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ZTHO > SEC Filings for ZTHO > Form 10-Q on 13-Nov-2012All Recent SEC Filings

Show all filings for Z TRIM HOLDINGS, INC

Form 10-Q for Z TRIM HOLDINGS, INC


13-Nov-2012

Quarterly Report


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

Cautionary Statement Regarding Forward Looking Information

This report contains or incorporates by reference various forward-looking statements concerning the Company's prospects that are based on the current expectations and beliefs of management. Forward-looking statements may contain words such as "anticipate," "believe," "estimate," "expect," "objective," "projection" and similar expressions or use of verbs in the future tense, and are intended to identify forward-looking statements; any discussions of periods after the date for which this report is filed are also forward-looking statements. The statements contained herein and such future statements involve or may involve certain assumptions, risks, and uncertainties, many of which are beyond the Company's control, 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 inability to guarantee profitable operations in the future;

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

the risk that we will be unable to pay our debt obligations as they become due;

the 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 desired benefits;

our reliance on a limited number of product offerings;

our product development efforts, including risk that we will not be able to produce our products in a cost-effective manner;

our ability to secure new customers, maintain our current customer base and deliver product on a timely basis;

our dependence on a small concentration of customers;


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possible issuance of common stock subject to options, warrants and other securities that may dilute the interest of stockholders;

our ability to protect technology through patents;

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

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

fluctuations in raw materials and price for agricultural products;

the effect of changes in the pricing and margins of products;

the potential loss of key personnel or other personnel disruptions;

sufficient voting power by one large stockholder to make corporate governance decisions that could have significant effect on us and the other stockholders;

our nonpayment of dividends to common stockholders and lack of plans to pay dividends to common stockholders in the future;

our need for additional financing;

future sale of a substantial number of shares of our common stock that could depress the trading price of our common stock, lower our value and make it more difficult for us to raise capital;

our additional securities available for issuance, which, if issued, could adversely affect the rights of the holders of our common stock; and

our stock price is likely to be highly volatile due to a number of factors, including a relatively limited public float.

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

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

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

Overview

Z Trim Holdings, Inc. is a bio-technology 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 revolutionary 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 finished products, thereby increasing its customers' gross margins.


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The Company, through an exclusive license to technology patented by the United States Department of Agriculture, 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.

As our current facility is a prototype plant, being the first of its kind to produce our innovative products, we are constantly seeking ways to improve efficiencies and achieve economies of scale. We are currently re-designing the process to make use of newer separation technologies and thereby optimize plant output. In late 2011, the Company entered into an agreement with an outside manufacturer, which should exponentially increase production capacity in the second half of 2012.

In July 2012, the Company announced its creation of an industrial products division, which will focus 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, 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 and other starches used as binders, adhesives, viscofiers or emulsifiers.

Current Trends and Recent Developments Affecting the Company

Sales and Manufacturing

Sales for the first nine months of 2012 were up 56% over the first nine months of 2011. This improvement was primarily due to an increase in Z Trim product sales to large food processors.

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


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On October 8, 2012, the Company announced that the FDA has approved the labeling of Z Trim products in meat applications. Specifically, the FDA has approved the use of Z Trim ingredients in ground, emulsified, and processed meats and poultry.

Conversion of Debt/Preferred Stock to Common Stock

On August 13, 2012, the Company entered into an agreement with its largest shareholder, Brightline Ventures I, LLC ("Brightline"), pursuant to which Brightline agreed to convert $7,721,988 (exclusive of dividends) worth of Series I and II Redeemable Preferred Stock into 7,721,988 shares of the Company's Common Stock. In consideration for the foregoing conversion of Series I and II Redeemable Preferred Stock by Brightline on or before their respective maturity dates, the Company modified the following warrants held by Brightline to provide them with the ability to exercise such warrants on a cashless basis: (i) warrants to purchase an aggregate of 11,582,983 shares of Common Stock with an exercise price of $1.50 per share, which were issued to Brightline in transactions where Brightline acquired shares of the Company's Series I and II Redeemable Preferred Stock; and (ii) warrants to purchase an aggregate of 2,859,375 shares of Common Stock with an exercise price of $1.50 per share, which equals one half of the outstanding and unexercised warrants issued to Brightline in other transactions where Brightline provided financing to the Company. The modification indicated above will be offered to the remaining shareholders of both the Series I and II Redeemable Preferred Stock.

On August 15, 2012, Brightline converted $907,120 (including accrued dividends) of Series I Redeemable Preferred Stock into 907,120 shares of the Company's Common Stock. In conjunction with this conversion, Morris Garfinkle, a Director of the Company, also converted $34,800 (including accrued dividends) of Series I Redeemable Preferred Stock into 34,800 shares of the Company's Common Stock.

In addition, on September 7, 2012, Brightline converted $727,280 (including accrued dividends) of Series I Redeemable Preferred Stock into 727,280 shares of the Company's Common Stock.

In the first quarter of fiscal 2012, Brightline converted $1,300,000 in principal balance on notes it held, plus $208,000 of interest accrued thereon into 1,508,000 shares of the Company's Common Stock. As a result, the Company was able to reduce indebtedness for outstanding convertible notes due in 2012 from $1,420,000 to $120,000. On April 19, 2012, the remaining $120,000 in outstanding convertible notes due in 2012, plus $30,979 in accrued interest, was converted into 150,979 shares of common stock the Company's Common Stock. As of September 30, 2012, there was $200,000 of convertible notes outstanding, which are described below.

Issuance of Convertible Notes and Warrants

During the first quarter of fiscal 2012, we secured financing from three accredited investors (the "Investors") pursuant to which we sold senior secured convertible promissory notes (each a "Note" and collectively the "2012 Notes") and warrants and received gross proceeds of $200,000. The 2012 Notes have a twenty-four month term and accrue interest at the rate of 8% per annum. The principal balance of the 2012 Notes is convertible at the rate of $1.00 per share into an aggregate of 200,000 shares of our Common Stock. The interest is payable either upon maturity or quarterly at the Investors' option in shares of our Common Stock. Any amount of principal or interest which is not paid when due shall bear interest at a rate of interest equal to the eighteen percent (18%) per annum.


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

During November 2012, the holders of the senior convertible promissory notes agreed to convert the principal balance of their notes outstanding in the amount of $200,000 and accrued interest of $12,056 into 212,056 shares of our Common Stock. After this conversion, no other convertible notes remain outstanding.

Investment Banking Agreement

On February 17, 2012, we entered into an Investment Banking Agreement ("Investment Banking Agreement") with Legend Securities, Inc. ("Legend"), pursuant to which Legend agreed to provide business advisory services to us for a period of up to eighteen months with our ability to further extend the term of the Investment Banking Agreement for an additional six months.

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

On July 2, 2012, we entered into a Private Placement of Securities & Advisory Services Agreement ("Private Placement Agreement") with Maxim Group LLC ("Maxim"), pursuant to which Maxim agreed to act as the Company's exclusive placement agent in a proposed private placement (the "Offering") of equity, convertible, debt and/or linked securities (the "Securities") of the Company up to $10 million. This agreement will remain in effect until December 31, 2012.

In exchange for Maxim's services, we agreed to pay Maxim the sum of $10,000 per month and we issued to Maxim 150,000 shares of the Company's Common Stock. An additional 350,000 shares of Common Stock would be issued to Maxim upon the completion of a closing that results in the Company receiving a minimum of $10 million. Also, the Company agrees to pay Maxim a fee of 8% of the gross proceeds received by the Company relating to the issuance of equity Securities to investors. Finally, the Company would grant to Maxim securities purchase warrants covering 8% of the total number of Securities sold and/or issued in an Offering. The Warrants would be non-exercisable for six months after the closing date and will expire five years after the closing. The warrants would be exercisable at a price per share equal to 110% of the price of the Securities paid by investors in connection with the Offering. The Maxim Warrants contain a cashless exercise provision and certain "piggy-back" registration rights, pursuant to which the Company is obligated to register the shares underlying the warrants under the Securities Act, in any future registration statement that is filed by the Company with the U.S. Securities and Exchange Commission.


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Issuance of Common Stock

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

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

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

On August 1, 2012, we entered into a private placement subscription agreement with Brightline Ventures I-B, pursuant to which we sold 417,612 shares of Common Stock, at a price of $1.50 per share and received gross proceeds of $626,417.

On September 10, 2012, we entered into a private placement subscription agreement with Brightline Ventures I-B, pursuant to which we sold 74,200 shares of Common Stock, at a price of $1.50 per share and received gross proceeds of $111,300.

Results of Operations

Three Months Ended September 30, 2012 Compared with Three Months Ended September 30, 2011

Revenues

Revenue for the three months ended September 30, 2012 was $411,941, as compared to revenue of $220,025 for the three months ended September 30, 2011. Our revenue for the three months ended September 30, 2012 and 2011 was entirely attributable to product sales. The increase in sales is due to increased demand for our products. Based on current order levels from our customers, we anticipate revenues will continue to increase during the fourth quarter of fiscal 2012 because of increased demand for our products and the addition of production capacity to meet such demand. Our ability to generate increased revenue in future reporting periods will be partially dependent on continued increased demand for our products from existing and new customers and the completion of changes in our production process to further improve our capacity and reduce costs, all of which cannot be assured.


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Cost of Revenues

Cost of revenues for products sold for the three months ended September 30, 2012 and 2011 was $859,795 and $621,026, respectively, an increase of $238,769 or 38%. The increase in costs of goods sold is attributable to an increase in the cost of finished goods relating to the increase in goods produced and sold. If we can further increase our production volume, we believe that this will enable us to allocate our fixed costs over a greater number of finished goods and help reduce the costs of goods sold in the future to improve margins. As we commence and ramp-up production pursuant to the CPA with ANP, we expect that this will result in greater efficiencies in our production process and also result in improved margins.

Gross Loss

Gross loss for the three months ended September 30, 2012 was $447,854, or approximately 109% of revenues, as compared to gross loss of $401,001, or approximately 182% of revenues for the three months ended September 30, 2011. Gross loss reflects a number of factors that can vary from period to period, including those described above.

Operating Expenses

Operating expenses for the three months ended September 30, 2012 consisted of selling, general and administrative expenses partially offset by a gain on fixed asset disposal. For the three months ended September 30, 2011 operating expenses consisted entirely of selling, general and administrative expenses. Operating expenses for the three months ended September 30, 2012 were $1,410,319, an increase of $101,146 or 8% from $1,309,173 for the three months ended September 30, 2011.

The significant components of selling, general and administrative expenses are as follows:

                                              Three Months Ended September 30,
                                                2012                    2011
Stock based compensation expenses         $         572,295       $         502,044
Salary expenses                                     278,943                 329,133
Professional fees                                    71,199                  45,843
Non-manufacturing depreciation expenses               3,368                  23,020
Employment recruiting expenses                          419                     350
Investor relation expense                           226,935                 189,583

                                          $       1,153,158       $       1,089,973

The increase in stock-based compensation was attributable to an increase in market price for the stock on the dates used to value the unvested portion of the stock-based compensation. In addition, a decrease in the number of employees reduced salary expense in the third quarter of 2012. Investor relations expense increased for the quarter ended September 30, 2012, as compared to the same period in 2011, due to the issuance of stock-based compensation to our investor relations consultants in 2012.


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Operating Loss

Operating loss for the three months ended September 30, 2012 increased to $1,858,173 compared to $1,710,174 for the three months ended September 30, 2011 due to the reasons described above.

Other Income (Expense)

Other expense for the three months ending on September 30, 2012 was $12,329,983, as compared to other income of $1,655,512 for the three months ending on September 30, 2011. The decrease in other income of $13,985,495 was primarily due to a decrease of $14,290,141 in the change of the fair value of our derivatives.

Net Profit (Loss)

As a result of the above, we reported a net loss of $14,188,156 for the three months ended September 30, 2012, as compared to a net loss of $54,662 for the three months ended September 30, 2011.

Basic and Diluted (Loss) per Share

The basic and diluted net loss per share for the three months ended September 30, 2012 was ($0.87) per share, as compared to net loss per share of ($0.08) for the three months ended September 30, 2011 due to the effect of the results described above as well as the offset of additional shares outstanding in 2012 due to the conversion of notes payable into shares of common stock and issuance of common stock in financing transactions.

Nine Months Ended September 30, 2012 Compared with Nine Months Ended September 30, 2011

Revenues

Revenue for the nine months ended September 30, 2012 was $1,054,214, a 56% increase from $674,951 for the nine months ended September 30, 2011. Our revenue for the nine months ended September 30, 2012 and 2011 was entirely attributable to product sales. The increase in sales is due to increased demand for our products.

Cost of Revenues

Cost of revenues for products sold for the nine months ended September 30, 2012 and 2011 was $2,124,840 and $1,875,722, respectively, an increase of $249,118 or approximately 13%. The increase in costs of goods sold is attributable to an increase in sales partially offset by decreases in direct labor and manufacturing overhead. If our production volumes continue to increase, we expect to be able to lower our cost of finished goods on a per unit basis because this would allow us to allocate our fixed costs over a greater number of finished goods and result in improved margins.


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Gross Loss

Gross loss for the nine months ended September 30, 2012 was $1,070,626, or approximately 102% of revenues, as compared to gross loss of $1,200,771, or approximately 178% of revenues for the nine months ended September 30, 2011. Gross loss reflects a number of factors that can vary from period to period, including those described above.

Operating Expenses

Operating expenses for the nine months ended September 30, 2012 were $3,353,786, a decrease of $1,411,272 or 30% from $4,765,058 for the nine months ended September 30, 2011. Operating expenses for the nine months ended June 30, 2012 consisted of selling, general and administrative expenses offset by a gain on a fixed asset disposal. For the nine months ended September 30, 2011 operating expenses consisted entirely of selling, general and administrative expenses.

The significant components of selling, general and administrative expenses are as follows:

                                              Nine Months Ended September 30,
                                                2012                   2011
Stock based compensation expenses         $      1,032,267       $      1,869,208
Salary expenses                                    822,950              1,050,035
Professional fees                                  200,968                199,952
Non-manufacturing depreciation expenses             20,610                 68,446
Employment recruiting expenses                      16,047                 26,846
Investor relation expense                          284,990                631,775

                                          $      2,377,832       $      3,846,262

The decrease in stock-based compensation was attributable to the fewer employees being granted stock-based compensation and a decrease in market price for the stock on the dates issued. In addition, a decrease in the number of employees reduced salary expense in the period. Investor relations expense decreased for the nine months ended September 30, 2012, as compared to the same period in 2011, due to a reduction of stock-based compensation to our investor relations consultants in 2012.

Operating Loss

Operating loss for the nine months ended September 30, 2012 decreased to $4,424,412 compared to $5,965,829 for the nine months ended September 30, 2011 due to the reasons described above.

Other Expense

Other expense for the nine months ended on September 30, 2012 was $15,276,770 as compared to other income for the nine months ended September 30, 2011 of $222,894. The net change of $15,499,664 was primarily due to the period-to-period change in the fair value of our derivatives by $18,143,288 . . .

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