered into an Equipment Note in the amount of $50,000.  The note requires payment in one installment of principal of $50,000 plus interest on June 30, 2015.  The interest on the note is calculated at a fixed rate of 22% per annum.
 
Pursuant to the Security Agreement, dated May 28, 2015, between the Company and Fordham (the “Security Agreement”), the Equipment Note is secured by a first priority security interest in all of the Company’s equipment (as more specifically defined in the Security Agreement, the “Collateral”).  The Security Agreement also contains customary restrictive covenants, including without limitation, covenants prohibiting the Company from (i) granting additional liens in the Collateral, (ii) selling, leasing or transferring the Collateral, (iii) entering into certain merger, consolidation or other reorganization transactions, and (iv) creating, incurring or assuming additional indebtedness, in each case subject to certain exceptions.  The Security Agreement also contains customary events of default.  If an event of default under the Security Agreement occurs and is continuing, Fordham may declare any outstanding obligations under the Credit Agreement immediately due and payable.  After an event of default, interest on the Note would accrue at a rate of 25% per annum.
 
Additionally, pursuant to the Factoring Agreement, dated May 28, 2015, between the Company and Fordham, Fordham may purchase any Accounts of the Company (the “Factoring Agreement”).  To secure payment and performance of the Company’s liabilities and obligations to Fordham, including obligations under the Factoring Agreement, the Company granted Fordham a security interest in all of the Company’s (i) Accounts, (ii) Inventory, (iii) Chattel Paper, Deposit Accounts, Documents, Equipment, Financial Assets, Fixtures, General Intangibles, Instruments, Investment Property, Letter-of-Credit Rights, Securities, Software and Supporting Obligations, (iv) books and records of Seller which relate to Accounts, (v) all amounts owing to the Company under the Factoring Agreement, and (vi) Proceeds of the foregoing.  The Factoring Agreement terminates on June 30, 2015 or at any time that the Equipment Note is paid in full.
 
On June 25, 2015, the Company and Fordham Capital Partners, LLC entered into an Amended and Restated Equipment Note (the “Second Amended Note”) in the amount of $150,000.  The Second Amended Note requires (a) one monthly interest only payment on June 30, 2015 followed by (b) one installment payment of principal of $150,000 plus interest, with such payment due on the maturity date of July 31, 2015.  The interest on the Second Amended Note is calculated at a fixed rate of 22% per annum.  As of June 30, 2015, the Company did not make the requisite interest payment stipulated in the Second Amended Note.  The amount of interest not paid was $1,222.
 
Also on June 25, 2015, the Company and Fordham Capital Partners, LLC entered into an Amended and Restated Security Agreement in which the Second Amended Note is secured by a first priority security interest in all of the Company’s equipment under substantially the same terms and covenants as stated in the Security Agreement (dated May 28, 2015) above.
 
Additionally, on June 25, 2015, the Company and Fordham entered into an Amendment to Factoring Agreement pursuant to which Fordham may purchase any Accounts of the Company under substantially the same terms and covenants as stated in the Factoring Agreement (dated May 28, 2015) above.   The Factoring Agreement terminates on July 31, 2015 or at any time that the Equipment Note is paid in full.
 
In connection with the Purchase Agreement, the Company’s Factoring Agreement with Fordham effective May 28, 2015, as amended by an amendment dated June 25, 2015, was further amended to grant to Fordham a security interest in all of the collateral under such agreement to secure the payment to Fordham of all rent payments and all other amounts owed by the Company to Fordham under the Equipment Lease Agreement.
 
On July 17, 2015, the Company entered into an equipment purchase agreement (the “Purchase Agreement”) with Fordham Capital Partners, LLC (“Fordham”) pursuant to which the Company sold all of its right, title and interest in production equipment utilized by the Company to Fordham for a purchase price of $500,000.  From the proceeds of the sale, the company repaid outstanding borrowings of $200,000 due to Fordham Capital plus accrued interest of $3,112, 2014 franchise taxes of $96,542 and a security deposit of $15,800 related to the equipment lease. Concurrently with entering into the Purchase Agreement, on July 17, 2015, the Company entered into an equipment lease agreement (the “Equipment Lease Agreement”) with Fordham pursuant to which the Company leased the production equipment from Fordham on terms that included the following: a lease term of 24 months, monthly lease payments by the Company of $15,800 and the option (at the election of the Company) to purchase the equipment on or after July 8, 2016 on the following terms:  (i) if the purchase date is between 12-18 months $425,000; (ii) if the purchase date is between 19-23 months: $360,000; and (iii) if the purchase date is during the 24th month (but no later than July 8, 2017): $325,000.
 
The Company received cash proceeds of $172,911 from the Purchase Agreement after paying off the obligations described above.  These proceeds were used for general corporate purposes.
 
The Equipment Lease Agreement includes customary events of default, including non-payment by the Company of the monthly lease payments and the payment of penalties upon such late payments.  The Company intends to use the net proceeds from the sale of the equipment for working capital purposes.
 
On September 29, 2015, the Company issued a 14% nonconvertible senior unsecured note to an accredited investor in the principal amount of $250,000.  The note matures in six months (March 26, 2016) and bears interest at 14% computed based on a 365-day year.  Accrued interest is payable at maturity in cash.
 
NOTE 9 – SHORT-TERM NONCONVERTIBLE NOTES PAYABLE TO RELATED PARTY
 
On September 29, 2014, the Company issued a 14% nonconvertible subordinated secured note to Edward Smith, III in the principal amount of $85,000.  The note matures in two months (November 29, 2014) and bears interest at 14% computed based on a 365-day year.  Accrued interest is payable at maturity in cash.   The note is secured by the assets of the Company, which security interest is subordinate to the security interest granted to Fordham in connection with the Equipment Loan and the Factoring Agreement.
 
On October 23, 2014, the Company issued a 14% nonconvertible subordinated secured note to Edward Smith, III in the principal amount of $85,000.  The note matures in two months (December 23, 2014) and bears interest at 14% computed based on a 365-day year.  Accrued interest is payable at maturity in cash.   The note is secured by the assets of the Company, which security interest is subordinate to the security interest granted to Fordham in connection with the Equipment Loan and the Factoring Agreement.
 
On October 30, 2014, the Company issued a 14% nonconvertible subordinated secured note to Edward Smith, III in the principal amount of $70,000.  The note matures in two months (December 30, 2014) and bears interest at 14% computed based on a 365-day year.  Accrued interest is payable at maturity in cash.   The note is secured by the assets of the Company, which security interest is subordinate to the security interest granted to Fordham in connection with the Equipment Loan and the Factoring Agreement.
 
On December 3, 2014, the Company issued a 14% nonconvertible subordinated secured note to Edward Smith, III in the principal amount of $30,000.  The note matures in two months (February 3, 2015) and bears interest at 14% computed based on a 365-day year.  Accrued interest is payable at maturity in cash.   The note is secured by the assets of the Company, which security interest is subordinate to the security interest granted to Fordham in connection with the Equipment Loan and the Factoring Agreement.
 
On December 19, 2014, the Company executed an amendment to the 14% nonconvertible subordinated secured notes (dated September 29, 2014, October 23, 2014, October 30, 2014 and December 3, 2014, respectively) whereby the maturity date for each note was extended to April 15, 2015.
 
On April 15, 2015, the Company executed an amendment number 2 to the 14% nonconvertible subordinated secured notes (dated September 29, 2014, October 23, 2014, October 30, 2014 and December 3, 2014, respectively) whereby the maturity date for each note was extended from April 15, 2015 to May 29, 2015.
 
On May 29, 2015, the Company executed an amendment number 3 to the 14% nonconvertible subordinated secured notes (dated September 29, 2014, October 23, 2014, October 30, 2014 and December 3, 2014, respectively) whereby the maturity date for each note was extended from May 29, 2015 to December 31, 2015.
 
On June 12, 2015, the Company issued a 14% nonconvertible subordinated secured note to Edward Smith, III in the principal amount of $12,000.  The note matures on December 31, 2015 and bears interest at 14% computed based on a 365-day year.  Accrued interest is payable at maturity in cash.   The note is secured by the assets of the Company, which security interest is subordinate to the security interest granted to Fordham in connection with the Equipment Loan and the Factoring Agreement.
 
On August 13, 2015, the Company issued a 14% nonconvertible subordinated secured note to Edward Smith, III in the principal amount of $25,000.  The note matures on December 31, 2015 and bears interest at 14% computed based on a 365-day year.  Accrued interest is payable at maturity in cash.   The note is secured by the assets of the Company, which security interest is subordinate to the security interest granted to Fordham in connection with the Equipment Loan and the Factoring Agreement.
 
On August 21, 2015, the Company issued a 14% nonconvertible subordinated secured note to Edward Smith, III in the principal amount of $150,000.  The note matures on December 31, 2015 and bears interest at 14% computed based on a 365-day year.  Accrued interest is payable at maturity in cash.   The note is secured by the assets of the Company, which security interest is subordinate to the security interest granted to Fordham in connection with the Equipment Loan and the Factoring Agreement.
 
The outstanding amount of nonconvertible notes payable to a related party was $457,000 and $270,000 at September 30, 2015 and December 31, 2014 respectfully.  The amount of accrued and unpaid interest was $38,549 and $7,268 as of the same dates.
 
NOTE 10 – CONVERTIBLE NOTES PAYABLE TO RELATED PARTIES
 
On February 11, 2014, the Company entered into an agreement with Edward Smith, III, a Director and Shareholder of the Company, pursuant to which Mr. Smith agreed to lend the Company $200,000 in a convertible senior secured note.  The note matures in two years (February 11, 2016) and bears interest at 12.5% computed based on a 365-day year.  Accrued interest is payable either at maturity or quarterly at the option of Mr. Smith in shares of the Company’s common stock.  At any time on or after the date that is 90 days after the date of issuance of the note, Mr. Smith may elect to convert the aggregate principal balance and accrued interest into shares of common stock of the Company.  The conversion price under the note is $2.25, subject to adjustment as provided in the note.  If on the maturity date of the note, the thirty day trailing average closing price of the Company’s common stock (the “Trailing Average Price”) is below $2.25, the Conversion Price on the maturity date will be reduced to the Trailing Average Price, but to not less than $1.25.  The Conversion Price was greater than the closing stock price on the agreement date; therefore no beneficial conversion feature was recorded on this note.  The note is secured by the assets of the Company, which security interest is expressly subordinate to the interest of Fordham Capital Partners LLC described below, pursuant to an intercreditor agreement between Mr. Smith and Fordham dated March 18, 2014.
 
On April 25, 2014, the Company entered into an agreement with Edward Smith, III, a Director and Shareholder of the Company, pursuant to which Mr. Smith agreed to lend the Company $300,000 in a convertible subordinated secured note.  The note matures in two years (April 25, 2016) and bears interest at 14% computed based on a 365-day year.  Accrued interest is payable at maturity in shares of the Company’s common stock.  At any time on or after the date that is 90 days after the date of issuance of the note, Mr. Smith may elect to convert the aggregate principal balance and accrued interest into shares of common stock of the Company.  The conversion price under the note is $1.00.  The conversion price was greater than the closing stock price on the agreement date; therefore no beneficial conversion feature was recorded on this note. The note is secured by the assets of the Company, which security interest is subordinate to the security interest granted to Fordham in connection with the Equipment Loan and the Factoring Agreement.
 
On April 30, 2014, the Company issued a 14% convertible subordinated secured note to each of Morris Garfinkle, Mark Hershhorn, Brian Israel and Edward Smith, III, Directors of the Company at such time, in the principal amount of $19,000, for director fees due and payable to them (the “Director Notes”).  Each Director Note matures in two years (April 30, 2016) and bears interest at 14% computed on a 365-day year.  Accrued interest is payable at maturity in shares of the Company’s common stock.  At any time on or after the date that is 90 days after the date of issuance of the Director Note, the director may elect to convert the aggregate principal balance and accrued interest into shares of common stock of the Company.  The conversion price under each Director Note is $1.00.  The conversion price was greater than the closing stock price on the agreement date; therefore no beneficial conversion feature was recorded on this note.  Each Director Note is secured by the assets of the Company, which security interest is subordinate to the security interest granted to Fordham in connection with the Equipment Loan and the Factoring Agreement.
 
On May 12, 2014, the Company issued 14% convertible subordinated secured notes to both Morris Garfinkle and CKS Warehouse, an entity owned by Mark Hershhorn, in the principal amount of $75,000 each.  Both notes mature in two years (May 12, 2016) and bear interest at 14% computed on a 365-day year.  Accrued interest is payable at maturity in shares of the Company’s common stock.  At any time on or after the date that is 90 days after the date of issuance of each note, Mr. Garfinkle and CKS Warehouse may elect to convert the aggregate principal balance and accrued interest into shares of common stock of the Company.  The conversion price under each note is $1.00.  The conversion price was greater than the closing stock price on the agreement date; therefore no beneficial conversion feature was recorded on this note.  Each note is secured by the assets of the Company, which security interest is subordinate to the security interest granted to Fordham in connection with the Equipment Loan and the Factoring Agreement.
 
On July 15, 2014, the Company entered into an agreement with Edward Smith, III, pursuant to which Mr. Smith agreed to lend the Company $64,000 in an unsecured note payable.  The note matures in 90 days (October 15, 2014) without interest payable on the unpaid principal and subject to the terms of the Company’s agreements with its secured creditors.  On August 6, 2014 this note was rolled into the $264,000 convertible subordinated secured note indicated below.
 
On August 6, 2014, the Company issued a 14% convertible subordinated secured note to Edward Smith, III in the principal amount of $264,000.  The note matures in two years (August 6, 2016) and bears interest at 14% computed on a 365-day year.  Under this note Mr. Smith has provided $200,000 of cash as of August 6, 2014 and the parties agreed to include the unsecured funds in the amount of $64,000 provided by Mr. Smith on July 15, 2014 and include those amounts as part of this subordinated secured transaction.  The loan agreement executed by the parties on July 15, 2014 was null and void after issuance of the note.  Accrued interest is payable at maturity in shares of the Company’s common stock.  At any time on or after the date that is 90 days after the date of issuance of the note, Mr. Smith may elect to convert the aggregate principal balance and accrued interest into shares of common stock of the Company.  The conversion price under this note is $1.00.  The conversion price was greater than the closing stock price on the agreement date; therefore, no beneficial conversion feature was recorded on this note.  The note is secured by the assets of the Company, which security interest is subordinate to the security interest granted to Fordham in connection with the Equipment Loan and the Factoring Agreement.
 
In connection with the private placement offering that was consummated in January 2015, the members of the Company’s Board of Directors agreed to receive an aggregate of 96,590 Units (representing one (1) Unit for every $4.00 of debt exchanged), this includes 1,103,880 shares of preferred stock, 826,806 Initial Warrants and 351,586 Additional Warrants in exchange for previously issued convertible notes (including principal and accrued and unpaid interest) (the “Notes”) held by the directors or affiliated entities as follows: (i) 71,211 Units, 609,566 Initial Warrants and 259,208 Additional Warrants were issued to Edward Smith, III, the Company’s Chief Executive Officer, in exchange for an aggregate of $284,844 of notes, (ii) 10,084 Units, 86,317 Initial Warrants and 36,705 Additional Warrants were issued to Morris Garfinkle in exchange for $40,335 of notes; (iii) 5,211 Units, 44,606 Initial Warrants and 18,968 Additional Warrants were issued to each of Mark Hershhorn and Brian Israel in exchange for an aggregate of $20,844 of notes, respectively; and (v) 4,873 Units, 41,712 Initial Warrants and 17,737 Additional Warrants were issued to CKS Warehouse, an entity in which Mr. Hershhorn owns a controlling interest, in exchange for an aggregate of $19,491of principal and interest on notes.
 
The fair value of the preferred stock issued with the units above was calculated using multinomial lattice models that valued the preferred stock based on a probability weighted discounted cash flow model.  The assumptions used to determine the fair value included the holder of the preferred stock would convert the preferred stock once the stock price exceeded the exercise price, the historical annual volatility of the Company’s stock price was 119% and the weighted cost of capital for the Company was 16.93%.   As a result of the conversion of convertible debt into units, the Company recorded a loss on debt conversion of $351,314.

The outstanding amount of short-term convertible notes payable to related parties was $624,866 at September 30, 2015.  The amount of accrued and unpaid interest was $108,096 as of the same date.  These notes were classified as long-term convertible notes payable to related parties on the December 31, 2014 balance sheet.
 
NOTE 11 – LIQUIDATED DAMAGES
 
In connection with certain private placements of the Company’s securities (the “Registrable Securities”) effected in 2008, the Company entered into registration rights agreements (the “RRA”) that required the Company to file a registration statement covering the Registrable Securities with the Securities and Exchange Commission no later than thirty days after the final closing as contemplated in the Private Placement Memorandum for the 2008 offering (the “Filing Deadline”), which the Company did not meet. Under the terms of the RRA, 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.  The Company obtained a release and waiver of the amounts due from almost all of the 2008 investors.   Under the terms of the RRA, the Company potentially owes, and have recognized as liquidated damages, $36,178 relating to holders from whom we did not receive waivers.
 
NOTE 12 – DERIVATIVE LIABILITIES
 
Certain of the Company’s convertible preferred stock and warrants have reset provisions to the exercise price if the Company issues equity or other derivatives at a price less than the exercise price set forth in such convertible preferred stock and warrants. This ratchet provision results in a derivative liability in our financial statements.
 
The Company’s derivative liabilities increased to $832,969 at September 30, 2015 from $20,166 at December 31, 2014.  The expense recognized during the first nine months ended September 30, 2015 was $1,355,747 as compared to the gain recognized of $71,125 for the nine months ended September 30, 2014.
 
The following tabular presentation reflects the components of derivative financial instruments on the Company’s balance sheet at September 30, 2015 and December 31, 2014:
 
   
9/30/2015
   
12/31/2014
 
Common stock warrants
 
$
129,923
   
$
20,166
 
Embedded conversion features for convertible debt or preferred shares
   
703,046
     
-
 
                 
Total
 
$
832,969
   
$
20,166
 
                 
Beginning balance
 
$
20,166
   
$
95,049
 
Change in derivative liabilities due to settlements
   
(542,944
)
   
-
 
Change in derivative liabilities valuation
   
1,355,747
     
(74,883
)
                 
Ending balance
 
$
832,969
   
$
20,166
 
 
NOTE 13 – COMMON STOCK
 
Common Stock Issued to Directors

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

On January 2, 2014 the Company issued 285,716 shares of common stock to its four non-executive directors (71,429 shares each) Mark Hershhorn, Brian Israel, Morris Garfinkle and Edward Smith, III. The Company recognized a total expense of $160,001 related to these issuances.  These shares were valued based on the closing price on the grant date.
 
Common Stock Issued on the Exercise of Stock Warrants and/or Options for Cash

During the nine month periods ended September 30, 2015 and 2014, respectively, there were no warrants or options exercised for cash.
 
Common Stock Issued on the Cashless Exercise of Warrants and/or Stock Options
 
During the nine months ended September 30, 2015 and 2014, respectively, the Company did not issue any shares of common stock on the cashless exercise of options.
 
On April 29, 2015, the Company sent a proposal to all warrant holders (as of September 30, 2014)  to participate in a warrant exchange program whereby each warrant holder will be able to 1) exchange their warrants for common stock, on a cashless basis, at a reduced exercise price of $0.00005 per share, 2) if applicable, receive the right to 17.5% more warrants and a two year extension on all of their warrants in return for waiving their anti-dilution rights on a one-time basis for the exchange, or 3) elect to take advantage of (1) and (2) by (i) exchanging a portion of their Warrants that they so designate for shares of Common Stock in accordance with the applicable terms in (1) and (ii) the remainder of the Warrant not exchanged will be retained and amended pursuant to the applicable provisions of (2). As of April 29, 2015 there were 55,334,490 warrants outstanding that were eligible to participate in the proposal inclusive of 38,888,147 warrants associated with anti-dilution provisions resulting from the January 8, 2015 private placement.
 
As of September 30, 2015, the results of this exchange were warrant holders elected to receive 52,110,896 shares of Common Stock under alternative (1), 318,750 additional warrants were issued under alternative (2) and a combination of 974,826 shares of Common Stock and 73,125 warrants were issued from elections made under alternative (3). The Company recorded a loss on exchange of warrants of $12,959,654 for the nine months ended September 30, 2015
 
During the nine months ended September 30, 2014, the Company did not issue any common stock on the cashless exercise of warrants.
 
Common Stock Issued for Services
 
On March 1, 2015, the Company entered into a Business Development Agreement with Steeltown Consulting Group, LLC, pursuant to which Steeltown will assist in evaluating various business and financial matters.  The Company issued 400,000 restricted shares of common stock as consideration for the services being rendered in this agreement.  The common stock was valued at $104,000 based on the closing prices of the stock on the date the agreement was executed.  This agreement is scheduled to terminate on March 1, 2016.

There were no shares issued for services during the nine months ended September 30, 2014.
 
NOTE 14 – PREFERRED STOCK
 
Preferred Stock Issued to Investors
 
Between December 29 and 31, 2014, the Company received cash deposits from several accredited investors in the amount of $1,010,000 towards the purchase of equity securities being offered by the Company.  On January 8, 2015, the Company  entered into agreements to sell an aggregate of 260,000 units to eight (8) accredited investors at a price per unit of $4.00 (the “Units”) with each Unit consisting of (i) one (1) share of 12.5% Redeemable Convertible Preferred Stock (the “Preferred Shares”) and (ii) one (1) warrant (the “Initial Warrant”), to acquire 8.56 shares of the Company’s common stock, par value, $0.00005 per share (“common stock”), at an exercise price of $0.64 per share, for aggregate cash proceeds of $1,040,000 pursuant to separate purchase agreements entered into with each investor (the “Securities Purchase Agreements”).  In addition, the Company agreed to issue to each of the investors in the first round of financing an  additional warrant for each Unit acquired (the “Additional Warrant” and together with the Initial Warrant, the “Warrants”) to acquire 3.64 shares of the Company’s common stock at an exercise price of $0.64 per share.  The Additional Warrants issued in the initial closing of 260,000 Units are exercisable for an aggregate of 946,400 shares of the Company’s common stock. The Warrants expire on the fifth anniversary of their issuance, may be exercised on a cashless basis, are subject to full ratchet price anti-dilution protection and entitled to registration rights.  As a result, 260,000 shares of Preferred Stock were issued.
 
In connection with the private placement offering that was consummated in January 2015, the members of the Company’s Board of Directors agreed to receive an aggregate of 96,590 Units (representing one (1) Unit for every $4.00 of debt exchanged), 826,806 Initial Warrants and 351,586 Additional Warrants in exchange for previously issued convertible notes (including principal and accrued and unpaid interest) (the “Notes”) held by the directors or affiliated entities as follows: (i) 71,211 Units, 609,566 Initial Warrants and 259,208 Additional Warrants were issued to Edward Smith, III, the Company’s Chief Executive Officer, in exchange for an aggregate of $284,844 of notes, (ii) 10,084 Units, 86,317 Initial Warrants and 36,705 Additional Warrants were issued to Morris Garfinkle in exchange for $40,335 of notes; (iii) 5,211 Units, 44,606 Initial Warrants and 18,968 Additional Warrants were issued to each of Mark Hershhorn and Brian Israel in exchange for an aggregate of $20,844 of notes, respectively; and (v) 4,873 Units, 41,712 Initial Warrants and 17,737 Additional Warrants were issued to CKS Warehouse, an entity in which Mr. Hershhorn owns a controlling interest, in exchange for an aggregate of $19,491 of principal and interest on notes.

On February 9, 2015, the Company closed a second round of its private placement offering with four (4) accredited investors in which it raised gross proceeds of $500,000 and sold 125,000 units, with each unit consisting of  (i) one (1) share of 12.5% Redeemable Convertible Preferred Stock (the “Preferred Shares”) and (ii) one (1) warrant (the “Initial Warrant”), to acquire 8.56 shares of the Company’s common stock, par value, $0.00005 per share (“common stock”), at an exercise price of $0.64 per share all pursuant to separate Securities Purchase Agreements entered into with each investor (the “Securities Purchase Agreements”).  In addition, the Company issued to each of the investors in the first and second rounds of financing an additional warrant for each Unit acquired (the “Additional Warrant” and together with the Initial Warrant, the “Warrants”) to acquire 3.64 shares of the Company’s common stock at an exercise price of $0.64 per share.  The Initial Warrants issued in the second closing are exercisable for 1,070,000 shares of the Company’s common stock and the Additional Warrants issued in the second closing are exercisable for an aggregate of 455,000 shares of the Company’s common stock. The sale was part of a private placement offering (the “Offering”) in which the Company offered for sale a maximum of 5,000,000 units (gross proceeds of $20,000,000).  Prior to the second closing, the Company raised gross proceeds of $1,040,000 in the initial closing of the Offering and sold 260,000 Units (260,000 Preferred Shares, Initial Warrants to acquire 2,225,600 shares of common stock and Additional Warrants to acquire 946,400 shares of common stock.   The Warrants expire on the fifth anniversary of their issuance, may be exercised on a cashless basis, are subject to full ratchet price anti-dilution protection and entitled to registration rights as set forth below.  The Preferred Shares are nonvoting, accrue dividends at the rate per annum equal to 12.5% of the sum of (i) the Stated Value (which initially is $4.00) until the Maturity Date as defined in the Statement of Resolution Establishing Preferred Shares and (ii) the amount of accrued and unpaid dividends payable, are convertible into shares of common stock at the option of the holder as described in the Statement of Resolution Establishing Preferred Shares, have anti-dilution protection, registration rights, may be redeemed under certain circumstances, liquidation preference, protective provisions and board rights under certain circumstances.  As a result, 125,000 shares of Preferred Stock were issued.

On March 18, 2015, the Company received $75,000 from an accredited investor towards the purchase of 18,750 units in a private placement offering.  Each unit consists of (i) one (1) share of 12.5% Convertible Preferred Stock and (ii) one (1) warrant, to acquire 8.56 shares of the Company’s common stock, par value, $0.00005 per share, at an exercise price of $0.64 per share all pursuant to separate Securities Purchase Agreements entered into with the investor.

On June 1, 2015, the Company received $25,000 from an accredited investor towards the purchase of 6,250 units in a private placement offering.  Each unit consists of (i) one (1) share of 12.5% Convertible Preferred Stock and (ii) one (1) warrant, to acquire 8.56 shares of the Company’s common stock, par value, $0.00005 per share, at an exercise price of $0.64 per share all pursuant to separate Securities Purchase Agreements entered into with the investor.

On August 26, 2015, the Company received $250,000 from accredited investors towards the purchase of 62,500 units in a private placement offering.  Each unit consists of (i) one (1) share of 12.5% Convertible Preferred Stock and (ii) one (1) warrant, to acquire 8.56 shares of the Company’s common stock, par value, $0.00005 per share, at an exercise price of $0.64 per share all pursuant to separate Securities Purchase Agreements entered into with the investor.

Preferred Stock Issued to Vendors

On May 12, 2015, the Company agreed to issue 12,500 shares of 12.5% Convertible Preferred Stock and 107,000 warrants to acquire the Company’s Common Stock at an exercise price of $0.64 per share in satisfaction of outstanding accounts payable due to a vendor.  The outstanding balance due to this vendor was $60,885. The Company recognized a loss of $13,990 as a result of the payable conversion.

On May 1, 2015, the Company and its landlord executed an amendment to the current lease extending the lease until October 14, 2015.  The parties agreed and the Company delivered to the landlord 8,010 shares of its 12.5% Convertible Preferred Stock and agreed to issue 68,566 warrants to acquire the Company’s Common Stock at an exercise price of $0.64 per share. The Company recorded additional rent expense of $48,060.
 
There were no shares of 12.5% Convertible Preferred Stock outstanding during the nine months ended September 30, 2014.

Dividends Accrued

As of September 30, 2015, the Company had accrued dividends of $194,302.  There were no accrued dividends as of December 31, 2014.
 
NOTE 15 – STOCK OPTION PLAN AND WARRANTS
 
STOCK OPTION PLAN
 
The Company’s Incentive Compensation Plan (the “Plan”) 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 outstanding under the Plan as of September 30, 2015 and December 31, 2014 is as follows:
 
   
9/30/2015
   
12/31/2014
 
   
Number of
Options
   
Weighted
Average
Exercise
Price
   
Number of
Options
   
Weighted
Average
Exercise Price
 
Outstanding at beginning of year
   
11,033,675
   
$
1.05
     
9,583,762
   
$
1.16
 
Granted
   
6,299,600
   
$
0.29
     
2,372,800
   
$
0.58
 
Exercised
   
-
   
$
-
     
-
   
$
-
 
Expired and Cancelled
   
(3,295,240
)
 
$
1.17
     
(922,887
)
 
$
0.99
 
     
14,038,035
             
11,033,675
         
                                 
Outstanding, end of period
   
14,038,035
   
$
0.69
     
11,033,675
   
$
1.05
 
                                 
                                 
Exercisable at end of period
   
7,738,435
   
$
0.88
     
11,033,675
   
$
1.05
 
 
During the nine months ended September 30, 2015, the Company granted 6,299,600 options at a weighted average exercise price of $0.29 per share valued at $1,845,892.  Stock-based compensation expense for both the three and nine months ended September 30, 2015 was $152,712 and $261,459 respectively.  As of September 30, 2015, the unrecognized compensation cost related to all non-vested share-based compensation arrangements granted under the Plan was $388,385.  Of this amount, $158,959 will be recognized in the fourth quarter of 2015.
 
During the nine months ended September 30, 2014 the Company granted to employees 2,372,800 options valued at $1,375,238.  Stock-based compensation expense for the three and nine months ended September 30, 2014 was $377,731 and $992,450, respectively.  As of September 30, 2014, the unrecognized compensation cost related to all non-vested share-based compensation arrangements granted under the Plan was $3,366 and was recognized in the fourth quarter of 2014.
 
During the nine months ended September 30, 2015 and 2014, there were no stock options exercised either for cash or on a cashless basis.
 
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 for stock options granted in 2015.  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 options is based on the U.S. Treasury yield curve in effect at the time of grant.
 
   
9/30/2015
 
Weighted average fair value per option granted
   
0.1431 - .3606
 
Risk-free interest rate
   
1.00% - 1.54
%
Expected dividend yield
   
0.00
%
Expected lives
   
2.688 - 3.00
 
Expected volatility
   
86.22% - 120.51
%
 
Warrants
 
As of September 30, 2015, the Company has warrants outstanding to purchase 49,283,205 shares of the Company’s common stock, at prices ranging from $0.35 to $1.45 per share.  These warrants expire at various dates through November 2020.  The summary of the status of the warrants issued by the Company as of September 30, 2015 and December 31, 2014 are as follows:
 
Z TRIM HOLDINGS, INC.
SUMMARY OF WARRANTS
 
   
9/30/2015
   
12/31/2014
 
   
Number of
Warrants
   
Weighted
Average
Exercise Price
   
Number of
Warrants
   
Weighted
Average
Exercise Price
 
Outstanding at beginning of year
   
16,446,351
   
$
1.45
     
16,688,265
   
$
1.44
 
Granted
   
86,275,799
   
$
0.42
     
-
   
$
-
 
Exercised
   
(53,095,204
)
 
$
0.66
     
-
   
$
-
 
Cashless Exercises
   
-
   
$
-
     
-
   
$
-
 
Expired and Cancelled
   
(218,571
)
 
$
0.66
     
(241,914
)
 
$
0.87
 
     
49,408,375
             
16,446,351
         
                                 
Outstanding, end of period
   
49,408,375
   
$
0.50
     
16,446,351
   
$
1.45
 
                                 
Exercisable at end of period
   
49,408,375
   
$
0.50
     
16,446,351
   
$
1.45
 
 
Effective January 1, 2015, the Company and its landlord executed an amendment to the current lease extending the lease until July 14, 2015.  Commencing on May 1, 2015, the parties agreed to a monthly base rent of $10,681 plus property taxes.  The Company also agreed to pay $71,125 in rental arrears on April 30, 2015 and another $71,125 in rental arrears on July 1, 2015.  Also, the parties agreed that the Company will deliver to the landlord 20,025 shares of its 12.5% convertible preferred stock which shares are convertible to common stock at the landlord’s option at .088 per preferred share.  Finally, the Company issued a five year warrant to the landlord to purchase 171,454 shares of common stock at $0.64 per share.  On May 1, 2015, the Company executed an amendment to the current lease extending the lease until October 14, 2015.  The parties agreed that the Company will deliver 8,010 shares of its 12.5% Convertible Preferred Stock. The Company also agreed to issue a five year warrant to purchase 68,566 shares of common stock at $0.64 per share.
 
On January 8, 2015, in conjunction with the sale of units consisting of convertible preferred stock, Company, issued warrants (the “Initial Warrant”) to acquire 8.56 shares of the Company’s common stock, par value, $0.00005 per share (“common stock”), at an exercise price of $0.64 per share.  In addition, the Company agreed to issue to each of the investors in the first round of financing an  additional warrant to acquire (the “Additional Warrant” and together with the Initial Warrant, the “Warrants”) to acquire 3.64 shares of the Company’s common stock at an exercise price of $0.64 per share.  The Additional Warrants issued are exercisable for an aggregate of 946,400 shares of the Company’s common stock. The Warrants expire on the fifth anniversary of their issuance, may be exercised on a cashless basis, are subject to full ratchet price anti-dilution protection and entitled to registration rights.
 
Due to the anti-dilution provisions of some of the outstanding warrants before the January 8, 2015 transaction, the exercise price on 15,512,057 warrants has been reduced to $0.35 and the number of shares of common stock into which the warrants are now exercisable has been adjusted such that the warrants are now exercisable into 54,400,204 shares of common stock.
 
In addition to the foregoing, the members of the Company’s then Board of Directors agreed to receive 1,103,880 shares of preferred stock, 826,806 Initial Warrants and 351,586 Additional Warrants in exchange for previously issued convertible notes (including principal and accrued and unpaid interest) (the “Notes”) held by the directors or affiliated entities as follows: (i) 71,211 Units, 609,566 Initial Warrants and 259,208 Additional Warrants were issued to Edward Smith, III, the Company’s Chief Executive Officer, in exchange for an aggregate of $284,844 of notes, (ii) 10,084 Units, 86,317 Initial Warrants and 36,705 Additional Warrants were issued to Morris Garfinkle in exchange for $40,335 of notes; (iii) 5,211 Units, 44,606 Initial Warrants and 18,968 Additional Warrants were issued to each of Mark Hershhorn and Brian Israel in exchange for an aggregate of $20,844 of notes, respectively; and (v) 4,873 Units, 41,712 Initial Warrants and 17,737 Additional Warrants were issued to CKS Warehouse, an entity in which Mr. Hershhorn owns a controlling interest, in exchange for an aggregate of $19,491of principal and interest on notes.
 
On February 9, 2015, the Company closed a second round of a private placement offering in which investors received the Initial Warrants to acquire 8.56 shares of the Company’s common stock, par value, $0.00005 per share (“common stock”), at an exercise price of $0.64 per share all pursuant to separate Securities Purchase Agreements entered into with each investor (the “Securities Purchase Agreements”).  In addition, the Company issued to each of the investors in the first and second rounds of financing an additional warrant for each Unit acquired (the “Additional Warrant” and together with the Initial Warrant, the “Warrants”) to acquire 3.64 shares of the Company’s common stock at an exercise price of $0.64 per share.  The Initial Warrants issued in the second closing are exercisable for 1,070,000 shares of the Company’s common stock and the Additional Warrants issued in the second closing are exercisable for an aggregate of 455,000 shares of the Company’s common stock. The sale was part of a private placement offering (the “Offering”) in which the Company offered for sale a maximum of 5,000,000 units (gross proceeds of $20,000,000).  Prior to the second closing, the Company raised gross proceeds of $1,040,000 in the initial closing of the Offering issued Initial Warrants to acquire 2,225,600 shares of common stock and Additional Warrants to acquire 946,400 shares of common stock.   The Warrants expire on the fifth anniversary of their issuance, may be exercised on a cashless basis, are subject to full ratchet price anti-dilution protection and entitled to registration rights.
 
The fair values for the Company’s derivative liabilities related to the Warrants (5 year warrants at $1.00, $0.35, and $0.64, with a full reset feature) issued is $832,969. The derivative instruments were valued as of September 30, 2015 with the following assumptions:
 
- The Holder would automatically exercise the warrants at a stock price above the exercise price (some warrants adjusted the exercise price to $1.00), with the target exercise price dropping as expiration approaches,
- The projected annual volatility was based on the Company’s historical volatility between 124% and 126%,
- An event of default would occurred 5% of the time, increasing to 0.10% per month,
- Dilutive/Full Reset events projected to occur based on future projected capital needs (capital funds raised were projected in prior quarters of 2013 – future financings are projected going forward in September 2015) resulting in the weighted conversion price dropping from the initial conversion price (no reset events have occurred).

Effective January 1, 2015 the Company entered into a consulting agreement with Jeffery Consulting Group, LLC pursuant to which Jeffery Consulting will provide assistance with operational improvements including manufacturing processes, strategic and tactical advice with respect to the Company’s sales and marketing initiatives, and provide customer introductions and strategic sales opportunities.  In consideration of services rendered by Jeffrey Consulting, the Company issued a warrant to purchase 1,250,000 shares of common stock at $0.35 per share.  The warrant vested 500,000 shares upon the mutual execution of this agreement, and 250,000 shares each at the three month, six month, and nine month anniversaries of this agreement.  The fair value of the warrants issued is estimated on the date of grant using the Black-Scholes valuation model.  The assumptions used in the model included the historical volatility of the Company’s stock of 84.52%, and the risk-free rate for periods within the expected life of the warrant based on the U.S. Treasury yield curve in effect of 1.07%.  For the three months ended March 31, 2015 the Company recognized compensation expense of $128,880.  The Company also agreed to accrue $5,000 per month which becomes payable to Jeffrey Consulting once the Company has raised $3 million in additional capital.
 
On February 9, 2015, Edward Smith, III and Morris Garfinkle were issued warrants exercisable for 31,000,000 and 5,500,000 shares of common stock, respectively, in consideration of the services to be provided to the Company as Chief Executive Officer of the Company and Chairman of the Board, respectively.  The exercise price of these warrants is $0.45 per share.   The fair value of the warrants issued is estimated on the date of grant using the Black-Scholes valuation model.  The assumptions used in the model included the historical volatility of the Company’s stock of 81.99%, and the risk-free rate for periods within the expected life of the warrant based on the U.S. Treasury yield curve in effect of 0.85%.  For the six months ended June 30, 2015 the Company recognized compensation expense of $3,749,259.
 
On April 29, 2015, the Company sent a proposal to all warrant holders (as of September 30, 2014) an offer to participate in a warrant exchange program whereby each warrant holder will be able to 1) exchange their warrants for common stock, on a cashless basis, at a reduced exercise price of $0.00005 per share, 2) if applicable, receive the right to 17.5% more warrants and a two year extension on all of their warrants in return for waiving their anti-dilution rights on a one-time basis for the exchange, or 3) elect to take advantage of (1) and (2) by (i) exchanging a portion of their Warrants that they so designate for shares of Common Stock in accordance with the applicable terms in (1) and (ii) the remainder of the Warrant not exchanged will be retained and amended pursuant to the applicable provisions of (2). As of April 29, 2015 there were 55,334,490 warrants outstanding that were eligible to participate in the proposal inclusive of 38,888,147 warrants associated with anti-dilution provisions resulting from the January 8, 2015 private placement.
 
As of September 30, 2015, the results of this exchange were warrant holders elected to receive 52,110,896 shares of Common Stock under alternative (1).  The Company recorded a loss on exchange of warrants in the amount of $12,959,654.
 
Warrant holders elected to receive 318,750 additional warrants under alternative (2).
 
Finally, warrant holders elected to receive a combination of 974,826 shares of Common Stock and 73,125 warrants under alternative (3).  The Company recognized a warrant expense of $259,662.
 
On May 14, 2015 the Company entered into a consulting agreement with E.B. Smith Jr. (father of the Company’s CEO and largest shareholder, Edward Smith, III) pursuant to which E.B. Smith Jr. will provide advice with respect to the Company’s marketing initiatives, provide customer introductions and investigating strategic transactions.  In consideration of services rendered by E.B. Smith Jr., the Company issued warrants to purchase 750,000 shares of common stock at $0.35 per share.  The warrants vested 450,000 shares upon the mutual execution of this agreement and then in 150,000 share increments at the three month and six month anniversaries of this agreement.
 
On May 14, 2015 the Company entered into a consulting agreement with Terme Bancorp pursuant to which Terme Bancorp will provide advice with respect to the Company’s marketing initiatives, provide customer introductions and investigating strategic transactions.  In consideration of services rendered by Terme Bancorp, the Company issued warrants to purchase 1,250,000 shares of common stock at $0.35 per share.  The warrants vested 750,000 shares upon the mutual execution of this agreement and then in 250,000 share increments at the three month and six month anniversaries of this agreement.
 
There were no warrants granted during the nine months ended September 30, 2014.  Also during this period there were no warrants exercised either for cash or on a cashless basis.
 
NOTE 16 – SETTLEMENT GAIN (LOSS)
 
In December 2011, the Company was sued in Circuit Court of the 17th Judicial District, Winnebago County, Illinois, by LIBCO Industries, Inc., alleging the Company breached a construction contract and tortuously interfered with a business relationship, and is seeking damages in excess of $185,000.  The case has subsequently been transferred to the 19th Judicial Circuit Court, Lake County, Illinois.  Management believes that the allegations are frivolous and wholly without merit and will vigorously defend the claim.  Related to this matter, Process Piping, LLC, a sub-contractor for LIBCO Industries, filed a mechanics lien on the property leased by the Company, claiming it was owed in excess of $95,000 by LIBCO Industries.  As of December 31, 2011, the Company accrued as a settlement loss, the $62,500 paid to Process Piping, LLC on March 6, 2012 in exchange for a release of its lien as well as an assignment of all of its claims against LIBCO Industries.  On January 31, 2013, the Circuit Court granted the Company’s motion for partial summary judgment on the tortious interference claim.  In the fourth quarter of 2013, the parties settled all outstanding matters and the case has subsequently been dismissed. On January 21, 2014 as part of the settlement, the Company received $10,000 in cash and both parties provided releases of all respective claims.
 
NOTE 17 – MAJOR CUSTOMERS AND CREDIT CONCENTRATION
 
The Company’s customers are food manufacturers, school districts and distributors.  There were two significant customers who accounted for 40% and 14% of total sales for the nine months ended September 30, 2015.  Further, there was one customer that accounted for 83% of the total accounts receivable for the nine months ended September 30, 2015.  The total accounts receivable at September 30, 2015 and December 31, 3014 were $196,453 and $ 46,188 respectively.  This difference is primarily due to the timing of shipments to a significant customer.
 
The Company maintains cash deposits with major banks, which from time to time may exceed federally insured limits.  At September 30, 2015 and December 31, 2014, $0 and $777,713, 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 18 – COMMITMENTS
 
Building Lease
 
The Company leases a combined manufacturing, research and development and office facility located in Mundelein, Illinois.  The facility is approximately 44,000 square feet.  On March 14, 2014, the Company extended the lease until May 2015 and the required monthly rental payments increased to $21,361, inclusive of property taxes.  Insurance and maintenance are billed when due.  If the Company wishes to remain at this facility beyond the lease expiration date, it will need to negotiate a new lease with the landlord, which cannot be assured.
 
Effective January 1, 2015, the Company and its landlord executed an amendment to the current lease extending the lease until July 14, 2015.  Commencing on May 1, 2015, the parties agreed to a monthly base rent of $10,681 plus property taxes.  The Company also agreed to pay $71,125 in rental arrears on April 30, 2015 and another $71,125 in rental arrears on July 1, 2015.  Finally, the parties agreed that the Company will deliver to the landlord 20,025 shares of its 12.5% Convertible Preferred Stock. As a result of the preferred stock issued, the Company recorded an expense of $48,060 for the three months ended June 30, 2015 with an offset to preferred stock and additional paid in capital.  Also, the Company issued a five year warrant to the landlord to purchase 171,454 shares of common stock at $0.64 per share.

On May 1, 2015, the Company and its landlord executed an amendment to the current lease extending the lease until October 14, 2015.  The parties agreed that the Company will deliver to the landlord 8,010 shares of its 12.5% Convertible Preferred Stock.  The Company recorded a Preferred stock payable and rent expense of $48,060 for the three months ended June 30, 2015.  Also the Company agreed to issue a five year warrant to the landlord to purchase 68,566 shares of common stock at $0.64 per share.  Finally, the Company upon execution of this amendment, agreed to make the $71,125 payment of rental arrears that was due on April 30, 2015.
 
The Company recognizes escalating lease expense on a straight line basis in accordance with current accounting standards.
 
For the nine months ended September 30, 2015 and 2014, the Company recognized rent expense of $308,756 and $202,599, respectively.  The future minimum annual rental payments and sub-lease income for the years ended December 31 under the current lease terms are as follows:
 
Year Ended
 
Rentals
 
2015
 
$
52,626
 
2016
   
-
 
2017
   
-
 
2018
   
-
 
2019
   
-
 
   
$
52,626
 
 
The current lease is set to expire on December 15, 2015.  The Company is currently negotiating an extension of the current lease and is confident that an agreement will be reached prior to the expiration date.
 
Equipment Sale and Leaseback
 
On July 17, 2015, the Company entered into an equipment purchase agreement (the “Purchase Agreement”) with Fordham Capital Partners, LLC (“Fordham”) pursuant to which the Company sold all of its right, title and interest in production equipment utilized by the Company to Fordham for a purchase price of $500,000.  Concurrently with entering into the Purchase Agreement, on July 17, 2015, the Company entered into an equipment lease agreement (the “Equipment Lease Agreement”) with Fordham pursuant to which the Company leased the production equipment from Fordham on terms that included the following: a lease term of 24 months, monthly lease payments by the Company of $15,800 and the option (at the election of the Company) to purchase the equipment on or after July 8, 2016 on the following terms:  (i) if the purchase date is between 12-18 months $425,000; (ii) if the purchase date is between 19-23 months: $360,000; and (iii) if the purchase date is during the 24th month (but no later than July 8, 2017): $325,000.  The Company is accounting for the transaction as a capital lease.  The future minimum lease payments under the lease are as follows:
 
Year Ended
 
Lease Payments
 
2015
 
$
79,000
 
2016
   
189,600
 
2017
   
110,600
 
2018
   
-
 
2019
   
-
 
   
$
379,200
 
 
NOTE 19 – PENDING LITIGATION/CONTINGENT LIABILITY
 
On July 7, 2007, the Company and Greg Halpern, its former Chief Executive Officer in his individual capacity, were served with a complaint by Joseph Sanfilippo and James Cluck for violation of the Consumer Fraud Act and the plaintiffs are seeking damages in excess of $200,000.   The trial court has issued a default order against the Company, and has denied the Company’s Motion to reconsider.  Management believes that the trial court’s rulings were erroneous and that it has grounds for appeal, and that the underlying allegations are frivolous and wholly without merit and will vigorously defends the claim. The outcome of this matter is unknown as of the report date.  However, the Company has accrued a liability in the amount of $102,000 in respect to this litigation.
 
On or about December 12, 2011, the Company was sued in Circuit Court of the 17th Judicial District, Winnebago County, Illinois with a complaint by LIBCO Industries, Inc., alleging the Company breached a construction contract and tortiously interfered with a business relationship, and is seeking damages in excess of $185,000.  The case was subsequently transferred to the 19th Judicial Circuit Court, Lake County, Illinois.  Management believes that the allegations are frivolous and wholly without merit and will vigorously defend the claim.  Related to this matter, Process Piping, LLC, a sub-contractor for LIBCO Industries, filed a mechanics lien on the property leased by the Company, claiming it was owed in excess of $95,000 by LIBCO Industries.  On March 6, 2012, the Company paid $62,500 to Process Piping, LLC in exchange for a release of its lien as well as an assignment of all of its claims against LIBCO Industries. On January 31, 2013, the Circuit Court granted the Company’s motion for partial summary judgment on the tortious interference claim.  During the fourth quarter of 2013, the parties settled all outstanding matters and the case has been dismissed.  On January 21, 2014 as part of the settlement, the Company received $10,000 in cash and both parties provided releases of all respective claims.
 
NOTE 20 – RELATED PARTY TRANSACTIONS
 
Effective January 1, 2015 the Company entered into a consulting agreement with Jeffery Consulting Group, LLC pursuant to which Jeffery Consulting will provide assistance with operational improvements including manufacturing processes, strategic and tactical advice with respect to the Company’s sales and marketing initiatives, and provide customer introductions and strategic sales opportunities.  In consideration of services rendered by Jeffrey Consulting, the Company issued a warrant to purchase 1,250,000 shares of common stock at $0.35 per share.  The warrant vested 500,000 shares upon the mutual execution of this agreement, and 250,000 shares each at the three month, six month, and nine month anniversaries of this agreement.  The fair value of the warrants issued is estimated on the date of grant using the Black-Scholes valuation model.  The assumptions used in the model included the historical volatility of the Company’s stock of 84.52%, and the risk-free rate for periods within the expected life of the warrant based on the U.S. Treasury yield curve in effect of 1.07%.  For the three months ended March 31, 2015 the Company recognized compensation expense of $128,880.  The Company also agreed to accrue $5,000 per month which becomes payable to Jeffrey Consulting once the Company has raised $3 million in additional capital.
 
On January 8, 2015, the Company entered into agreements to sell an aggregate of 260,000 Units to eight (8) accredited investors at a price per unit of $4.00 for aggregate cash proceeds of $1,040,000 pursuant to separate purchase agreements entered into with each investor (the “Securities Purchase Agreements”).  In addition, the Company agreed to issue to each of the investors in the first round of financing an Additional Warrant for each Unit acquired.  The Additional Warrants issued in the initial closing of 260,000 Units are exercisable for an aggregate of 946,400 shares of the Company’s common stock. The Warrants expire on the fifth anniversary of their issuance, may be exercised on a cashless basis, are subject to full ratchet price anti-dilution protection and entitled to registration rights.
 
In addition to the foregoing, the members of the Company’s Board of Directors agreed to receive an aggregate of 96,590 Units (representing one (1) Unit for every $4.00 of debt exchanged), this includes 1,103,880 shares of preferred stock, 826,806 Initial Warrants and 351,586 Additional Warrants in exchange for previously issued convertible notes (including principal and accrued and unpaid interest) (the “Notes”) held by the directors or affiliated entities as follows: (i) 71,211 Units, 609,566 Initial Warrants and 259,208 Additional Warrants were issued to Edward Smith, III, the Company’s Chief Executive Officer, in exchange for an aggregate of $284,844 of notes, (ii) 10,084 Units, 86,317 Initial Warrants and 36,705 Additional Warrants were issued to Morris Garfinkle in exchange for $40,335 of notes; (iii) 5,211 Units, 44,606 Initial Warrants and 18,968 Additional Warrants were issued to each of Mark Hershhorn and Brian Israel in exchange for an aggregate of $20,844 of notes, respectively; and (v) 4,873 Units, 41,712 Initial Warrants and 17,737 Additional Warrants were issued to CKS Warehouse, an entity in which Mr. Hershhorn owns a controlling interest, in exchange for an aggregate of $19,491 of principal and interest on notes.
 
On February 9, 2015, Edward Smith, III and Morris Garfinkle were issued warrants exercisable for 31,000,000 and 5,500,000 shares of common stock, respectively, in consideration of the services to be provided to the Company as Chief Executive Officer of the Company and Chairman of the Board, respectively.  The exercise price of these warrants is $0.45 per share.   The fair value of the warrants issued is estimated on the date of grant using the Black-Scholes valuation model.  The assumptions used in the model included the historical volatility of the Company’s stock of 81.99%, and the risk-free rate for periods within the expected life of the warrant based on the U.S. Treasury yield curve in effect of 0.85%.  For the six months ended June 30, 2015 the Company recognized compensation expense of $3,749,259.
 
On February 24, 2015 the Company issued 576,924 shares of common stock to its then three non-executive directors (192,308 shares each) Brian Israel, Morris Garfinkle and Dan Jeffrey. The Company recognized a total expense of $150,000 related to these issuances.  These shares were valued based on the closing price on the grant date.
 
On June 12, 2015, the Company issued a 14% nonconvertible subordinated secured note to Edward Smith, III in the principal amount of $12,000.  The note matures on December 31, 2015 and bears interest at 14% computed based on a 365-day year.  Accrued interest is payable at maturity in cash.   The note is secured by the assets of the Company, which security interest is subordinate to the security interest granted to Fordham in connection with the Equipment Loan and the Factoring Agreement.
 
On August 13, 2015, the Company issued a 14% nonconvertible subordinated secured note to Edward Smith, III in the principal amount of $25,000.  The note matures on December 31, 2015 and bears interest at 14% computed based on a 365-day year.  Accrued interest is payable at maturity in cash.   The note is secured by the assets of the Company, which security interest is subordinate to the security interest granted to Fordham in connection with the Equipment Loan and the Factoring Agreement.
 
On August 21, 2015, the Company issued a 14% nonconvertible subordinated secured note to Edward Smith, III in the principal amount of $150,000.  The note matures on December 31, 2015 and bears interest at 14% computed based on a 365-day year.  Accrued interest is payable at maturity in cash.   The note is secured by the assets of the Company, which security interest is subordinate to the security interest granted to Fordham in connection with the Equipment Loan and the Factoring Agreement.
 
On January 2, 2014 the Company issued 285,716 shares of common stock to its then four non-executive directors (71,429 shares each) Mark Hershhorn, Brian Israel, Morris Garfinkle and Edward Smith III. The Company recognized a total expense of $160,001 related to these issuances.  These shares were valued based on the closing price on the grant date.
 
On February 11, 2014 the Company entered into an agreement with Edward Smith, III, a Director and Shareholder of the Company, pursuant to which Mr. Smith agreed to lend the Company $200,000 in a convertible senior secured note.  The note matures in two years (February 11, 2016) and bears interest at 12.5% computed based on a 365-day year.  Accrued interest is payable either at maturity or quarterly at the option of Mr. Smith in shares of the Company’s common stock.  At any time on or after the date that is 90 days after the date of issuance of the note, Mr. Smith may elect to convert the aggregate principal balance and accrued interest into shares of common stock of the Company.  The conversion price under the note is $2.25, subject to adjustment as provided in the note.  If on the maturity date of the note, the thirty day trailing average closing price of the Company’s common stock (the “Trailing Average Price”) is below $2.25, the Conversion Price on the maturity date will be reduced to the Trailing Average Price, but to not less than $1.25.  The note is secured by the assets of the Company, which security interest is expressly subordinate to the interest of Fordham Capital Partners LLC described below, pursuant to an intercreditor agreement between Mr. Smith and Fordham dated March 18, 2014.
 
NOTE 21 – GUARANTEES
 
The Company from time to time enters into certain types of contracts that contingently require the Company to indemnify parties against third party claims. These contracts primarily relate to: (i) divestiture agreements, under which the Company may provide customary indemnifications to purchasers of the Company’s businesses or assets; (ii) certain real estate leases, under which the Company may be required to indemnify property owners for environmental and other liabilities, and other claims arising from the Company’s use of the applicable premises; and (iii) certain agreements with the Company's officers, directors and employees, under which the Company may be required to indemnify such persons for liabilities arising out of their employment relationship.  The terms of such obligations vary. Generally, a maximum obligation is not explicitly stated. Because the obligated amounts of these types of agreements often are not explicitly stated, the overall maximum amount of the obligations cannot be reasonably estimated. Historically, the Company has not been obligated to make significant payments for these obligations, and no liabilities have been recorded for these obligations on its balance sheet as of June 30, 2015.
 
In general, the Company offers a one-year warranty for most of the products it sells.  To date, the Company has not incurred any material costs associated with these warranties.
 
NOTE 22 – SUBSEQUENT EVENTS
 
On October 2, 2015, the Company issued a warrant to acquire 250,000 shares of the Company’s common stock, par value, $0.00005 per share, at an exercise price of $0.64 per share to an accredited investor.  The Warrants expire on the fifth anniversary of their issuance, may be exercised on a cashless basis, are subject to full ratchet price anti-dilution protection and entitled to registration rights.
 
On October 20, 2015, the Company received $200,000 from an accredited investor towards the purchase of 50,000 units in a private placement offering.  Each unit consists of (i) one (1) share of 12.5% Convertible Preferred Stock and (ii) one (1) warrant, to acquire 8.56 shares of the Company’s common stock, par value, $0.00005 per share, at an exercise price of $0.64 per share all pursuant to separate Securities Purchase Agreements entered into with the investor.
 
On November 4, 2015, the Company received $200,000 from an accredited investor towards the purchase of 50,000 units in a private placement offering.  Each unit consists of (i) one (1) share of 12.5% Convertible Preferred Stock and (ii) one (1) warrant, to acquire 8.56 shares of the Company’s common stock, par value, $0.00005 per share, at an exercise price of $0.64 per share all pursuant to separate Securities Purchase Agreements entered into with the investor.
 
On November 4, 2015, Steven J. Cohen provided the Company with notice of his resignation from the Company’s Board of Directors (the “Board”), effective immediately. Mr. Cohen’s resignation from the Board was not the result of any dispute or disagreement with the Company. Mr. Cohen has served on the Board since 2006.
 
On November 16, 2015, Anthony Saguto resigned as Chief Financial Officer of the Company, effective immediately. To replace Mr. Saguto, Donald G. Wittmer was appointed as acting Chief Financial Officer of the Company, effective November 18, 2015.
 
On November 18, 2015, the Company entered into a consulting agreement (the “Consulting Agreement”) with ACT Financial Services Inc. (“ACT Financial”), pursuant to which ACT Financial will provide to the Company finance, accounting and administrative functions, including acting chief financial officer (and principal financial officer) services to be provided by Donald G. Wittmer.  The Company will pay an agreed upon weekly rate for such services and will reimburse ACT Financial for certain travel expenses. The Consulting Agreement will continue for six months and may be extended by mutual agreement of the parties.
 
Item 2. Management’s Discussion and Analysis of Financial Information and Results of Operations

Cautionary Statement Regarding Forward Looking Information

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

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

- our history of operating losses and our inability to achieve or guarantee profitable operations in the future or to continue operations;
- the risk that we will be unable to pay our debt obligations as they become due or that we will be able to find sufficient financing to fund our operations;
- risk that there will not be market acceptance of our products;
- our plans for commercialization of our products;
- possible problems in implementing new relationships or the failure to achieve the desire benefits from such relationships;
 
- our reliance on a limited number of product offerings;
- our product development efforts, including risk that we will not be able to produce our products in a cost-effective manner;
- our ability to secure new customers, maintain our current customer base and deliver product on a timely basis;
- our dependence on a small concentration of customers;
- possible issuances of common stock subject to options, warrants and other securities that may dilute the interest of stockholders, and/or future exercise of such options and warrants;
- our ability to protect technology through patents;
- our ability to protect our proprietary technology and information as trade secrets and through confidentiality agreements or other similar means;
- the effects of the 2015 expiration of the USDA patent we have employed in manufacturing our products;
- competition from larger, more established companies with far greater economic and human resources;
- fluctuations in the availability of raw materials and the price for agricultural products;
- the effect of changes in the pricing and margins of products;
- the potential loss of key personnel or other personnel disruptions;
- possible product recalls due to adulteration of products or materials, future regulatory action, or other concerns;
- our ability to comply with all government regulation and retain favorable regulatory status, such as GRAS status, of our products and ingredients;
- risk that we will not be able to remediate identified material weaknesses in our disclosure controls and procedures and internal control over financial reporting;
- sufficient voting power by one large stockholder to make corporate governance decisions that could have significant effect on us and the other stockholders;
- our nonpayment of dividends to common stockholders and lack of plans to pay dividends to common stockholders in the future;
- our need for additional financing;
- our ability to successfully defend future litigation, including possible claims related to products liability and infringement of intellectual property, as well as the outcome of regulatory actions and inquiries;
- future sale of a substantial number of shares of our common stock that could depress the trading price of our common stock, lower our value and make it more difficult for us to raise capital;
- our additional securities available for issuance, which, if issued, could adversely affect the rights of the holders of our common stock;
- our stock is classified as a penny stock and subject to additional regulation as such; and
- our stock price is likely to be highly volatile due to a number of factors, including a relatively limited public float and potential for short sales of our stock.

In addition, see Risk Factors in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 14, 2014 for a further discussion of some of the factors that could affect future results.

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

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

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

The Company, through an exclusive license to technology patented by the United States Department of Agriculture (the “USDA”), has developed products that manage moisture to help reduce production costs and improve nutritional value in finished foods, while maintaining the essential taste and mouth-feel associated with full-fat products.  The 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.

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

Current Trends and Recent Developments Affecting the Company

Sales and Manufacturing

Sales for the third quarter of 2015 decreased 39% as compared to sales for the third quarter of 2014 due to lower volume of a large customer. The Company believes that the lost revenues will be recaptured in the 4th quarter and that sales for the year will exceed 2014.
 
On January 1, 2015 the Company and ANP entered into a new Custom Processing Agreement (the “New CPA”) replacing the Agreement from October 17, 2011.  The term of the New CPA will be one year.  The New CPA automatically renews at the end of the initial term for an additional two year term unless either party provides written notice to the other within the specified time frame.  The New CPA provides that the Company and ANP mutually agree to release each other from the original Agreement.  Also agreed to was the Company absolution to ANP of any responsibility to pay the balance of line of credit in the amount of $459,608 and accrued interest of $59,398.  ANP further agreed to release the Company from any responsibility to pay $359,713 owed to ANP relating to the original Agreement.  The Company further agrees to remove from ANP’s premises any BioFiber Gum product and all remaining product and raw materials.
 
The New CPA further stipulates that ANP will provide custom product processing services in the future on an order-by-order basis provided ANP has the available capacity to produce the Company’s products.  The Company agrees to give ANP purchase orders for a minimum of 40,000 pounds of product per order.

On September 2, 2015 ANP notified the Company of its intent to not renew the New CPA.  The Company is currently negotiating a processing agreement with another contract manufacturer and has increased its capacity at the Mundelein facility.  The Company does not believe that the termination of the New CPA will have an adverse effect.
 
Funding Initiatives

On January 8, 2015, the Company,  raised an aggregate of $1,040,000 from the sale of 260,000 units to eight (8) accredited investors at a price per unit of $4.00 (the “Units”) with each Unit consisting of (i) one (1) share of 12.5% Redeemable Convertible Preferred Stock (the “Preferred Shares”) and (ii) one (1) warrant (the “Initial Warrant”), to acquire 8.56 shares of the Company’s common stock, par value, $0.00005 per share (“common stock”), at an exercise price of $0.64 per share, for aggregate cash proceeds of $1,040,000 pursuant to separate purchase agreements entered into with each investor (the “Securities Purchase Agreements”).  In addition, the Company agreed to issue to each of the investors in the first round of financing an  additional warrant for each Unit acquired (the “Additional Warrant” and together with the Initial Warrant, the “Warrants”) to acquire 3.64 shares of the Company’s common stock at an exercise price of $0.64 per share.  The Additional Warrants issued in the initial closing of 260,000 Units are exercisable for an aggregate of 946,400 shares of the Company’s common stock. The Warrants expire on the fifth anniversary of their issuance, may be exercised on a cashless basis, are subject to full ratchet price anti-dilution protection and entitled to registration rights as set forth below. The Preferred Shares are nonvoting, accrue dividends at the rate per annum equal to 12.5% of the sum of (i) the Stated Value (which initially is $4.00) until the Maturity Date as defined in the Statement of Resolution Establishing Preferred Shares and (ii) the amount of accrued and unpaid dividends payable, are convertible into shares of common stock at the option of the holder as described in the Statement of Resolution Establishing Preferred Shares, have anti-dilution protection, registration rights, may be redeemed under certain circumstances, liquidation preference, protective provisions and board rights under certain circumstances.  The sale was part of an offering in which the Company offered for sale a maximum of 5,000,000 units (gross proceeds of $20,000,000). The Company has used the net proceeds of the Offering for working capital and general corporate purposes, including without limitation, to repay certain loans.   The Offering was set to terminate on January 31, 2015 but has been extended until December 31, 2015.

In addition to the foregoing, as part of the Offering, the members of the Company’s Board of Directors agreed to receive an aggregate of 96,590 Units (representing one (1) Unit for every $4.00 of debt exchanged), 826,806 Initial Warrants and 351,586 Additional Warrants in exchange for previously issued convertible notes (including principal and accrued and unpaid interest) (the “Notes”) held by the directors or affiliated entities as follows: (i) 71,211 Units, 609,566 Initial Warrants and 259,208 Additional Warrants were issued to Edward Smith, III, the Company’s Chief Executive Officer, in exchange for an aggregate of $284,844 of notes, (ii) 10,084 Units, 86,317 Initial Warrants and 36,705 Additional Warrants were issued to Morris Garfinkle in exchange for $40,335 of notes; (iii) 5,211 Units, 44,606 Initial Warrants and 18,968 Additional Warrants were issued to each of Mark Hershhorn and Brian Israel in exchange for an aggregate of $20,844 of notes, respectively; and (v) 4,873 Units, 41,712 Initial Warrants and 17,737 Additional Warrants were issued to CKS Warehouse, an entity in which Mr. Hershhorn owns a controlling interest, in exchange for an aggregate of $19,491of principal and interest on notes.
 
On February 9, 2015, the Company closed a second round of the Offering with four (4) accredited investors in which it raised gross proceeds of $500,000 and sold 125,000 Units. The Initial Warrants issued in the second closing are exercisable for 1,070,000 shares of the Company’s common stock and the Additional Warrants issued in the second closing are exercisable for an aggregate of 455,000 shares of the Company’s common stock.

On May 28, 2015, the Company and Fordham Capital Partners, LLC entered into an Equipment Note in the amount of $50,000.  The note requires payment in one installment of principal of $50,000 plus interest on June 30, 2015.  The interest on the note is calculated at a fixed rate of 22% per annum.
 
On June 12, 2015, the Company issued a 14% nonconvertible subordinated secured note to Edward Smith, III in the principal amount of $12,000.  The note matures on December 31, 2015 and bears interest at 14% computed based on a 365-day year.  Accrued interest is payable at maturity in cash.  The note is secured by the assets of the Company, which security interest is subordinate to the security interest granted to Fordham in connection with the Equipment Loan and the Factoring Agreement.
 
On June 25, 2015, the Company and Fordham Capital Partners, LLC entered into an Amended and Restated Equipment Note (the “Second Amended Note”) in the amount of $150,000.  The Second Amended Note requires (a) one monthly interest only payment on June 30, 2015 followed by (b) one installment payment of principal of $150,000 plus interest, with such payment due on the maturity date of July 31, 2015.  The interest on the Second Amended Note is calculated at a fixed rate of 22% per annum.
 
On July 9, 2015, the Company and Fordham Capital Partners, LLC entered into an Amended and Restated Equipment Note (the “Note”) in the amount of $200,000.  The Note requires the entire principal balance of this Note and all accrued interest to be paid on the maturity date of July 31, 2015.  The interest on the Note is calculated at a fixed rate of 22% per annum.
 
This Note was issued pursuant to and entitled to the benefits of, and is secured by, the Amended and Restated Security Agreement which is in effect and under substantially the same terms and covenants as stated in the Security Agreement (dated May 28, 2015) previously discussed in Footnote 8 above.
 
Additionally, on July 9, 2015, the Company and Fordham entered into a Second Amendment to Factoring Agreement pursuant to which Fordham may purchase any Accounts of the Company under substantially the same terms and covenants as stated in the Factoring Agreement dated May 28, 2015, as amended by Amendment to Factoring Agreement dated June 25, 2015.   The Factoring Agreement terminates on July 31, 2015 or at any time that the Note (dated July 9, 2015) is paid in full.
 
On July 17, 2015, the Company entered into an equipment purchase agreement (the “Purchase Agreement”) with Fordham Capital Partners, LLC (“Fordham”) pursuant to which the Company sold all of its right, title and interest in production equipment utilized by the Company to Fordham for a purchase price of $500,000.  Concurrently with entering into the Purchase Agreement, on July 17, 2015, the Company entered into an equipment lease agreement (the “Equipment Lease Agreement”) with Fordham pursuant to which the Company leased the production equipment from Fordham on terms that included the following: a lease term of 24 months, monthly lease payments by the Company of $15,800 and the option (at the election of the Company) to purchase the equipment on or after July 8, 2016 on the following terms:  (i) if the purchase date is between 12-18 months $425,000; (ii) if the purchase date is between 19-23 months: $360,000; and (iii) if the purchase date is during the 24th month (but no later than July 8, 2017): $325,000.
 
The Company received net proceeds of $172,911 from the Purchase Agreement.  The gross proceeds were used for general corporate purposes and to pay off the $200,000 Note and accrued interest discussed above.
 
The Equipment Lease Agreement includes customary events of default, including non-payment by the Company of the monthly lease payments and the payment of penalties upon such late payments.  The Company utilized the proceeds from the sale of the equipment for working capital purposes.
 
In connection with the Purchase Agreement, the Company’s Factoring Agreement with Fordham effective May 28, 2015, as amended by an amendment dated June 25, 2015, was further amended to grant to Fordham a security interest in all of the collateral under such agreement to secure the payment to Fordham of all rent payments and all other amounts owed by the Company to Fordham under the Equipment Lease Agreement.
 
On August 13, 2015, the Company issued a 14% nonconvertible subordinated secured note to Edward Smith, III in the principal amount of $25,000.  The note matures on December 31, 2015 and bears interest at 14% computed based on a 365-day year.  Accrued interest is payable at maturity in cash.   The note is secured by the assets of the Company, which security interest is subordinate to the security interest granted to Fordham in connection with the Equipment Lease Agreement and the Factoring Agreement.
 
On August 21, 2015, the Company issued a 14% nonconvertible subordinated secured note to Edward Smith, III in the principal amount of $150,000.  The note matures on December 31, 2015 and bears interest at 14% computed based on a 365-day year.  Accrued interest is payable at maturity in cash.   The note is secured by the assets of the Company, which security interest is subordinate to the security interest granted to Fordham in connection with the Equipment Loan and the Factoring Agreement.
 
Board of Directors and Management Changes

Effective as of January 8, 2015, Edward Smith, III, a member of the Board of Directors was appointed as the Chief Executive Officer of the Company.  Morris Garfinkle was appointed to serve as Chairman of the Board of Directors. Steven J. Cohen assumed the role of Managing Director and remained as a director.
 
Since January 1, 2015, Mr. Smith, age 40, has been the Managing Member of Aristar Capital Management, LLC, a New York-based investment firm and the Company’s controlling stockholder.  From April 2005 through December 2014, Mr. Smith was the Managing Partner of Brightline Capital Management, LLC (“BCM”), a New York-based investment firm founded in 2005. Prior to founding BCM, Mr. Smith worked at Gracie Capital from 2004-2005, GTCR Golder Rauner from 1999-2001 and Credit Suisse First Boston from 1997-1999. 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 is also a director of Heat Biologics, Inc. (NASDAQ: HTBX), a development stage biopharmaceutical company that focuses on the development and commercialization of novel allogeneic off-the-shelf cellular therapeutic vaccines for a range of cancers and infectious diseases.
 
On March 10, 2015, the Board of Directors of the Company appointed Dan Jeffery to serve as a director on its Board of Directors.  Mr. Jeffery was appointed to fill the vacancy created by the resignation of Mark Hershhorn from the Company’s Board of Directors.  On March 10, 2015, the Company received Mr. Hershhorn’s written resignation as a Director of the Company.
 
Brian Israel notified the Company that he would resign from the Company’s Board of Directors, effective May 4, 2015. At the time of his resignation, Mr. Israel served as Chairman of the Compensation and Nominating Committees of the Board.
 
On May 6, 2015, the Company announced the appointment of Anthony Saguto as the Chief Financial Officer of the Company, effective May 18, 2015.  Mr. Saguto replaced John Elo, who is retiring as Chief Financial Officer of the Company, effective May 18, 2015.
 
On November 16, 2015, Mr. Saguto resigned as Chief Financial Officer of the Company, effective immediately. To replace Mr. Saguto, Donald G. Wittmer was appointed as acting Chief Financial Officer of the Company, effective November 18, 2015.
 
Results of Operations

Three Months Ended September 30, 2015 Compared with Three Months Ended September 30, 2014

Revenues

Revenue for the three months ended September 30, 2015 was $218,732, as compared to revenue of $360,710 for the three months ended September 30, 2014, a decrease of 39%.  Our revenue for the three months ended September 30, 2015 and 2014 was entirely attributable to product sales.   The decrease in sales in the current year’s period was due to a decrease in order volumes from one customer due to reduced needs.  Our ability to generate increased revenue in future reporting periods will be partially dependent on continued increased demand for our products from existing and new customers, and the completion of changes in our production process to further improve our capacity and reduce costs, all of which cannot be assured. The Company believes that the lost revenues will be recaptured in the 4th quarter and that sales for the year will exceed 2014.

Cost of Revenues

Cost of revenues for products sold for the three months ended September 30, 2015 and 2014 was $445,936 and $349,946, respectively, an increase of $95,990 or 27%.  The increase in costs of goods sold in the current year’s period was attributable to the production of product in our own pilot facility and not the outside toll manufacturer. We believe that sustained increases in sales and monthly production volume will enable us to allocate our fixed costs over a greater number of finished goods and further reduce the cost of goods sold in the future to improve margins.  However, there can be no assurance that greater efficiencies or improved margins can be achieved.

Gross Margin
 
Gross loss for the three months ended September 30, 2015 was $227,204, as compared to a gross margin of $10,764, for the three months ended September 30, 2014.  Gross loss reflects a number of factors that can vary from period to period, including those described above.
 
Operating Expenses

Total operating expenses for the three months ended September 30, 2015 were $772,957 a decrease of $627,902 or approximately 45% lower than the comparable period ended September 30, 2014 of $1,400,859.  As a result of the Company producing product in its own facility various expenses classified as research and development costs in 2014 are now included with cost of goods sold for 2015. The amount of research and development costs included with cost of goods sold for the three months ended September 30, 2015 was $0 as compared to $365,345 in research and development costs for the three months ended September 30, 2014.

The significant components of selling, general and administrative expenses for the quarters ended September 30, 2015 and 2014 respectively are as follows:

   
Three Months Ended September 30,
 
   
2015
   
2014
 
Salary and employee benefits
 
$
271,710
   
$
332,196
 
Stock based compensation expense
   
208,991
     
377,731
 
Professional fees
   
69,146
     
46,696
 
Research & development
   
-
     
60,000
 
Directors fees
   
-
     
-
 
Consultant fees
   
106,640
     
-
 
Other
   
116,469
     
218,893
 
   
$
772,957
   
$
1,035,516
 

The decrease in salary and employee benefits from $332,196 for the three months ended September 30, 2014 to $271,710 for the three months ended September 30, 2015 is attributable to fewer employees.   Professional fees increased for the period ended September 30, 2014 from $46,696 to $69,146 for September 30, 2015 due to an increase in accounting and legal fees.  Consultant fees increased from $0 for the three months ended September 30, 2014 to $106,640 for the three months ended September 30, 2015 due to the vesting of warrants granted to several consultants employed by the Board of Directors.  Other expenses decreased by $108,076 due to the payment of state franchise taxes.

Operating Loss

The operating loss for the three months ended September 30, 2015 decreased to $1,000,161 compared to $1,390,095 for the three months ended September 30, 2014 due to the reasons described above.

Other Income (Expenses)

Other expenses for the three months ended September 30, 2015 were $565,031 as compared to $22,865 for the three months ended on September 30, 2014.  The increase in other expenses of $542,166 was primarily due to the loss recognized from the sale and leaseback transaction of $574,331 offset by the change in the fair value of our derivatives of $66,561.  Interest expense on debt of $35,743 incurred during the three months ended September 30, 2015 compares to $64,362 for the same three month period ended in 2014.  The interest is related to the short-term borrowings and convertible note payable discussed above.

Net Loss

As a result of the above, for the three months ended September 30, 2015, we reported a net loss of $1,565,192 as compared to a net loss of $1,412,960 for the three months ended September 30, 2014.

Basic and Diluted Net Loss per Share

The basic and diluted net loss per share for the three months ended September 30, 2015 was $0.03 as compared to the basic and diluted net loss per share of $0.04 for the three months ended September 30, 2014.  Net loss per share was negatively impacted by the increase in the Operating Loss and Other Expenses as discussed above.
 
Nine Months Ended September 30, 2015 Compared with Nine Months Ended September 30, 2014
                                  
Revenues

Revenue for the nine months ended September 30, 2015 was $834,563, as compared to revenue of $889,334 for the nine months ended September 30, 2014, an decrease of 6%.  Our revenue for the nine months ended September 30, 2015 and 2014 was entirely attributable to product sales.   The decrease in sales in the current year’s period was due to a decline in volume for a significant customer.  The Company anticipates that 4th quarter sales will overcome the shortfall and that sales for the year will exceed 2014.   Our ability to generate increased revenue in future reporting periods will be partially dependent on continued increased demand for our products from existing and new customers, and the completion of changes in our production process to further improve our capacity and reduce costs, all of which cannot be assured.

Cost of Revenues

Cost of revenues for products sold for the nine months ended September 30, 2015 and 2014 was $1,420,476 and $879,898, respectively, an increase of $540,578 or 61%.  The increase in costs of goods sold in the current year’s period was attributable to the production of product in our own pilot facility and not the outside toll manufacturer and the classification of production costs as research and development costs in 2014. We believe that sustained increases in sales and monthly production volume will enable us to allocate our fixed costs over a greater number of finished goods and further reduce the cost of goods sold in the future to improve margins.  However, there can be no assurance that greater efficiencies or improved margins can be achieved.

Gross Margin
 
Gross loss for the nine months ended September 30, 2015 was $585,913, or approximately 70% of revenues, as compared to a gross margin of $9,436, or approximately 0.1% of revenues for the nine months ended September 30, 2014.  Gross loss reflects a number of factors that can vary from period to period, including those described above.

Operating Expenses

Total operating expenses for the nine months ended September 30, 2015 were $6,881,428 an increase of $2,462,489 or approximately 56% over the comparable period ended September 30, 2014 of $4,419,139.  As a result of the Company producing product in its own facility various expenses classified as research and development costs in 2014 are now included with cost of goods sold for 2015. The amount of research and development costs included with cost of goods sold for the nine months ended September 30, 2015 was $914,323 as compared to the $1,161,712 in research and development costs for the nine months ended September 30, 2014.

The significant components of selling, general and administrative expenses for the nine months ended September 30, 2015 and 2014 respectively are as follows:

   
Nine Months Ended September 30,
 
   
2015
   
2014
 
Salary and employee benefits
 
$
863,175
   
$
1,042,132
 
Stock based compensation expense
   
4,326,659
     
992,450
 
Professional fees
   
206,812
     
143,232
 
Directors fees
   
150,000
     
236,000
 
Consultant fees
   
657,963
     
17,251
 
Research & development
   
-
     
60,000
 
Other
   
676,819
     
766,362
 
   
$
6,881,428
   
$
3,257,427
 
 
The decrease in salary and employee benefits from $1,042,132 for the nine months ended September 30, 2014 to $863,175 for the nine months ended September 30, 2015 is attributable to fewer employees.  Stock based compensation increased by $3,334,209 in 2015 as compared to 2014 as a result of warrants awarded as compensation to Morris Garfinkle, Chairman of the Board and Edward Smith III, CEO of the Company. Professional fees increased for the period ended September 30, 2014 from $143,232 to $206,812 for September 30, 2015 due to an increase in legal fees.  Consultant fees increased by $640,712 as a result of warrants issued as compensation to several consultants contracted with by the Company.

Operating Loss

The operating loss for the nine months ended September 30, 2015 increased to $7,467,341 compared to $4,409,703 for the nine months ended September 30, 2014 due to the reasons described above.
 
Other Income (Expenses)

Other expenses for the nine months ended on September 30, 2015 were $15,409,236 as compared to other expenses of $15,405 for the nine months ended on September 30, 2014.  The increase in other expenses of $15,393,831 was primarily due to the to the loss recognized from the issuance of Common Stock from the warrant exchange program of $12,959,654, the increase in the fair value of our derivatives, which resulted in additional expense of $1,355,747 as compared to the prior year, a loss of 574,331 on the sale and leaseback transaction, and the recognition of a loss of $351,314 relating to the conversion of convertible notes payable into units of preferred stock and warrants during the first quarter of 2015. The increase in the fair value of the derivative liability resulted from the issuance of preferred stock and warrants with conversion features subject to full ratchet price ant-dilution protection.   Interest expense on debt of $128,006 incurred during the nine months ended September 30, 2015 compares to $112,660 for the same nine month period ended in 2014.  The interest is related to the short-term borrowings and convertible note payable discussed above. In December 2011, the Company was sued in Circuit Court of the 17th Judicial District, Winnebago County, Illinois, by LIBCO Industries, Inc., alleging the Company breached a construction contract and tortiously interfered with a business relationship.  During the fourth quarter of 2013, the parties settled all outstanding matters and the case has been dismissed.  On January 21, 2014 as part of the settlement, the Company received $10,000 in cash and both parties provided releases of all respective claims.

Net Loss

As a result of the above, for the nine months ended September 30, 2015, we reported a net loss of $22,876,577 as compared to a net loss of $4,425,108 for the nine months ended September 30, 2014.

Basic and Diluted Net Loss per Share

The basic and diluted net loss per share for the nine months ended September 30, 2015 was $0.48 as compared to the basic and diluted net loss per share of $0.11 for the nine months ended September 30, 2014.  Net loss per share was negatively impacted by the increase in the Operating Loss and Other Expenses as discussed above.

Liquidity and Capital Resources

As of September 30, 2015, the Company had a cash balance of $284,567, a decrease of $743,146 from a balance of $1,027,713 at December 31, 2014.  At September 30, 2015, we had working capital deficit of $3,086,693, as compared to working capital deficit of $539,935 as of December 31, 2014.  The decrease in working capital primarily resulted from the decreases in cash, inventory, and short-term borrowings offset by the increase in the derivative liability as discussed above.

The following discussion focuses in information in more detail on the main elements of the $743,146 net decrease in cash during the nine months ended September 30, 2015 included in the accompanying Statements of Cash Flows.  The table below sets forth a summary of significant sources and uses of cash for the nine months ended September 30, 2015 and 2014:

   
2015
   
2014
 
Cash used in operating activities
 
$
(1,794,846
)
 
$
(2,077,727
)
Cash provided by investing activities
   
172,911
     
-
 
Cash provided by financing activities
   
878,789
     
1,704,249
 
                 
Increase (decrease) in cash
 
$
(743,146
)
 
$
(373,478
)

Between December 29 and 31, 2014, we received cash deposits from several accredited investors in the amount of $1,010,000 towards the purchase of equity securities being offered by the Company.  On January 8, 2015, the Company  entered into agreements to sell an aggregate of 260,000 units to eight (8) accredited investors at a price per unit of $4.00 (the “Units”) with each Unit consisting of (i) one (1) share of 12.5% Redeemable Convertible Preferred Stock (the “Preferred Shares”) and (ii) one (1) warrant (the “Initial Warrant”),  to acquire 8.56 shares of the Company’s common stock, par value, $0.00005 per share (“common stock”), at an exercise price of $0.64 per share, for aggregate cash proceeds of $1,040,000 pursuant to separate purchase agreements entered into with each investor (the “Securities Purchase Agreements”).  In addition, the Company agreed to issue to each of the investors in the first round of financing an  additional warrant for each Unit acquired (the “Additional Warrant” and together with the Initial Warrant, the “Warrants”) to acquire 3.64 shares of the Company’s common stock at an exercise price of $0.64 per share.  The Additional Warrants issued in the initial closing of 260,000 Units are exercisable for an aggregate of 946,400 shares of the Company’s common stock. The Warrants expire on the fifth anniversary of their issuance, may be exercised on a cashless basis, are subject to full ratchet price anti-dilution protection and entitled to registration rights. The sales were part of an offering (“the Offering”) in which the Company offered for sale a maximum of 5,000,000 Units (gross proceeds of $20,000,000).  The Company has used the net proceeds of the Offering for working capital and general corporate purposes, including without limitation, to repay certain loans.   The Offering was set to terminate on January 31, 2015 but has been extended until December 31, 2015.
 
On February 9, 2015, we closed a second round of the Offering with four (4) accredited investors in which it raised gross proceeds of $500,000 and sold 125,000 Units. The Initial Warrants issued in the second closing are exercisable for 1,070,000 shares of the Company’s common stock and the Additional Warrants issued in the second closing are exercisable for an aggregate of 455,000 shares of the Company’s common stock.

On March 24, 2015 the Company made a final payment of principal and interest in the amount of $570,449 to Fordham Capital Partners in satisfaction of the Amended and Restated Equipment Revolving Note dated July 16, 2014.
 
On May 28, 2015, the Company and Fordham Capital Partners, LLC entered into an Equipment Note in the amount of $50,000.  The note requires payment in one installment of principal of $50,000 plus interest on June 30, 2015.  The interest on the note is calculated at a fixed rate of 22% per annum.
 
On June 25, 2015, the Company and Fordham Capital Partners, LLC entered into an Amended and Restated Equipment Note (the “Second Amended Note”) in the amount of $150,000.  The Second Amended Note requires (a) one monthly interest only payment on June 30, 2015 followed by (b) one installment payment of principal of $150,000 plus interest, with such payment due on the maturity date of July 31, 2015.  The interest on the Second Amended Note is calculated at a fixed rate of 22% per annum.  All outstanding notes due to Fordham Capital and their related interest were paid in full as a result of the sale and leaseback transaction on July 17, 2015.
 
On July 9, 2015, the Company and Fordham Capital Partners, LLC entered into an Amended and Restated Equipment Note (the “Note”) in the amount of $200,000.  The Note requires the entire principal balance of this Note and all accrued interest to be paid on the maturity date of July 31, 2015.  The interest on the Note is calculated at a fixed rate of 22% per annum.
 
This Note was issued pursuant to and entitled to the benefits of, and is secured by, the Amended and Restated Security Agreement which is in effect and under substantially the same terms and covenants as stated in the Security Agreement (dated May 28, 2015) previously discussed in Footnote 8 above.
 
On July 9, 2015, the Company and Fordham entered into a Second Amendment to Factoring Agreement pursuant to which Fordham may purchase any Accounts of the Company under substantially the same terms and covenants as stated in the Factoring Agreement dated May 28, 2015, as amended by Amendment to Factoring Agreement dated June 25, 2015.   The Factoring Agreement terminates on July 31, 2015 or at any time that the Note (dated July 9, 2015) is paid in full.
 
On July 17, 2015, the Company entered into an equipment purchase agreement (the “Purchase Agreement”) with Fordham Capital Partners, LLC (“Fordham”) pursuant to which the Company sold all of its right, title and interest in production equipment utilized by the Company to Fordham for a purchase price of $500,000.  Concurrently with entering into the Purchase Agreement, on July 17, 2015, the Company entered into an equipment lease agreement (the “Equipment Lease Agreement”) with Fordham pursuant to which the Company leased the production equipment from Fordham on terms that included the following: a lease term of 24 months, monthly lease payments by the Company of $15,800 and the option (at the election of the Company) to purchase the equipment on or after July 8, 2016 on the following terms:  (i) if the purchase date is between 12-18 months $425,000; (ii) if the purchase date is between 19-23 months: $360,000; and (iii) if the purchase date is during the 24th month (but no later than July 8, 2017): $325,000.
 
The Company received proceeds of $172,911 from the Purchase Agreement.  The proceeds were used for general corporate purposes and to pay off the $200,000 Note and accrued interest discussed above.
 
The Equipment Lease Agreement includes customary events of default, including non-payment by the Company of the monthly lease payments and the payment of penalties upon such late payments.  The Company intends to utilize the proceeds from the sale of the equipment for working capital purposes.
 
In connection with the Purchase Agreement, the Company’s Factoring Agreement with Fordham effective May 28, 2015, as amended by an amendment dated June 25, 2015, was further amended to grant to Fordham a security interest in all of the collateral under such agreement to secure the payment to Fordham of all rent payments and all other amounts owed by the Company to Fordham under the Equipment Lease Agreement.
 
On August 13, 2015, the Company issued a 14% nonconvertible subordinated secured note to Edward Smith III in the principal amount of $25,000.  The note matures on December 31, 2015 and bears interest at 14% computed based on a 365-day year.  Accrued interest is payable at maturity in cash.  The note is secured by the assets of the Company, which security interest is subordinate to the security interest granted to Fordham in connection with the Equipment Lease Agreement and the Factoring Agreement.
 
On August 21, 2015, the Company issued a 14% nonconvertible subordinated secured note to Edward Smith III in the principal amount of $150,000.  The note matures on December 31, 2015 and bears interest at 14% computed based on a 365-day year.  Accrued interest is payable at maturity in cash.   The note is secured by the assets of the Company, which security interest is subordinate to the security interest granted to Fordham in connection with the Equipment Loan and the Factoring Agreement.
 
To successfully grow our business, our management believes it must improve our cash position through greater and sustainable sales of our product lines, and increase the productivity and efficiency of the production process.  However, such an increase would depend on sustained or increased levels of purchases by existing and new customers and actual realization of our customers’ current demand levels, as well as the completion of changes in our production process, all of which cannot be assured.

Certain of the Company’s preferred stock and warrants have reset provisions to the exercise price and conversion price if the Company issues equity or other derivatives at a price less than the exercise price set forth in such preferred stock and warrants. These reset provisions result in a derivative liability in our financial statements.  Our derivative liabilities increased to $832,969 at September 30, 2015 from $20,166 at December 31, 2014.  Fair values for exchange traded securities and derivatives are based on quoted market prices. Where market prices are not readily available, fair values are determined using market based pricing models incorporating readily observable market data and requiring judgment and estimates.

The following discussion focuses on information in more detail on the main elements of the $743,146 net decrease in cash during the nine months ended September 30, 2015 included in the accompanying Statements of Cash Flows. The table below sets forth a summary of the significant sources and uses of cash for the nine months ended September 30, 2015 and 2014:

Cash used in operating activities was $1,794,846 during the nine month period ended September 30, 2015, compared to $2,077,727 in the nine month period ended September 30, 2014.  Net losses of $22,876,577 and $4,425,108 for the nine months ended September 30, 2015 and 2014, respectively, were the primary reasons for our negative operating cash flow in both periods.  The table below outlines the comparative non-cash charges included in Net losses for the nine months ended September 30, 2015 and 2014 respectively:

Description
 
2015
   
2014
 
         
Loss on exchange of warrants
   
12,959,654
     
-
 
Stock based compensation - stock options and warrants vested
   
4,534,849
     
992,450
 
Change in derivative liability, net of bifurcation
   
1,355,747
     
(71,125
)
Loss os sale and leaseback transaction
   
574,331
     
-
 
Loss on debt conversion
   
351,314
     
-
 
Warrants issued expense
   
259,662
     
-
 
Preferred stock issued for services
   
258,731
     
-
 
Depreciation
   
154,250
     
495,468
 
Common stock issued for director fees
   
150,000
     
160,001
 
Common stock & warrants issued for services
   
104,000
     
-
 
Loss on settlement with vendor
   
13,990
     
-
 
Preferred stock to be issued for services
   
-
         
                 
     
20,716,528
     
1,576,794
 

Cash provided by financing activities was $878,789 in the nine months ended September 30, 2015, compared to $1,704,249 during the nine months ended September 30, 2014.  Over the last several years, the Company’s operations have been funded primarily through the sale of both equity and debt securities and the cash conversion of options and warrants into equity. During the first nine months of 2015, the Company raised $880,000 from the sale of units consisting of preferred stock and warrants and $587,000 from short term borrowings that were offset by $588,211 of principal payments made to Fordham Capital.  During the nine months ended September 30, 2014, the Company raised $785,000 in short term borrowings and $990,000 from convertible notes payable from related parties.

Commitments/Contingencies:

Sale of Preferred Stock and Warrants Issued.  Between December 29 and 31, 2014, the Company received cash deposits from several accredited investors in the amount of $1,010,000 towards the purchase of equity securities being offered by the Company.  On January 8, 2015, the Company entered into agreements to sell an aggregate of 260,000 units to eight (8) accredited investors at a price per Unit of $4.00 with each Unit consisting of (i) one (1) share of Preferred Stock and (ii) one (1) Initial Warrant to acquire 8.56 shares of the Company’s Common Stock at an exercise price of $0.64 per share, for aggregate cash proceeds of $1,040,000 pursuant to separate Securities Purchase Agreements entered into with each investor.  In addition, the Company agreed to issue to each of the investors in the first round of financing an Additional Warrant for each Unit acquired to acquire 3.64 shares of the Company’s common stock at an exercise price of $0.64 per share.  The Additional Warrants issued in the initial closing of 260,000 Units are exercisable for an aggregate of 946,400 shares of the Company’s Common Stock. The Warrants expire on the fifth anniversary of their issuance, may be exercised on a cashless basis, are subject to full ratchet price anti-dilution protection and entitled to registration rights.
 
On February 9, 2015, we closed a second round of its private placement offering with four (4) accredited investors in which it raised gross proceeds of $500,000 and sold 125,000 Units, with each unit consisting of  (i) one (1) share of 12.5% Redeemable Convertible Preferred Stock (the “Preferred Shares”) and (ii) one (1) warrant (the “Initial Warrant”), to acquire 8.56 shares of the Company’s common stock, par value, $0.00005 per share (“Common Stock”), at an exercise price of $0.64 per share all pursuant to separate Securities Purchase Agreements entered into with each investor (the “Securities Purchase Agreements”).  In addition, the Company issued to each of the investors in the first and second rounds of financing an Additional Warrant to acquire 3.64 shares of the Company’s common stock at an exercise price of $0.64 per share.  The Initial Warrants issued in the second closing are exercisable for 1,070,000 shares of the Common Stock and the Additional Warrants issued in the second closing are exercisable for an aggregate of 455,000 shares of the Common Stock. The sale was part of a private placement offering (the “Offering”) in which the Company offered for sale a maximum of 5,000,000 units (gross proceeds of $20,000,000).  Prior to the second closing, the Company raised gross proceeds of $1,040,000 in the initial closing of the Offering and sold 260,000 Units (260,000 Preferred Shares, Initial Warrants to acquire 2,225,600 shares of common stock and Additional Warrants to acquire 946,400 shares of common stock.   The Warrants expire on the fifth anniversary of their issuance, may be exercised on a cashless basis, are subject to full ratchet price anti-dilution protection and entitled to registration rights as set forth below.  The Preferred Shares are nonvoting, accrue dividends at the rate per annum equal to 12.5% of the sum of (i) the Stated Value (which initially is $4.00) until the Maturity Date as defined in the Statement of Resolution Establishing Preferred Shares and (ii) the amount of accrued and unpaid dividends payable, are convertible into shares of common stock at the option of the holder as described in the Statement of Resolution Establishing Preferred Shares, have anti-dilution protection, registration rights, may be redeemed under certain circumstances, liquidation preference, protective provisions and board rights under certain circumstances.

On March 18, 2015, the Company received $75,000 from an accredited investor towards the purchase of 18,750 units in a private placement offering.  Each unit consists of  (i) one (1) share of 12.5% Convertible Preferred Stock  and (ii) one (1) warrant, to acquire 8.56 shares of the Company’s common stock, par value, $0.00005 per share, at an exercise price of $0.64 per share all pursuant to separate Securities Purchase Agreements entered into with the investor.  As the shares were not yet issued, the $75,000 was recorded as preferred stock payable as of March 31, 2015.

On June 1, 2015, the Company received $25,000 from an accredited investor towards the purchase of 6,250 units in a private placement offering.  Each unit consists of  (i) one (1) share of 12.5% Convertible Preferred Stock  and (ii) one (1) warrant, to acquire 8.56 shares of the Company’s common stock, par value, $0.00005 per share, at an exercise price of $0.64 per share all pursuant to separate Securities Purchase Agreements entered into with the investor.

On August 26, 2015, the Company received $250,000 from accredited investors towards the purchase of 62,500 units in a private placement offering.  Each unit consists of (i) one (1) share of 12.5% Convertible Preferred Stock and (ii) one (1) warrant, to acquire 8.56 shares of the Company’s common stock, par value, $0.00005 per share, at an exercise price of $0.64 per share all pursuant to separate Securities Purchase Agreements entered into with the investor.

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

On March 24, 2014, Fordham Capital Partners, LLC (“Fordham”) extended a $500,000 revolving loan (the “Equipment Loan”) to Z Trim Holdings, Inc. (the “Company”) evidenced by an Equipment Revolving Note (the “Note”) issued by the Company to Fordham.  The Note requires monthly payments of principal of $10,417 plus interest, commencing on April 24, 2014 and continuing until February 24, 2015, followed by a final balloon payment of the entire unpaid principal balance of the Note and all accrued and unpaid interest on March 24, 2015.  The interest on the Note is calculated at a fixed rate of 20% per annum.  The Note may be prepaid in full at any time; provided that if the Company prepays the Note prior to September 24, 2014 (such six-month period, the “Guaranteed Interest Period”), it must pay a prepayment penalty equal to the amount by which (i) the aggregate interest that Fordham would have received on the Note during the Guaranteed Interest Period had there been no prepayment exceeds (ii) the aggregate interest paid by the Company prior to the date of prepayment.
 
Pursuant to the Security Agreement, dated March 24, 2014, between the Company and Fordham (the “Security Agreement”), the Equipment Loan is secured by a first priority security interest in all of the Company’s equipment (as more specifically defined in the Security Agreement, the “Collateral”).  The Security Agreement also contains customary restrictive covenants, including without limitation, covenants prohibiting the Company from (i) granting additional liens in the Collateral, (ii) selling, leasing or transferring the Collateral, (iii) entering into certain merger, consolidation or other reorganization transactions, and (iv) creating, incurring or assuming additional indebtedness, in each case subject to certain exceptions.  The Security Agreement also contains customary events of default.  If an event of default under the Security Agreement occurs and is continuing, Fordham may declare any outstanding obligations under the Credit Agreement immediately due and payable.  After an event of default, interest on the Note would accrue at a rate of 25% per annum.

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

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

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

On May 12, 2014, the Company issued 14% convertible subordinated secured notes to both Morris Garfinkle and CKS Warehouse in the principal amount of $75,000 each.  Both notes mature in two years (May 12, 2016) and bear interest at 14% computed on a 365-day year.  Accrued interest is payable at maturity in shares of the Company’s Common Stock.  At any time on or after the date that is 90 days after the date of issuance of each note, Mr. Garfinkle and CKS Warehouse may elect to convert the aggregate principal balance and accrued interest into shares of Common Stock of the Company.  The conversion price under each note is $1.00.  The conversion price was greater than the closing stock price on the agreement date; therefore, no beneficial conversion feature was recorded on this note.  Each note is secured by the assets of the Company, which security interest is subordinate to the security interest granted to Fordham in connection with the Equipment Loan and the Factoring Agreement.
 
On May 28, 2015, the Company and Fordham Capital Partners, LLC entered into an Equipment Note in the amount of $50,000.  The note requires payment in one installment of principal of $50,000 plus interest on June 30, 2015.  The interest on the note is calculated at a fixed rate of 22% per annum.

On June 12, 2015, the Company issued a 14% nonconvertible subordinated secured note to Edward Smith, III in the principal amount of $12,000.  The note matures on December 31, 2015 and bears interest at 14% computed based on a 365-day year.  Accrued interest is payable at maturity in cash.   The note is secured by the assets of the Company, which security interest is subordinate to the security interest granted to Fordham in connection with the Equipment Loan and the Factoring Agreement.
        
On June 25, 2015, the Company and Fordham Capital Partners, LLC entered into an Amended and Restated Equipment Note (the “Second Amended Note”) in the amount of $150,000.  The Second Amended Note requires (a) one monthly interest only payment on June 30, 2015 followed by (b) one installment payment of principal of $150,000 plus interest, with such payment due on the maturity date of July 31, 2015.  The interest on the Second Amended Note is calculated at a fixed rate of 22% per annum.

On July 17, 2015, the Company entered into an equipment purchase agreement (the “Purchase Agreement”) with Fordham Capital Partners, LLC (“Fordham”) pursuant to which the Company sold all of its right, title and interest in production equipment utilized by the Company to Fordham for a purchase price of $500,000.  Concurrently with entering into the Purchase Agreement, on July 17, 2015, the Company entered into an equipment lease agreement (the “Equipment Lease Agreement”) with Fordham pursuant to which the Company leased the production equipment from Fordham on terms that included the following: a lease term of 24 months, monthly lease payments by the Company of $15,800 and the option (at the election of the Company) to purchase the equipment on or after July 8, 2016 on the following terms:  (i) if the purchase date is between 12-18 months $425,000; (ii) if the purchase date is between 19-23 months: $360,000; and (iii) if the purchase date is during the 24th month (but no later than July 8, 2017): $325,000
 
On August 13, 2015, the Company issued a 14% nonconvertible subordinated secured note to Edward Smith, III in the principal amount of $25,000.  The note matures on December 31, 2015 and bears interest at 14% computed based on a 365-day year.  Accrued interest is payable at maturity in cash.   The note is secured by the assets of the Company, which security interest is subordinate to the security interest granted to Fordham in connection with the Equipment Loan and the Factoring Agreement.
 
On August 21, 2015, the Company issued a 14% nonconvertible subordinated secured note to Edward Smith, III in the principal amount of $150,000.  The note matures on December 31, 2015 and bears interest at 14% computed based on a 365-day year.  Accrued interest is payable at maturity in cash.   The note is secured by the assets of the Company, which security interest is subordinate to the security interest granted to Fordham in connection with the Equipment Loan and the Factoring Agreement.
 
On September 29, 2015, the Company issued a 14% nonconvertible senior unsecured note to an accredited investor in the principal amount of $250,000.  The note matures in six months (March 29, 2016) and bears interest at 14% computed based on a 365-day year.  Accrued interest is payable at maturity in cash.

Capital Expenditures .  At September 30, 2015, we have no material commitments for capital expenditures.  On July 17, 2015, the Company entered into an equipment purchase agreement (the “Purchase Agreement”) with Fordham Capital Partners, LLC (“Fordham”) pursuant to which the Company sold all of its right, title and interest in production equipment utilized by the Company to Fordham for a purchase price of $500,000.  The Company entered into an equipment lease agreement (the “Equipment Lease Agreement”) with Fordham pursuant to which the Company leased the production equipment from Fordham on terms that included the following: a lease term of 24 months, monthly lease payments by the Company of $15,800 and the option (at the election of the Company) to purchase the equipment on or after July 8, 2016 on the following terms:  (i) if the purchase date is between 12-18 months $425,000; (ii) if the purchase date is between 19-23 months: $360,000; and (iii) if the purchase date is during the 24th month (but no later than July 8, 2017): $325,000.

Lease commitments .  We lease a combined manufacturing, research and development and office facility located in Mundelein, Illinois.  The lease expires in November 2015 and the monthly rental payments are $17,542, inclusive of property taxes.  The Company believes it will be successful in negotiating an lease extension.

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

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Critical Accounting Policies

Our financial statements have been prepared in conformity with GAAP. For a full discussion of our accounting policies as required by GAAP, refer to our Annual Report on Form 10-K for the year ended December 31, 2014. We consider certain accounting policies to be critical to an understanding of our condensed consolidated financial statements because their application requires significant judgment and reliance on estimations of matters that are inherently uncertain. The specific risks related to these critical accounting policies are unchanged at the date of this report and are described in detail in our Annual Report on Form 10-K.

Item 3. Quantitative and Qualitative Disclosure About Market Risks

Not Applicable.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures.
 
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were not effective (1) to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (2) to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to us, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.  This conclusion is based primarily on the material weakness in internal control over financial reporting which was disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014, where management identified material weaknesses consisting of ineffective controls over the control environment and financial statement disclosures, and our failure to complete the process of remediating these weaknesses by the end of the period covered by this Quarterly Report.

Changes in Internal Control Over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting through the date of this report or during the quarter ended September 30, 2015, that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Limitations on the Effectiveness of Controls

Our Principal Executive Officer and Principal Financial Officer do not expect that our disclosure controls or internal controls will prevent all error and all fraud. Although our disclosure controls and procedures were designed to provide reasonable assurance of achieving their objectives, a control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented if there exists in an individual a desire to do so. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Furthermore, smaller reporting companies face additional limitations. Smaller reporting companies employ fewer individuals and find it difficult to properly segregate duties. Often, one or two individuals control every aspect of the Company's operation and are in a position to override any system of internal control. Additionally, smaller reporting companies tend to utilize general accounting software packages that lack a rigorous set of software controls.

Remediation of Material Weaknesses

As discussed above, as of December 31, 2014, we identified material weaknesses in our internal control over financial reporting primarily due to us not having developed accounting policies and procedures and effectively communicating the same to our employees.  Management plans to address these weaknesses by providing future investments in the continuing education of our accounting and financial professionals.

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

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

In addition to the risks and uncertainties discussed herein, particularly those discussed in the “Safe Harbor” Cautionary Statement and the other sections of Management’s Discussion and Analysis of Financial Information and Results of Operations in Part I, Item 2, see the risk factors set forth in Part I, Item 1A of our annual report on Form 10-K for the year ended December 31, 2014.  There has been no material changes to the risk factors previously disclosed in Part I, Item 1A of our annual report on Form 10-K for the year ended December 31, 2014.

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

On August 26, 2015, the Company received $250,000 from accredited investors towards the purchase of 62,500 units in a private placement offering.  Each unit consists of (i) one (1) share of 12.5% Convertible Preferred Stock and (ii) one (1) warrant, to acquire 8.56 shares of the Company’s common stock, par value, $0.00005 per share, at an exercise price of $0.64 per share all pursuant to separate Securities Purchase Agreements entered into with the investor.
 
None of the issuances of the securities described above were registered under the Securities Act of 1933, as amended (the “Securities Act”), or the securities laws of any state, and were offered and sold in reliance on the exemption from registration afforded by Section 4(a)(2)) under the Securities Act and corresponding provisions of state securities laws, which exempt transactions by an issuer not involving any public offering.

Item 3. Defaults upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not Applicable

Item 5. Other Information
 
On March 10, 2015, the Board of Directors of the Company  amended the Company’s bylaws (the “Bylaws”) to: (i) to amend the provision related to the number of directors that shall serve on the Board to provide that the Board shall consist of at least three (3) members; and (ii) to amend the provision related to the filling of any vacancy occurring on the Board such that any vacancy shall be filled by a majority of the board of directors then in office. The foregoing is a summary description of the amendment to the Bylaws is qualified in its entirety by reference to the full text of the amendment, a copy of which is filed as Exhibit 3.1 to this Form 10-Q and is incorporated by reference herein.
 
On November 16, 2015, Mr. Saguto resigned as Chief Financial Officer of the Company, effective immediately. To replace Mr. Saguto, Donald G. Wittmer was appointed as acting Chief Financial Officer of the Company, effective November 18, 2015.
 
On November 18, 2015, the Company entered into a consulting agreement (the “Consulting Agreement”) with ACT Financial Services Inc. (“ACT Financial”), pursuant to which ACT Financial will provide to the Company finance, accounting and administrative functions, including acting chief financial officer (and principal financial officer) services to be provided by Donald G. Wittmer.  The Company will pay an agreed upon weekly rate for such services and will reimburse ACT Financial for certain travel expenses. The Consulting Agreement will continue for six months and may be extended by mutual agreement of the parties.

Mr. Wittmer, age 80, was appointed Acting Chief Financial Officer of the Company on November 18, 2015.  Mr. Wittmer spent 19 years in the finance department of the Quaker Oats Company including serving as Vice President and Controller from 1977 to 1987.  Subsequent to Quaker Oats, Mr. Wittmer owned several businesses and acted as a consultant.  From 2009 to 2014, he served as an Accounting Partner of Monarch Financial Group.  From 2014 to 2015, Mr. Wittmer acted as a consultant to a privately-held transportation company. He has a BS in accounting from Fairleigh Dickerson University and an MBA in Financial Management from Loyola University.  He is a Certified Public Accountant. 

Other than as described above there are no related party transactions between the Company and Mr. Wittmer and Mr. Wittmer is neither related to, nor does he have any relationship with, any existing member of the board of directors of the Company or any executive officer of the Company.
 
Item 6. Exhibits

EXHIBIT INDEX
Z TRIM HOLDINGS, INC.
Form 10-Q for Quarter Ended September 30, 2015
 
Exhibit Number
Description
 
   
Amendment to Bylaws of Z Trim Holdings, Inc. effective as of March 10, 2015*
   
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.*
   
Certification of Principal Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.*
   
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
   
Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
   
101.INS
XBRL Instance Document*
   
101.SCH
XBRL Taxonomy Extension Schema Document*
   
101.CAL
XBRL Taxonomy Extension Calculation Link base Document*
   
1.01 LAB
XBRL Extension Labels Link base Document*
   
101.PRE
XBRL Taxonomy Extension Presentation Link base Document*
   
101.DEF
XBRL Taxonomy Extension Definition Link base Document*


*
Filed herewith.
 
SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
Z TRIM HOLDINGS, INC.
 
 
(Registrant)
 
     
Date: November 19, 2015
/s/ Edward Smith, III
 
 
Edward Smith, III
 
 
Chief Executive Officer (Principal Executive Officer)
     
Date: November 19, 2015
/s/ Donald G. Wittmer
 
 
Donald G. Wittmer
 
 
Acting Chief Financial Officer (Principal Financial Officer)
 
 
41