Agritech Worldwide 10Q 2014 Q1 Quarterly report

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 March 31, 2014

	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 ý 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 ý 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 a smaller reporting company) Smaller reporting company ý

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

Yes ¨ No ý

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 May 14, 2014
Common Stock, $0.00005 par value		39,734,854

Z TRIM HOLDINGS, INC.

FORM 10-Q QUARTERLY REPORT Table of Contents

Item			Page
PART I
Item l.	Financial Statements (see below)		3

Item 2.	Management's Discussion and Analysis of Financial		3
	Condition and Results of Operations

Item 3.	Quantitative and Qualitative Disclosures about Market Risk		12

Item 4.	Controls and Procedures		12

PART II

Item 1.	Legal Proceedings		13

Item 1A.	Risk Factors		13

Item 5.	Other Information		13

Item 6.	Exhibits		13

SIGNATURES

EXHIBIT INDEX

Financial Statements		Balance Sheets
		At March 31, 2014 (unaudited) and December 31, 2013	F-1

		Statements of Operations
		for the three months ended March 31, 2014 and 2013 (unaudited)	F-2

		Statements of Cash Flows
		for the three months ended March 31, 2014 and 2013 (unaudited)	F-3

		Notes to Financial Statements (unaudited)	F-4

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

See Financial Statements beginning on page F-23.

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, which are intended to identify forward-looking statements; any discussions of periods after the date for which this report is filed are also forward-looking statements. The forward-looking statements contained herein and such future statements involve or may involve certain assumptions, risks, and uncertainties, many of which are beyond the Company’s control, which could cause the Company’s actual results and performance to differ materially from what is expected. Readers are cautioned not to place undue reliance on such forward-looking statements. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. There can be no assurance that the forward-looking statements contained in this document will, in fact, transpire or prove to be accurate.

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

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

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

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

- our plans for commercialization of our products;

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

- our reliance on a limited number of product offerings;

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

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

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

- our dependence on a small concentration of customers;

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

- our ability to protect technology through patents;

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

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

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

- fluctuations in the availability of raw materials and the price for agricultural products;

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

- the potential loss of key personnel or other personnel disruptions;

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

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

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

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

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

- our need for additional financing;

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

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

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

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

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

In addition, see Risk Factors in Part I, Item 1A of the Company’s 2013 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,” “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 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.

We currently manufacture our products at a facility owned by our toll manufacturer, AVEKA Nutra Processing, LLC (“ANP”). Our original facility, which we phased out in the third quarter of 2013, was a prototype plant, the first of its kind to produce our innovative products.

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 first quarter of 2014 were down 13% as compared to sales for the first quarter of 2013 due (1) to a change in the ordering pattern of several customers (several customers accelerated orders into the fourth quarter of 2013 that, in the previous year, were made in the first quarter) and (2) the long and harsh winter in the Midwest and Northeastern U.S. (several customers had their manufacturing plants shut down for periods of time due to heavy snowfalls).

In 2011, the Company entered into a Custom Processing Agreement (“CPA”) with 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 dietary 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 the specified time frame. Start-up activities began in the third quarter of 2012, and production began in the fourth quarter of 2012. The CPA provides 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 million pounds per month. However, due to factors, including 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.

Funding Initiatives

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.

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, subject to adjustment as described in the 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 B. Smith, 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, subject to adjustment as described in the 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 Mo 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, subject to adjustment as described in the 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.

Results of Operations

Three Months Ended March 31, 2014 Compared with Three Months Ended March 31, 2013

Revenues

Revenue for the three months ended March 31, 2014 was $316,470, as compared to revenue of $363,831 for the three months ended March 31, 2013, a decrease of 13%. Our revenue for the three months ended March 31, 2014 and 2013 was entirely attributable to product sales. The decrease in sales in the current year’s period was due (1) to a change in the ordering pattern of several customers (several customers accelerated orders into the fourth quarter of 2013 that, in the previous year, were made in the first quarter) and (2) the long and harsh winter in the Midwest and Northeastern U.S. (several customers had their manufacturing plants shut down for periods of time due to heavy snowfalls). 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 three months ended March 31, 2014 and 2013 was $313,981 and $669,473, respectively, a decrease of $355,492 or 53.1%. The decrease in costs of goods sold in the current year’s period was attributable to our total reliance on our outside toll manufacturer to produce sellable product. Costs that previously were related to the Company’s manufacturing of products at our pilot facility are now classified as research and development costs. 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. As we continue to increase 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. However, there can be no assurance that greater efficiencies or improved margins can be achieved.

Gross Income (Loss)

Gross income for the three months ended March 31, 2014 was $2,489, or approximately 0.8% of revenues, as compared to a gross loss of $305,642, or approximately 84% of revenues for the three months ended March 31, 2013. Gross income or loss reflects a number of factors that can vary from period to period, including those described above.

Operating Expenses

As a result of all manufacturing activity being moved to ANP, direct manufacturing costs that were previously included with Costs of Revenue are now related to the Company’s efforts at research and development of new products and processes using different feed stocks, expanded grade applications and more efficient manufacturing methods. These costs are being classified as operating expenses for the three months ended March 31, 2014. Therefore, operating expenses for the three months ended March 31, 2014 were $1,499,987 (including $398,377 of research and development costs) as compared to $1,833,450 (which includes $56,678 of research and development costs) for the three months ended March 31, 2013, a decrease of $333,463, or 18.2%.

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

��

	Three Months Ended March 31,
	2014	2013
Stock based compensation expenses	$251,159	$676,932
Salary expenses	334,143	324,001
Professional fees	78,906	238,324
Non-manufacturing depreciation expenses	562	1,166
Employment recruiting expenses	395	294
Investor relation expense	25,490	69,100

	$690,655	$1,309,817

The decrease in stock-based compensation was attributable to a decrease in market price for the stocks on the date employee stock options were granted. Professional fees were higher in 2013 due to legal fees incurred regarding a settlement with a former provider of investment services and work related to potential capital raising activities. Investor relations expense was higher due to work related to potential capital raising activities in 2013. Excluding stock-based compensation expenses, directors’ fees and non-manufacturing depreciation expenses, which are non-cash items, our operating expenses, excluding research and development costs, for the three months ended March 31, 2014 and 2013 were $689,888 and $955,350, respectively. Operating expenses excluding non-cash items is a non-Generally Accepted Accounting Principles (“non-GAAP”) financial measure and is provided by our management to provide further information regarding uses of cash during the periods presented. This non-GAAP measure, we believe, will assist our investors to better understand our uses of cash resources with respect to operating expenses during the periods presented.

Included as research and development costs are the following:

	Three Months Ended March 31,
	2014	2013
Salary and employee benefits	$92,668	$-
Depreciation expense	164,596	-
Utilities	49,374	-
Product analysis and testing	73,548	-
Repairs and supplies	1,896	-
Other	16,296	56,678

	$398,377	$56,678

Operating Loss

The operating loss for the three months ended March 31, 2014 decreased to $1,497,498 compared to $2,139,092 for the three months ended March 31, 2013 due to the reasons described above.

Other Income(Expenses)

Other income for the three months ending on March 31, 2014 was $59,429 as compared to other expenses of $9,201,052 for the three months ending on March 31, 2013. The increase in other income (expenses) of $9,260,481 was primarily due to the decrease in the fair value of our derivatives, which resulted in additional income of $4,466,238 as compared to the prior year and the recognition in 2013 of $4,789,801 as an expense relating to modifications made to warrants to induce investors to exercise those warrants. The decrease in the fair value of the derivative liability resulted from the conversion of derivative securities during the period that originally led to the recognition of the derivative liability. Interest expense on debt of $5,232 incurred during the three months ended March 31, 2014 related to the short-term borrowings and convertible note payable discussed above. There was no interest expense recognized during the three months ended March 31, 2013 due to all convertible notes payable being converted to common stock during fiscal year 2012. 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 three months ended March 31, 2014, we reported a net loss of $1,438,069 as compared to a net loss of $11,340,144 for the three months ended March 31, 2013.

Basic and Diluted Net Loss per Share

The basic and diluted net loss per share for the three months ended March 31, 2014 was $0.04 as compared to the basic and diluted net loss per share of $0.42 for the three months ended March 31, 2013. Net loss per share was favorably impacted by the increase in Other Income as discussed above.

Liquidity and Capital Resources

As of March 31, 2014, we had a cash balance of $387,617, a decrease from a balance of $443,472 at December 31, 2013. At March 31, 2014, we had working capital of $124,162, as compared to working capital of $805,195 as of December 31, 2013. The decrease in working capital primarily resulted from the increases in inventory, accounts payable, and short-term borrowings as a result of an unanticipated change in the ordering pattern of several customers that resulted in a decrease in orders during the first quarter.

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 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 warrants. These reset provisions result in a derivative liability in our financial statements. Our derivative liabilities decreased to $46,861 at March 31, 2014 from $95,049 at December 31, 2013. 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.

In connection with the CPA with ANP, the Company agreed to make available to ANP a $500,000 line of credit at an interest rate of 5.5%. The line of credit is only permitted to be used by ANP for operating costs, which excludes capital expenditures of equipment in excess of $5,000. The loan is to be paid back to 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 CPA, are specifically guaranteed by its parent company, AVEKA Inc. As of March 31, 2014, all $500,000 under this line of credit was outstanding. This extension of credit to ANP had a material adverse impact on the Company’s cash resources, which has required the Company to seek additional capital resources to fund its operations.

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.

The following discussion focuses on information in more detail on the main elements of the $55,855 net decrease in cash during the three months ended March 31, 2014 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 three month periods ended March 31:


	2014	2013
Cash used in operating activities	$(755,855)	$(1,258,257)
Cash provided by financing activities	700,000	2,235,721

(Decrease) Increase in cash	$(55,855)	$977,464

Cash used in operating activities was $755,855 during the three month period ended March 31, 2014, compared to $1,258,257 in the three month period ended March 31, 2013. Net losses of $1,438,069 and $11,340,144 for the three months ended March 31, 2014 and 2013, respectively, were the primary reasons for our negative operating cash flow in both periods. The Company’s negative operating cash flow for the three months ended March 31, 2014 was offset by the effects of non-cash charges to income including stock-based compensation, shares issued for directors fees and depreciation. During three months ended March 31, 2013 the Company’s negative operating cash flow was offset by $4,789,801 of expense related to the equity modification to warrants and changes in the fair value of the derivative liability as a result of warrants being exercised.

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

Cash provided by financing activities was $700,000 in the three month period ended March 31, 2014, compared to $2,235,721 during the three month period ended March 31, 2013. 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 warrants into equity. During the first three months of 2014, the Company raised $500,000 in short-term borrowings and $200,000 from a convertible note payable from a related party as discussed above. The Company’s warrant exercise program raised approximately $2,195,110 in additional capital during the first quarter of 2013. The Company did not engage in any debt financing for the three months ended March 31, 2013.

Commitments/Contingencies:

AVEKA Nutra Processing, LLC Line of Credit. As discussed under “Liquidity and Capital Resources” above, under the terms of the CPA with ANP, 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 ANP with the purchase of its Waukon, Iowa facility) at an interest rate of 5.5%. As of March 31, 2014, all $500,000 to ANP under the line of credit was outstanding.

Debt Instruments. 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.

Following the quarter ended March 31, 2014, the Company entered into the following additional debt instruments:

Capital Expenditures. At March 31, 2014, the Company has no material commitments for capital expenditures.

Lease commitments. The Company leases a combined research and development and office facility located in Mundelein, Illinois. The lease expires in May 2015 and the monthly rental payments are $21,361, inclusive of property taxes. 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.

Litigation. In July 2007, the Company and Greg Halpern, its former Chief Executive Officer in his individual capacity, were sued in the 20th Judicial Circuit Court, St. Clair County, Illinois by Joseph Sanfilippo and James Cluck for violation of the Consumer Fraud Act and damages in excess of $200,000. The trial court has issued a default order against 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 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.

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, 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. 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.

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, 2013. 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, 2013, 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 March 31, 2014, 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, 2013, we identified material weaknesses in our internal control over financial reporting primarily due to the Company not having developed accounting policies and procedures and effectively communicated to same to its 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

On October 1, 2013, FINRA informed the Company that it had concluded its review of the trading activity in the Company’s common stock surrounding the Company’s January 22, 2013 announcement of the joint development agreement with Newpark Drilling Fluids LLC to develop new, environmentally-friendly drilling fluids that incorporate Z Trim's proprietary industrial materials, and had referred the matter to the SEC for whatever action, if any, it deems appropriate. While there have not been any allegations of violations of FINRA conduct rules or the federal securities laws, as of the date of this report, the outcome of this matter is uncertain.

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 Condition 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 fiscal year ended December 31, 2013.

Item 5. Other Information

Item 6. Exhibits

See the Exhibit Index included as the last part of this report (following the signature page), which is incorporated herein by reference.

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: May 14, 2014

/s/ Steven J. Cohen

Steven J. Cohen

Chief Executive Officer

Date: May 14, 2014 /s/ Brian Chaiken

Brian Chaiken

Chief Financial Officer (Principal Financial Officer)

EXHIBIT INDEX

Z TRIM HOLDINGS, INC.

Form 10-Q for Quarter Ended March 31, 2014

Exhibit Number	Description
10.1	12.5% Convertible Senior Secured Note dated February 11, 2014, to Edward B. Smith in the principal amount of $200,000.+*

10.2	14% Convertible Subordinated Secured Note dated April 25, 2014, to Edward B. Smith in the principal amount of $300,000.+*

10.3	Form of 14% Convertible Subordinated Secured Note dated April 30, 2014, to each of Edward B. Smith, Mark Hershhorn, Morris Garfinkle and Brian Israel.+*

10.4	Equipment Revolving Note dated March 31, 2014, issued by Z Trim Holdings, Inc. in favor of Fordham Capital Partners, LLC.(1)

10.5	Security Agreement dated March 24, 2014, between Z Trim Holdings, Inc. and Fordham Capital Partners, LLC.(1)

10.6	Factoring Agreement dated March 24, 2014, between Z Trim Holdings, Inc. and Fordham Capital Partners, LLC.(1)

10.7	Fifth Amendment to Lease by and among the Registrant, M&R II Limited Partnership and Chaska Limited Partnership dated as of March 14, 2014.*

10.8	Amendment to Custom Processing Agreement by and between the Registrant and AVEKA Nutra Processing, LLC dated March 28, 2014.*

10.9	Form of 14% Convertible Subordinated Secured Note dated May 12, 2014, to each of Mo Garfinkle and CKS Warehouse.+*

31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.
31.2	Certification of Principal Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.
32.1	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.
32.2	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

_______

+ Management compensatory plan or arrangement.

* Filed herewith.

(1) Incorporated herein by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on March 28, 2014.

INDEX TO FINANCIAL STATEMENTS

	Page #
Balance Sheets at March 31, 2014 (unaudited) and December 31, 2013	F-1
Statements of Operations for the three months ended March 31, 2014 and 2013 (unaudited)	F-2
Statements of Cash Flows for the three months ended March 31, 2014 and 2013 (unaudited)	F-3
Notes to Financial Statements as of March 31, 2014 and 2013 (unaudited)	F-4

Z TRIM HOLDINGS, INC.
BALANCE SHEET

ASSETS

	(Unaudited)
	3/31/14	12/31/13

Current Assets
Cash and cash equivalents	$387,617	$443,472
Accounts receivable	207,018	380,238
Inventory	643,550	544,535
Prepaid expenses and other assets	104,403	136,887

Total current assets	1,342,588	1,505,132

Long Term Assets
Note receivable	$557,431	$550,650
Other assets	24,393	11,892
Property and equipment, net	1,635,148	1,800,306

Total long term assets	2,216,972	2,362,848

TOTAL ASSETS	$3,559,560	$3,867,980

LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIT)

	(Unaudited)
	3/31/14	12/31/13

Current Liabilities
Accounts payable	$464,223	$374,566
Short-term borrowings	500,000	-
Accrued expenses and other	171,164	194,144
Accrued liquidated damages	36,178	36,178
Derivative liabilities	46,861	95,049
Total Current Liabilities	1,218,426	699,937

Long-term convertible note payable to related party	200,000	-

Total Liabilities	1,418,426	699,937

Stockholders' Equity (Deficit)
Common stock, $0.00005 par value; authorized 200,000,000 shares; issued and outstanding 39,734,854 and 39,449,138 shares, March 31, 2014 and December 31, 2013, respectively	1,987	1,973
Additional paid-in capital	130,450,707	130,039,561
Accumulated deficit	(128,311,560)	(126,873,491)

Total Stockholders' Equity (Deficit)	2,141,134	3,168,043

TOTAL LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIT)	$3,559,560	$3,867,980

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

F-1

Z TRIM HOLDINGS, INC.
STATEMENTS OF OPERATIONS (Unaudited)

	Three Months Ended
	March 31,	March 31,
	2014	2013
REVENUES:
Products	$316,470	$363,831
Total revenues	316,470	363,831

COST OF REVENUES:
Products	313,981	669,473
Total cost of revenues	313,981	669,473

GROSS MARGIN	2,489	(305,642)

OPERATING EXPENSES:
Research and development costs	398,377	56,678
Selling, general and administrative	1,101,610	1,776,772
Total operating expenses	1,499,987	1,833,450

OPERATING LOSS	(1,497,498)	(2,139,092)

OTHER INCOME (EXPENSES):
Rental and other income	200	-
Interest income	6,781	6,838
Interest expense - other	(508)	(39)
Interest expense - debt	(5,232)	-
Change in fair value - derivative	48,188	(4,418,050)
Expense for modification of warrants	-	(4,789,801)
Settlement gain (loss)	10,000	-
Total other income (expenses)	59,429	(9,201,052)

NET LOSS	$(1,438,069)	$(11,340,144)

Less Preferred Dividends	-	56,144

NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS	$(1,438,069)	$(11,396,288)
NET LOSS PER SHARE - BASIC AND DILUTED	$(0.04)	$(0.42)

Weighted Average Number of Shares Basic and Diluted	39,728,505	26,868,311

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

F-2

Z TRIM HOLDINGS, INC.
STATEMENTS OF CASH FLOWS (Unaudited)

FOR THE THREE MONTHS ENDED MARCH 31	2014	2013

CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$(1,438,069)	$(11,340,144)
Adjustments to reconcile loss from continuing operations to
net cash used in operating activities:
Stock based compensation - stock options vested	251,159	676,932
Common shares issued for director fees	160,001	200,002
Shares & warrants issued for services	-	46,627
Loss on equity modification	-	4,789,801
Depreciation	165,158	161,109
Change in derivative liability, net of bifurcation	(48,188)	4,418,050
Changes in operating assets and liabilities:
Accounts receivable	173,220	(91,755)
Inventory	(99,015)	(158,462)
Prepaid expenses and other assets	19,983	3,203
Note receivable	(6,781)	(6,781)
Accounts payable and accrued expenses	66,677	43,161
CASH USED IN OPERATING ACTIVITIES	(755,855)	(1,258,257)

CASH FLOWS FROM FINANCING ACTIVITES
Proceeds from exercise of stock options	-	10,100
Proceeds from exercise of warrants	-	2,225,621
Borrowing on short term debt	500,000	-
Borrowing on long term note payable	200,000	-
CASH PROVIDED BY FINANCING ACTIVITIES	700,000	2,235,721
NET (DECREASE) INCREASE IN CASH	(55,855)	977,464

CASH AT BEGINNING OF PERIOD	443,472	644,804
CASH AT THE PERIOD ENDED MARCH 31	$387,617	$1,622,268

Supplemental Disclosures of Cash Flow Information:
Cashless exercise of warrants	$-	$6
Cashless exercise of options	$-	$4
Shares issued for stock payable related to settlement loss	$-	$1,881,250
Preferred stock conversion	$-	$2,690,056
Change in derivative liability due to exercise of warrants	$-	$1,410,651
Change in derivative liability due to conversion of preferred stock	$-	$2,761,688
Dividends payable declared	$-	$56,144

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

F-3

Z TRIM HOLDINGS, INC.

Notes to Financial Statements

March 31, 2014

(Unaudited)

NOTE 1 – NATURE OF BUSINESS

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, energy and other industries. The Company’s products can be used by food manufacturers and processors, restaurants, schools, and the general public worldwide, as well as in industrial applications. The Company continues to explore all available options for its other Z Trim technologies and related assets. The Company owns an exclusive license to Z Trim, a natural, agriculture-based functional food ingredient.

NOTE 2 – GOING CONCERN

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 net loss equal to $128,311,560 as of March 31, 2014. 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 March 31, 2014 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, 2013.

The results for the three months ended March 31, 2014 may not be indicative of results for the year ending December 31, 2014 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 March 31, 2014 and December 31, 2013 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 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, 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 $387,617 in cash at March 31, 2014 and $443,472 at December 31, 2013.

F-4

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 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 March 31, 2014, 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 to purchase common stock. The Company classifies the fair value of these warrants under level three. The fair value of the derivative liability at March 31, 2014 was $46,861 compared to $95,049 as of December 31, 2013. The decrease in fair value for the three months ended March 31, 2014 was $48,188 compared to an increase of $4,418,050 for the three months ended March 31, 2013. 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
12/31/13	$95,049	$-	$-	$95,049	$95,049

Change in derivative liabilities due to
settlements	-	-	-	-	-
Change in derivative liabilities valuation	(48,188)	-	-	(48,188)	(48,188)
	(48,188)	-	-	(48,188)	(48,188)

Derivative Liabilities
3/31/14	$46,861	$-	$-	$46,861	$46,861

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.

F-5

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 three months ended March 31, 2014 and 2013 were $0 and $250, 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 and directors, including stock options, restricted stock and employee stock purchases related to employee stock purchase plans, on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as an expense ratably over the requisite service periods. We estimate the fair value of each share-based award using the Black-Scholes option pricing model. The Black-Scholes model is highly complex and dependent on key estimates by management. The estimates with the greatest degree of subjective judgment are the estimated lives of the stock-based awards and the estimated volatility of the Company’s stock price. The Company recognized pre-tax compensation expense related to stock options of $251,159 and $676,932 for the three months ended March 31, 2014 and 2013, respectively.

New Accounting Pronouncements

Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income

In February 2013, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update which adds new disclosure requirements for items reclassified out of accumulated other comprehensive income. The update requires entities to disclose additional information about reclassification adjustments, including changes in accumulated other comprehensive income balances by component and significant items reclassified out of accumulated other comprehensive income. The update was effective for the Company in the first quarter of 2013. The update primarily impacted our disclosures and did not have a material impact on our financial position, results of operations or cash flows.

Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists

In July 2013, the FASB issued an accounting standards update which requires an entity to present an unrecognized tax benefit, or portion thereof, in the statement of financial position as a reduction to a deferred tax asset for a net operating loss carryforward or a tax credit carryforward, with certain exceptions related to availability. The update was effective in the first quarter of 2014. The update did not have a material impact on the Company’s financial position, results of operations or cash flows.

Testing Indefinite-Lived Intangible Assets for Impairment

In July 2012, the FASB issued an accounting standards update which provides, subject to certain conditions, the option to perform a qualitative, rather than quantitative, assessment to determine whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount. The update was effective for the Company in the first quarter of 2013. The update may, under certain circumstances, reduce the complexity and costs of testing indefinite-lived intangible assets for impairment and did not have a material impact on the Company’s financial position, results of operations or cash flows.

NOTE 4 – INVENTORY

At March 31, 2014 and December 31, 2013, inventory consists of the following:

	3/31/14	12/31/13
Raw materials	$26,754	$27,575
Packaging	10,456	8,178
Work-in-process	20,593	33,527
Finished goods	585,747	475,255

	$643,550	$544,535

F-6

NOTE 5 – PROPERTY AND EQUIPMENT, NET

At March 31, 2014 and December 31, 2013, property and equipment, net consists of the following:

	3/31/14	12/31/13
Production, engineering and other equipment	$6,422,110	$6,422,110
Leasehold improvements	2,904,188	2,904,188
Office equipment and furniture	603,182	603,182
Computer equipment and related software	140,238	140,238
	$10,069,718	$10,069,718
Accumulated depreciation	($8,434,570)	($8,269,412)
Property and equipment, net	$1,635,148	$1,800,306

Depreciation expense was $165,158 and $161,109 for the three months ended March 31, 2014 and 2013, respectively. During 2014, the Company has not sold 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 provides that ANP will 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 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. Production pursuant to the Agreement began in November 2012 and is still in the process of being ramped up to contractual 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 is only permitted to be used by ANP for operating costs which excludes capital expenditures of equipment in excess of $5,000. ANP may not draw down on the line of credit more than $75,000 in any given thirty day period. The loan is 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, are specifically guaranteed by its parent company, AVEKA Inc. As of March 31, 2014, the Company has advanced a total of $500,000 under this line of credit, and accrued interest on the advance was $57,431.

On March 28, 2014 the Company entered into an amendment to the custom processing agreement with Aveka Nutra Processing LLC relating to the repayment of the line of credit advances made by the Company plus interest. Commencing on April 1, 2014, Aveka Nutra Processing agreed to begin paying the Company $5,000 per month to be applied to the advances made and accrued interest.

F-7

NOTE 7 – SHORT-TERM BORROWINGS

NOTE 8 – ACCRUED EXPENSES AND OTHER

At March 31, 2014 and December 31, 2013 accrued expenses consist of the following:

	3/31/14	12/31/13
Accrued payroll and taxes	$46,659	$51,566
Accrued settlements	102,000	102,000
Accrued interest	5,232	-
Accrued expenses and other	17,273	40,578

	$171,164	$194,144

NOTE 9 – CONVERTIBLE NOTE PAYABLE TO RELATED PARTY

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 agreeement 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.

See “Subsequent Events” described in Note 20 below.

F-8

NOTE 10 – PREFERRED STOCK

On March 18, 2013, Brightline Ventures I converted the Series II Convertible Preferred Stock of $3,326,697 together with $533,000 of accrued dividends thereon into 3,859,697 shares of the Company’s Common Stock. As of March 31, 2013 there was no Series II Convertible Preferred Stock outstanding. The value of the Series II Preferred Stock and dividends converted was equal to the total value recorded to common stock and additional paid in capital with no gain or loss recorded as the conversion was consistent with the original agreement. As a result of the preferred stock conversion, $2,690,056 was recorded to common stock and additional paid-in capital.

As of March 31, 2014, no shares of Series I or II Preferred Stock remained outstanding.

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. We obtained a release and waiver of the amounts due from almost all of the 2008 investors. Under the terms of the RRA, we potentially owe, 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 warrants (as well as its formerly outstanding preferred stock and Convertible 8% Senior Secured Notes issued in 2008 and 2010) 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 warrants. This ratchet provision results in a derivative liability in our financial statements.

Our derivative liabilities decreased to $46,861 at March 31, 2014 from $95,049 at December 31, 2013. The change in fair value during the three months ended March 31, 2014 was $48,188 as compared to $4,418,050 for the three months ended March 31, 2013.

The following tabular presentation reflects the components of derivative financial instruments on the Company’s balance sheet at March 31, 2014 and December 31, 2013:

	3/31/14	12/31/13
Common stock warrants	$46,861	$95,049
Embedded conversion features for
convertible debt or preferred shares	-	-

Total	$46,861	$95,049

Beginning balance	$95,049	$8,025,381
Bifurcated amount	-	-
Change in derivative liability valuation	(48,188)	(966,736)
Change in derivative liability - settlements	-	(6,963,596)

Total	$46,861	$95,049

F-9

NOTE 13 – EQUITY

Common Stock Issued to Directors

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 first quarter of 2014 there were no warrants or options exercised for cash.

During the first quarter of 2013, several investors participated in a warrant exercise program that resulted in the exercise of 1,756,088 warrants into 1,756,088 shares of the Company’s common stock. The warrant program, which was open to all holders of $1.50 warrants, allowed those warrant holders to exercise their warrants for a $1.25 strike price during February 2013; it also required a waiver of the anti-dilution provisions in these warrants until February 28, 2013 so that those provisions would not be triggered by the exercises. The conversion of these warrants raised $2,195,110 of cash for the Company. As a result of this warrant modification the Company recognized $4,789,801 of additional expense for previously issued warrants during the period ended March 31, 2013. The value of the additional expense was based on the fair value of the warrant modification at the date the offer was made to the warrant holders calculated by using the Black-Scholes Model. The key inputs utilized in this model include the Company’s stock price on the date of the modification of $2.30, the computed volatility of the Company’s stock price at 109.96% and the discount rate used based on a U.S. Treasury security for a comparable period to the remaining term of the warrants of .06%.

Also during the first quarter of 2013, in addition to the warrant exercise program, investors exercised 82,753 warrants and the Company received proceeds of $30,511. During the quarter ended June 30, 2013, investors exercised 287,006 warrants and the Company received proceeds of $180,369. During the three months ended September 30, 2013, investors exercised 161,883 warrants and the Company received proceeds of $83,857.

Common Stock Issued on the Cashless Exercise of Warrants and/or Stock Options

During the first quarter of 2014 the Company did not issue any shares of common stock on the cashless exercise of warrants or options.

During the first quarter of 2013 the Company issued 117,999 shares of common stock on the cashless exercise of 223,988 warrants. Also during this period the Company issued 79,825 shares of Common Stock on the cashless exercise of 160,000 stock options. In recognition of the cashless exercise of both the warrants and stock options, the Company recorded an increase to Common Stock of $10, offset by a $10 decrease to additional paid in capital.

Common Stock Payable

On February 12, 2013 (the “Settlement Date”), the Company entered into a settlement and release agreement with a former provider of investment services over compensation provided in a prior period for services in the raising of equity capital for the Company. The agreement called for the Company to issue 875,000 shares of common stock to this party. As of December 31, 2012, the Company recorded a common stock payable in the amount of $1,881,250, which was equal to the value of the 875,000 shares on the Settlement Date. As of the Settlement Date, the Company issued the shares and recorded an increase to common stock and additional paid in capital with the offset to common stock payable.

Convertible Preferred Stock

On March 18, 2013, Brightline Ventures I converted Series II Convertible Preferred Stock of $3,326,697 together with $533,000 of accrued dividends thereon into 3,859,697 shares of the Company’s Common Stock. As of March 31, 2013 there was no Series II Convertible Preferred Stock outstanding and, therefore, there were no accrued dividends at March 31, 2013.

As of March 31, 2014 there was no Convertible Preferred Stock outstanding.

NOTE 14 – STOCK-BASED COMPENSATION PLAN AND WARRANTS

The Company’s Incentive Compensation Plan (the “Plan”), which was last amended and restated with shareholder approval in December 2012, provides for the issuance of stock options, stock appreciation rights, restricted stock, restricted stock units and cash incentive awards.

A summary of the status of stock options under the Plan as of March 31, 2014 and December 31, 2013 is as follows:

	3/31/14		12/31/13
	Number of Shares	Weighted Average Exercise Price	Number of Shares	Weighted Average Exercise Price
Outstanding at beginning of year	9,583,762	$1.16	7,728,877	$1.01
Granted	1,844,300	$0.56	2,176,535	$1.67
Exercised	-	$-	(293,650)	$0.98
Expired and Cancelled	(80,000)	$1.02	(28,000)	$2.18
	11,348,062		9,583,762

Outstanding, end of period	11,348,062	$1.06	9,583,762	$1.16

Exercisable at end of period	9,964,837	$1.14	9,536,262	$1.17

F-10

During the three months ended March 31, 2014 the Company granted to employees 1,844,300 options at an exercise price of $0.56 per share valued at $916,225. Stock-based compensation expense for the three months ended March 31, 2014 was $251,159. As of March 31, 2014, the unrecognized compensation cost related to all non-vested share-based compensation arrangements granted under the Plan was $687,168 and will be recognized in each of the remaining fiscal 2014 quarters.

During the three months ended March 31, 2013, the Company granted 1,986,535 options valued at $2,079,484. Stock-based compensation expense for the three months ended March 31, 2013 was $676,932.

During the three months ended March 31, 2014, there were no stock options exercised either for cash or on a cashless basis.

During the three months ended March 31, 2013 a former employee exercised 10,000 stock options and the Company received proceeds of $10,100. Also during this period the Company issued 79,825 shares of Common Stock on the cashless exercise of 160,000 stock options.

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 2014. Expected volatilities are based on the historical volatility of the Company’s stock. The risk-free rate for periods within the expected life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

	3/31/14


Weighted average fair value per option granted	$0.4968
Risk-free interest rate	1.75%
Expected dividend yield	0.00%
Expected lives	2.688
Expected volatility	98.91%

Stock options outstanding at March 31, 2014 are as follows:

		Weighted
		Average	Weighted
		Remaining	Average
	Options	Contractual	Exercise	Options
Range of Exercise Prices	Outstanding	Life	Price	Exercisable
$0.01-$1.50	8,874,527	2.4	$0.77	7,491,302
$1.51-$3.00	2,348,535	3.5	$1.67	2,348,535
$3.01-$5.00	125,000	3.6	$3.11	125,000
	11,348,062	2.7	$1.07	9,964,837

F-11

Warrants

As of March 31, 2014, the Company has warrants outstanding to purchase 16,590,351, shares of the Company’s common stock, at prices ranging from $0.01 to $1.50 per share. These warrants expire at various dates through November 2018. The summary of the status of the warrants issued by the Company as of March 31, 2014 and December 31, 2013 are as follows:

	3/31/14		12/31/13
	Number of Warrants	Weighted Average Exercise Price	Number of Warrants	Weighted Average Exercise Price
Outstanding at beginning of year	16,688,265	$1.44	23,392,811	$1.46
Granted	-	$-	4,010,295	$1.18
Exercised	-	$-	(2,287,730)	$1.43
Cashless Exercises	-	$-	(8,082,535)	$1.43
Expired and Cancelled	(97,914)	$0.01	(344,576)	$0.88
	16,590,351		16,688,265

Outstanding, end of period	16,590,351	$1.44	16,688,265	$1.44

Exercisable at end of period	16,590,351	$1.44	16,688,265	$1.44

There were no warrants granted during the three months ended March 31, 2014. Also during this period there were no warrants exercised either for cash or on a cashless basis.

For the three months ended March 31, 2013, there were no warrants granted to investors.

During the three months ended March 31, 2013, several investors participated in a warrant exercise program that resulted in the exercise of 1,756,088 warrants into 1,756,088 shares of the Company’s common stock. The warrant program, which was open to all holders of $1.50 warrants, allowed those warrant holders to exercise their warrants for a $1.25 strike price during February 2013. The conversion of these warrants raised $2,195,110 of gross proceeds for the Company.

Also during the first quarter of 2013, other investors exercised 82,753 warrants and received 82,753 shares of common stock with the Company receiving proceeds of $30,511. Other investors exercised 223,988 of warrants on a cashless basis and the Company issued 117,999 shares of common stock during this period.

F-12

NOTE 15 – MAJOR CUSTOMERS AND CREDIT CONCENTRATION

The Company’s major customers are food manufacturers. There were three significant customers that each accounted for greater than 10% of sales for the three months ended March 31, 2014. These three customers accounted for 33%, 23% and 11% of total net sales, respectively. In addition, the same three customers accounted for more than 10% each of total accounts receivable for the quarter ended March 31, 2014. These customers accounted for 36%, 26% and 17% of the accounts receivable as of March 31, 2014, respectively.

The Company maintains cash deposits with major banks, which from time to time may exceed federally insured limits. At March 31, 2014 and December 31, 2013, $137,617 and $193,472, respectively, were in excess of federally insured limits. The Company periodically assesses the financial condition of the institutions and believes that the risk of any loss is minimal.

NOTE 16 – COMMITMENTS

Building Lease

The Company leases a combined 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.

The Company recognizes escalating lease expense on a straight line basis in accordance with current accounting standards.

For the three months ended March 31, 2014 and 2013, the Company recognized rent expense of $66,783 and $80,333, respectively. The future minimum annual rental payments and sub-lease income for the years ended December 31 under the lease terms are as follows:

Year Ended	Rentals
2014	$192,249
2015	85,444
2016	-
2017	-
2018	-
	$277,693

F-13

NOTE 17 – 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 is 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 allocated a reserve of $102,000 to satisfy any liability it may incur as a result of this matter.

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 18 – RELATED PARTY TRANSACTIONS

On January 22, 2013 the Company issued 114,944 shares of common stock to its four non-executive directors, Mark Hershhorn, Morris Garfinkle, Brian Israel and Edward Smith (28,736 shares each). The Company recognized a total of expense of $200,002 related to these issuances. These shares were valued based on the closing price on the grant date.

On February 27, 2013 Morris Garfinkle and Mark Hershhorn, Directors of the Company, participated in a warrant exercise program in which all holders of $1.50 warrants were allowed to exercise their warrants for a $1.25 strike price until February 28, 2013. Mr. Garfinkle exercised 200,000 warrants and received 200,000 shares of Common Stock. Mr. Hershhorn exercised 30,000 warrants and received 30,000 shares of Common Stock. Also on this date, Mr. Hershhorn exercised other warrants, with various exercise prices, and received 28,525 shares of Common Stock. On March 6, 2013, Mr. Garfinkle exercised other warrants, with various exercise prices, and received 26,571 shares of Common Stock.

On March 18, 2013, Brightline Ventures I converted 665,339 shares of preferred stock plus accrued dividends of $533,000 into 3,859,697 shares of the Company’s common stock as disclosed in Notes 10 and 13 above.

See “Subsequent Events” described in Note 20 below.

F-14

NOTE 19 – 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 March 31, 2014.

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 20 – SUBSEQUENT EVENTS

F-15

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. sophomore Avg

Agritech Worldwide (FBER) Inactive 10-Q2014 Q1 Quarterly report

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