10-K 1 form10k.htm FORM 10K-123108 form10k.htm
 
 


SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K

[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934

For the fiscal year ended December 31, 2008

OR

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934


COMMISSION FILE NUMBER: 001-32134

Z TRIM HOLDINGS, INC.
(Exact name of Registrant as specified in its Charter)

 
  ILLINOIS
  36-4197173
(State or Other Jurisdiction of
Incorporation or Organization)
  (I.R.S. Employer
Identification No.)
 
1011 CAMPUS DRIVE, MUNDELEIN, ILLINOIS 60060
(Address of Principal Executive Offices)

(847) 549-6002
(Issuer's Telephone Number, Including Area Code)

Indicate by check mark whether the registrant:  (1)  has filed  all  reports  required  to be filed by Section 13 of 15(d) of the Exchange Act o 1934 during the past 12 months (or for such shorter  period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes [X]     No [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  (See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.)

Large Accelerated Filer                                                      [  ]                      Accelerated Filer                                                      [  ]

Non-Accelerated Filer                                                        [  ]                      Smaller Reporting Company                                  [X]
           (do not check if Smaller Reporting Company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).      Yes [ ]      No [X]

At March 24, 2009, there were 2,687,879 shares of common stock outstanding.

The issuer's revenues for its most recent fiscal year were: $720,899.

The  aggregate  market  value  of  the  voting  stock  of  the  issuer  held  by non-affiliates  of the  issuer  as of  March 24, 2009  was  $50,134  This aggregate market value is estimated solely for purposes of this report and are based on the closing price for the issuer's common stock on March 24, 2009, as reported on the Over-the-Counter Bulletin Board.  For the purpose of this report, it has been assumed that all officers and directors of the issuer are affiliates of the issuer.  The statements made herein shall not be construed as an admission for determining the affiliate status of any person.



STATEMENT REGARDING THIS FILING

This filing amends our annual report on Form 10-KSB/A for the year ended December 31, 2007, previously filed on August 21, 2008.  Specifically, Note 20 to our financial statements herein reflects the restatement of our quarterly reports for the periods ended March 31, 2008, June 30, 2008 and September 30, 2008, as well as for the annual report for the year ended December 31, 2006.

We identified certain accounting errors regarding our depreciation expense for leasehold improvements during the aforementioned time periods.  These amendments should be read in conjunction with our previously filed annual reports for the years ended December 31, 2006 and 2007, and the quarterly reports for the periods ended March 31, 2008, June 30, 2008 and September 30, 2008.

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                                       TABLE OF CONTENTS
            
                     
   
PART I
            
Page No.
  
Item 1.
Business
              
3
  
Item 2.
Properties
            
3
  
Item 3.
Legal Proceedings
            
3
  
Item 4.
Submission of Matters to a Vote of Security Holders
    
4
  
                     
   
PART II
                
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters
      
 
and Issuer Purchases of Equity Securities
        
4
  
Item 6.
Selected Financial Data
          
5
  
Item 7.
Management's Discussion and Analysis of Financial Condition and Results
    
 
of Operations
            
6
  
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
            
9
  
Item 8.
Financial Statements and Supplementary Data
      
13
  
Item 9.
Changes in and Disagreements with Accountants on Accounting and
      
 
Financial Disclosure
            
13
  
Itme 9A.
Controls and Procedures
          
13
  
Item 9B.
Other Information
            
14
  
                     
   
PART III
                
Item 10.
Directors, Executive Officers and Corporate Governance
    
14
  
Item 11.
Executive Compensation
          
16
  
Item 12.
Security Ownership of Certain Beneficial Owners and Management and
      
 
Related Stockholder Matters
          
17
  
Item 13.
Certain Relationships and Related Transactions, and Director Independence
18
  
Itme 14.
Principal Accounting Fees and Services
       19
                   
   
PART IV
              
Item 15.
Exhibits, Financial Statement Schedules
        20
                   
Signatures
              20

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PART I

ITEM 1.  DESCRIPTION OF BUSINESS.

Z Trim Holdings, Inc. is a food technology deployment company that produces, markets and distributes functional food ingredients, emulsions and systems for both domestic and international markets.
 
Z Trim®, a USDA-developed, minimally processed, non-caloric functional food ingredient made from healthy dietary fiber, is central to the company’s intellectual property portfolio. Z Trim Holdings has an exclusive license from the USDA to make, use and sell Z Trim both domestically and internationally.  Currently, Z Trim is made from corn and oat, but it can be produced from virtually any cellulose, the substance that makes up most of a plant’s cell walls, and is one of the most abundant organic compounds on earth.
 
Current Z Trim products include gel and powder used to replace portions of fat, gums, starches and carbohydrates in foods.   The Company’s core product portfolio of wellness foods and dietary fiber food ingredients includes corn Z Trim, non-GMO oat Z Trim, and functional emulsions and gels.    Z Trim is now being used by manufacturers, restaurants, schools, and consumers on 6 continents to replace as much as 80% of the fat and calories, as well as offering innovative and functional alternatives to gums, modified starches and phosphates in foods without changing taste, texture, appearance or digestive properties in the doughs, fillings and icings of baked goods, dairy products, extruded snacks, desserts, sauces, dressings, meats and many other foods.
 
After years of development, Z Trim is now commercialized. The Company currently manufactures and markets Z Trim products as price competitive ingredients that improve the food industry's ability to deliver on its promises of healthier quality foods. The Company's primary goal is establishing Z Trim as an important ingredient in the evolution of the food industry.  The Company is developing its market through (i) direct and brokered sales to major food manufacturers, as well as small and mid size companies, and (ii) direct and brokered sales to large food institutions such as those that supply to restaurants, hospitals, schools and cafeterias. Our R&D team, in conjunction with our customers and strategic industry partners, continues to develop additional products and applications.
 
 Z Trim Holdings, Inc. was incorporated in the State of Illinois on May 5, 1994 under the original name Circle Group Entertainment Ltd.   In 2007, the Company dissolved its four operating subsidiaries: FiberGel Technologies, Inc., thebraveway.com, Inc., operating as The Brave Way Training Systems, On-Line Bedding Corp., and Z-Amaize Technologies, Inc.  In 2008, the Company had no operating subsidiaries.
 
Z Trim Holdings operates within the $25-30 billion per year (2006) global business of food additives.  The global hydrocolloid business - which consists of agents used for thickening, gelling and stabilizing food and beverage products, is over $19 billion per year (http://www.sriconsulting.com/CEH/Public/Reports/582.7000/) with food applications constituting approximately $4.2 billion of that total (http://www.foodnavigator-usa.com/Financial-Industry/Health-and-prices-dominate-hydrocolloids-debate).  Specifically, the U.S. fat replacer and bulk dietary fiber (supplement) markets are estimated to be just over $500 million each, with carbohydrate-based fat replacers such as Z Trim accounting for approximately 59 percent of the market in 2000 (http://www.frost.com/prod/servlet/market-insight-top.pag?docid=10039518).
 
The Company protects an array of intangible assets that includes patents pending and issued, as well as a wide array of trade secrets and know-how, trademarks and copyrights.  Central to this portfolio is an exclusive license to US Patent No. 5,766,662, including all related international patents, issued to Dr. George Inglett of the USDA.  This license expires upon the expiration of the underlying patent in late 2015.  Through the process of development and commercialization of the technology, the Company has identified and sought patent protection for improvements to the manufacturing process, product applications and is currently developing several commercially promising spin-off technologies.  The Company also maintains a stable of trademarks that has continued to gain value through usage and increased brand recognition.
 
The Company has spent $10,811 in 2008 and $14,325 in 2007 for research and development expense, and is still innovating toward developing value-added products to add to its core line.

Presently, the Company employs 22 full-time employees and no part-time employees.


            CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 ("Securities Act"), as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The forward-looking statements are principally contained in the section entitled "Description of Business." These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to differ, perhaps materially, from any future results, performance or achievements expressed or implied by the forward-looking statements. Forward-looking statements include, but are not limited to, statements about:

·  
Our product development efforts;

·  
The commercialization of our products;

·  
Anticipated operating losses and capital expenditures;

·  
Our estimates regarding our needs for additional financing;

·  
Our estimates for future revenues and profitability; and

·  
Sources of revenues and anticipated revenues, including contributions from corporate collaborations, license agreements and other collaborative efforts for the development and commercialization of our product candidates, and the continued viability and duration of those agreements and efforts.

In some cases, you can identify forward-looking statements by terms such as "may," "will," "should," "could," "would," "expect," "plan," anticipate," "believe," "estimate," "project," "predict," "intend," potential" and similar expressions intended to identify forward-looking statements. These statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements.  We discuss many of these risks in greater detail in the foregoing section under the heading "Risk Factors." Also, these forward-looking statements represent our estimates and assumptions only as of the date of this Annual Report.

You should read this Annual Report and the documents that we reference in this Annual Report with the understanding that our actual future results may be materially different from what we expect.  We do not intend to update any of these statements or to publicly announce the result of any revisions to any of these forward-looking statements.  We qualify all of our forward-looking statements by these cautionary statements.

ITEM 2.  DESCRIPTION OF PROPERTY.

We occupy approximately 44,000 square feet of leased space at 1011 Campus Drive, Mundelein, Illinois. This space is leased for $26,900 per month, including property taxes, pursuant to a non-cancelable operating lease.  The current lease term is through March 2010, and the Company is currently negotiating an extension.  All of our subsidiaries and divisions are operated out of this space.  We also maintain a 5,000 square foot warehouse at 110 Terrace, Mundelein, Illinois at a cost of $2,750 per month, the lease of which expires in January 2010.

ITEM 3.  LEGAL PROCEEDINGS.

On July 7, 2007, the Company was served with a complaint by Joseph Sanfilippo and James Cluck for violation of the Consumer Fraud Act.  Management believes that the allegations are frivolous and wholly without merit and will vigorously defend the claim.
 
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ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

     The Company held its annual shareholders’ meeting on December 30, 2008.  At that time, the shareholders voted in a new slate of directors, as described more fully herein below at Item 6.  The vote tabulation for each director was as follows, based on the pre-reverse split shares:


                            Cumulative votes                           Votes                      
FOR DIRECTORS                                                      RECEIVED                                AGAINST                   ABST.    BROKER NON-VOTES
 
Steve Cohen                                                               56,479,682                                           n/a                      n/a           0
 
Triveni Shukla                                                    56,472,822                                           n/a                      n/a                               0
 
Brian Israel                                                              56,022,290                                           n/a                      n/a          0
 
Mark Hershhorn                                                         56,035,024                                           n/a                      n/a          0
 
Sheldon Drobny                                                         56,005,648                                           n/a                      n/a          0
 
Due to the use of cumulative voting, it is impossible to determine the number of votes against and the number of votes abstained.
 
 
The shareholders considered also whether to amend the corporate By-Laws to eliminate cumulative voting provisions. There were 19,595,993 votes cast in favor, 2,293,805 votes cast against, 462,126 abstentions and 36,126,178 broker non-votes, which vote was not sufficient for approval and the measure did not pass.
 
 
In addition, the shareholders voted on whether to authorize the board of directors to affect a 30:1 reverse split of the Company's common stock on or before June 30, 2009. There were 53,029,478 votes cast in favor, 4,668,004 votes cast against and 780,619 abstentions, which vote was sufficient for approval and the measure passed with 68% voting "for" and 6% voting "against."
 

PART II

ITEM 5.  MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES.

     The following table sets forth, for the periods indicated, the high and low closing prices for our common stock, as quoted for trading on the American Stock Exchange under the symbol "ZTM" and on the Over-the-Counter Bulletin Board under the symbol “ZTMH.” Our common stock began trading on the American Stock Exchange on March 31, 2004.  On September 16, 2008, our Company moved from the American Stock Exchange and began trading on the Over-the-Counter Bulletin Board.  As of the close of business on February 6, 2009, the Company effectuated a one-for-thirty (1:30) reverse stock split.  All prices in the following table reflect post-reverse split prices.



 
Common Stock
Quarter Ended
High
Low
2007
    
March 31, 2007
$48.00
$27.00
June 30, 2007
$44.70
$28.50
September 30, 2007
$33.30
$18.30
December 31, 2007
$25.20
$10.50
2008
    
March 31, 2008
$14.40
$6.30
June 30, 2008
$9.60
$4.20
September 30, 2008
$6.90
$1.50
December 31, 2008
$3.30
$0.60

2009
    
March 9, 2009
$1.50
$0.25


 
As of March 24, 2009, there were 5,271 record holders of the common stock.  This number does not include shareholders whose shares are held in securities position listings.  We have never paid any dividends on our common stock and do not anticipate paying any dividends in the foreseeable future.

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                                      EQUITY COMPENSATION PLAN INFORMATION
                                                       (AS OF DECEMBER 31, 2008)

                                      NUMBER OF SHARES
                                          REMAINING AVAILABLE
WEIGHTED-AVERAGE               FOR FUTURE ISSUANCE
EXERCISE PRICE OF                    UNDER EQUITY
OUTSTANDING                            COMPENSATION PLANS                               NUMBER OF SHARES TO BE
OPTIONS,                                       (EXCLUDING SECURITIES                      ISSUED UPON EXERCISE OF
WARRANTS AND                       REFLECTED IN 1ST                                           OUTSTANDING OPTIONS,
RIGHTS                                   PLAN CATEGORY                                             WARRANTS AND RIGHTS
                                  COLUMN)
--------------                                        ------------------------------                                       ----------------------------------
Equity compensation plans approved by security holders (consisting of the 2004 Stock Incentive Plan):

$1.07                                         18,480,585 (1)                                        429,415

(1) Reflects 20,000,000 shares registered under the plan less the outstanding options less 1,090,000 shares issued to external directors under the Plan.

Plans not approved by shareholders:  None



ITEM 6.  SELECTED FINANCIAL DATA

RESULTS OF OPERATIONS

YEAR ENDING DECEMBER 31, 2008 COMPARED TO THE YEAR ENDING DECEMBER 31, 2007

Revenues

Revenues increased 14.4% for the year ended December 31, 2008, from $616,848 for the year ended December 31, 2007 to $720,899 for the year ended December 31, 2008.  The increase in product revenue was primarily due to the increase in Z Trim product sales resulting from greater acceptance of our products by food manufacturers, both domestically and internationally.  The following table provides a breakdown of the revenues for the periods indicated:

                                                 Year ended December 31,
                                                  2008                 2007
                                                ------------        -------------
           Products                      $ 720,899         $616,799
           Services                              --                          49
                                                ------------         ------------
        Total Revenues              $ 720,899        $616,848
                                                =========   ========

Operating expenses

Operating expenses consist of payroll and related costs, stock option expense, insurance, occupancy expenses, professional fees, and general operating expenses. Total operating expenses decreased by $5,173,610 or 54.6% to $4,310,419 for the year ended December 31, 2008 from $9,484,029 for the year ended December 31, 2007. The decrease in operating expenses was primarily due to decreases in stock option expense of $3,446,965 and legal fees of $1,069,704 that was partially offset by an increase in selling, general and administrative expense of $680,266.

The stock option expense for the year ended December 31, 2008 was $40,613.
The stock option expense for the year ended December 31, 2007 was $3,487,579.

Other income (expense)

Total other expense for the year ended December 31, 2007 was $847,190 compared to other expense of $1,397,787 for the year ended December 31, 2008.  The increase in expense in 2008 was primarily due to a settlement loss of $772,202 and interest expense (from fund-raising activities) of $670,562 that was partially offset by other income of $44,977.  Further, in 2007, although there was a settlement loss for $1,360,891, there was interest income of $173,256 and recovery of a loan in the amount of $300,000.

Net loss

The Company incurred a net loss of $7,416,927 for the year ended December 31, 2008, or $2.95 per share, compared to $12,784,853 for the year ended December 31, 2007 or $5.44 per share – a 46% improvement.  This improvement was due primarily to decreases in cost of revenues, stock option expense and professional fees (accountants, auditors and attorneys), and settlement losses.
 
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LIQUIDITY AND CAPITAL RESOURCES
YEAR ENDING DECEMBER 31, 2008 COMPARED TO THE YEAR ENDING DECEMBER 31, 2007

At December 31, 2008, we had cash and cash equivalents of $592,696, compared to $2,436,581 at December 31, 2007.  The Company raised $3,615,966 and $8,996,217 in additional capital through equity and convertible debt transactions during the year ended December 31, 2008 and 2007 respectively.

Net cash used by operating activities decreased by $1,444,996 or 22.0%, to $5,119,030 for the year ended December 31, 2008 as compared to $6,564,028 for the year ended December 31, 2007.  The decrease resulted primarily from a reduction in fees paid to outside professionals (including accountants, auditors and attorneys).

Net cash used by investing activities was $340,820 for the year ended December 31, 2008, as compared to $717,210 for the year ending December 31, 2007. The decrease was due to fewer purchases of property and equipment for our manufacturing plant in the current year.  The 2008 number does not include pre-payment for equipment that was to be delivered in 2009.

Net cash provided by financing activities was $3,615,966 for the year ended December 31, 2008, as compared to $8,996,217 for the year ended December 31, 2007.  Net cash provided by financing activities for the year ended December 31, 2008 was primarily from the net proceeds from the sale of convertible notes offset by a return of common stock.  Net cash provided by financing activities for the year ended December 31, 2007 was primarily from the proceeds received from sale of stock, options and warrants exercised and proceeds from notes receivable related to the sale of stock.

As of March 24, 2009, our cash balance was approximately $127,946.  To successfully grow our business, we must improve our cash position through greater and sustainable sales of our product lines, increase the productivity of the production process, as well as raise additional capital through a combination of public or private equity offerings, strategic alliances or debt financing to allow us to make necessary changes to our plant and to provide working capital until we achieve profitability.  The Company estimates that it will take from 16 to 24 months to achieve profitability.  Given this estimate, the Company will likely need to find sources of funding for both the short and mid terms.



ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

THE FOLLOWING DISCUSSION IS INTENDED TO ASSIST IN UNDERSTANDING THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF Z TRIM HOLDINGS, INC. YOU SHOULD READ THE FOLLOWING DISCUSSION ALONG WITH OUR FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED ELSEWHERE IN THIS FORM 10-K.  THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT ARE SUBJECT TO RISKS, UNCERTAINTIES AND ASSUMPTIONS. OUR ACTUAL RESULTS, PERFORMANCE AND ACHIEVEMENTS IN 2008 AND BEYOND MAY DIFFER MATERIALLY FROM THOSE EXPRESSED IN, OR IMPLIED BY, THESE FORWARD LOOKING STATEMENTS.

Z Trim is a functional food ingredient company which provides custom product solutions that help answer the food industry’s problems.  Z Trim’s revolutionary technology provides value-added ingredients across virtually all food industry categories.  Z Trim’s all-natural products, among other things,  help to reduce fat and calories, add fiber, provide shelf-stability, prevent oil migration, and add binding capacity – all without degrading the taste and texture of the final food products.  Perhaps most significantly, Z Trim’s products can help extend finished products, and thereby increase its customers’ gross margins.  Under the direction of new management since December 2007, Z Trim has focused its efforts and resources towards the manufacture, marketing and sales of its industry-changing products.

Z Trim, through an exclusive license to technology patented by the United States Department of Agriculture, has developed products that both reduce fat and add fiber, with the added benefit of maintaining taste and mouth-feel associated with full fat products.  The global market for Z Trim's line of products spans the entire food and nutritional beverage industry, both low-fat and full fat, including meats, baked goods, dairy and non-dairy products, snacks, beverages, dressings, sauces and dips.

As our current facility is a prototype plant, being the first of its kind to produce our innovative products, we are constantly seeking ways to improve efficiencies and achieve economies of scale. We are currently re-designing the process to make use of newer drying technologies and thereby optimize plant capacity. In order to fully realize the potential of our business model, the Company will eventually need to move to a larger facility, enter into strategic partnerships, or find some other means to produce greater volumes of finished product.

SELECTED FINANCIAL ANALYSIS

In 2008, we experienced our best revenue performance to date, achieving sales revenues of $720,899.  Our last two quarters were our two highest ever, achieving sales of $264,485 in Q3 and $218,097 in Q4.  This represents a substantial improvement over the same last two quarters of 2007, which resulted in sales of $113,975 in Q3 and $72,535 in Q4.

Additionally, although we sold more product in 2008 than we did in 2007, our cost of goods sold decreased by $655,708 or 21.2%, from $3,085,328 in 2007 to $2,429,620.  This, we believe, shows that we are becoming both more efficient in our production process, and beginning to see positive results stemming from the achievement of economies of scale.

Significantly, cash flows used in operating activities decreased by $1,444,998 or 22.0%, to $5,119,030 in 2008.  The 2008 number includes $294,328 in accounting and audit fees, $498,602 in attorneys’ and other professional fees and $111,266 in Amex registration fees (a total of $904,196).  We believe that fees relating to accountants, auditors, attorneys and other professionals will be greatly reduced on a going forward basis, and that the fees related to Amex will cease altogether.
 
6

Our performance over the last three years shows significant trends:

   
2006
2007
2008
         
Net Loss
  
$16,744,338
$12,784,853
$7,416,927
         
Net Revenues from Manufacturer Sales
  
$62,508
$236,288
$647,709


Net losses have been decreasing at a significant and steady pace.  Net revenues from sales to food manufacturers have been increasing at a significant and steady pace.

Additionally, we have simultaneously reduced our accounts payable by $164,704 during 2008, while increasing our accounts receivable by $198,709 during the same period.


RECENT MATERIAL DEVELOPMENTS

Reverse Stock Split

As of the close of business on February 6, 2009, the Company effectuated a one-for-thirty (1:30) reverse stock split.  As part of this split, the Company’s stock began trading on February 9, 2009 under the symbol “ZTHO” on the Over-the-Counter Bulletin Board.

Annual Shareholder’s Meeting, Board of Directors and Bylaws Changes.

On September 18, 2008, the Company’s Board of Directors amended its by-laws to reduce the number of directors serving on the Board of Directors from 7 to 5. The Board also amended the by-laws to create a nominating committee comprising of two independent directors for the purpose of identifying and evaluating potential director candidates, and proposing to the full board a slate of director nominees to be included in the Company’s proxy.

On December 30, 2008, the Company held its Annual Shareholders’ meeting.  The shareholders voted for a slate of five directors:  Steven Cohen, Triveni Shukla, Mark Hershhorn, Brian Israel, and Sheldon Drobny.  The following directors were not re-elected: Michael Donahue, Randal Hoff and Harvey Rosenfeld.

 
On March 21, 2009, for personal reasons, Director Sheldon Drobny resigned as Director and Audit Chair of the Company.
 
 
On March 25, 2009, the Company appointed Morris Garfinkle as Director and Audit Chair. Mr. Garfinkle is the Founder, President and CEO of GCW Consulting, a consulting firm based in Arlington, Virginia. He received his Juris Doctor from Georgetown University and his B.S. in Economics (cum Laude) from the Wharton School of Finance & Commerce, University of Pennsylvania. Mr. Garfinkle has over 35 years of experience in restructuring, mergers and acquisitions, investment assessment, competitive positioning, strategic planning and capital raising. His clients have included United Airlines Creditors' Committee, Pension Benefit Guaranty Corporation, Air China and Dallas-Fort Worth International Airport, among many others. He also served on the Board of Directors of HMSHost from 2000 - 2006.
 
 Restatements

On August 6, 2008, the Company determined that its financial statements for the year ended December 31, 2007 should no longer be relied upon because of accounting errors in those financial statements relating to specific equity transactions. These errors also required a restatement of the financial statements for the first quarter of 2008. On August 21, 2008, the Company amended those financial statements via an amendment to its Annual Report on Form 10-KSB for the applicable period.

On March 25, 2009, the Company’s management and Board of Directors determined that the Company's financial statements contained within the Company's 10-Qs for the quarters ended March 31, 2008, June 30, 2008, and September 30, 2008, and 10-Ks for the years ended December 31, 2006 and 2007, contained misstatements regarding depreciation expense for leasehold improvements, a non-cash item on the income statement and that such previously filed quarterly and yearly financial statements should no longer be relied upon, as previously presented.  The Company’s present filing contains restated audited December 31, 2007 financial statements. The Company’s present filing also includes unaudited restatements of the year ended December 31, 2006 and quarters ended March 31, 2008, June 30, 2008, and September 30, 2008 in addition to the aforementioned restatement of the year ended December 31, 2007.

Change of Trading Exchange

On September 16, 2008 the Company’s transition from its common stock being listed on the American Stock Exchange to trades in its common stock being reported on the OTC Bulletin Board has been successfully completed.  The Company is trading under the symbol ZTHO.OB.
 
Change of Auditors

On December 17, 2008 the Company terminated its relationship with Blackman Kallick, LLP, and engaged the firm of M&K CPAs, PLLC as the Company’s independent auditors.  The termination was approved by the audit committee of the Board of Directors.   In connection with the audits of the Company’s consolidated financial statements for the fiscal year ended December 31, 2007 and through the date of this current report, there were: (1) no disagreements between Z Trim and Blackman on any matters of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which disagreements, if not resolved to the satisfaction of Blackman, would have caused Blackman to make reference to the subject matter of the disagreement in their report on Z Trim’s consolidated financial statements for such year, and (2) no reportable events within the meaning set forth in Item 304 (a)(1)(iv)(B) of Regulation S-B or Item 304 (a)(1)(v) of Regulation S-K.
 
7

Sales Developments

 
1.  
 Shift in strategy – twofold:  (a) focus on sales to food manufacturers and institutions, cease direct sales to consumers and cease producing finished retail products; and (b) expanding our external sales force through the establishment of relationships with domestic and international ingredient distributors.

 
2.  
Successful results of this shift include increase in sales to both the number of food manufacturers as well as to the volume of product being sold.  We are currently selling to the following companies, among many others:

        Amazing Foods Group
        Amazing Food Manufacturing LLC
        Bay Valley Foods
        Chelsea Milling Company
        Consolidated Mills, Inc.
        Crestone Group Baking Companies
        Edward Keller Philipines, INc.
        Echo Lake Foods
        Hans Kissle Company
        Heinz North America
        Kens Foods
        Kerry Ingredients & Flavours
        Sterling Foods
        Supreme Oil
        Walden Farms
 
    3.  Established relationships with the following distributors:
 
        Kraki -- Brazil
        WTI -- United States
        Freya -- Israel
        Scott -- India
        DKSH -- UK, Italy, Australia, Korea, Chile, etc.
 
The success achieved by our network of distributors has just started. Sales achieved by these distributors account for 45% of our total sales in 2008.  We anticipate that the number of sales achieved by these distributors will grow in 2009.

Operational Improvements

We are continually improving upon our manufacturing technology.  We have honed our processes and procedures and made plans to significantly improve our efficiencies and economies of scale.  As we increase our volume of production, we expect that per unit costs will decrease.

During 2008, we hired two new plant engineers, both of whom had previously worked at food plants of Fortune 100 companies.  Their collective experience has already helped us find additional ways to cut costs by slightly modifying our process and thereby decreasing our process time.

We spent some of the capital raised in 2008 on the purchase of a new dryer and milling system.  This system is now on-line, and we believe we will be able to increase substantially our production volume, while also doing so more efficiently.

Research and Development Highlights

Under prior direction, there was no emphasis on new technology, research or development.  Now, our R&D department is a major strength, providing our sales team with invaluable support in creating innovative product design that solves particular challenges faced by our respective customers.  Working hand-in-hand with major food companies, we engage in joint development of finished products that incorporate our technologies.  This has had the effect of reducing sales cycle time.
 
In addition to working on application technology, we are expanding our portfolio of new products.  Our R&D team has recently developed a new product we call NanoGum – soluble dietary fiber derived from corn bran.  NanoGum is proving to be a game-changer because, while it is a viable stand-alone product, it also allows us to design premium custom blends with specifically targeted attributes.  It is comparable to Gum Arabic – a hydrocolloid with high emulsifying capacity.  Created from the same raw materials as Z Trim, NanoGum is less viscous (i.e., it is “thinner”) than Z Trim.  It is capable, however, of delivering up to half the daily recommended dosage of fiber per serving – more than sufficient for the FDA to allow a fiber claim on the labels of such products.    Functioning similar to some gums, NanoGum has its own attributes, such that when it is blended with Z Trim in varying ratios, it creates a veritable universe of multi-functionality and performance, replete with significant fiber supplementation.  In addition to the functional and economic benefits of this innovation, its processing involves converting valuable materials that previous management had been throwing down the drain.
 
OFF-BALANCE SHEET ARRANGEMENTS

We have no off-balance sheet arrangements as defined in Item 303(c) of Regulation S-X.
8
 
ITEM 7A.  QUANTATIVE AND QUALATATIVE DISCLOSURES ABOUT MARKET RISK
 
The following risks are material risks that we face.  If any of the following risks occur, the business of the Company and its operating results could be seriously harmed.

BUSINESS RISKS

THE COMPANY HAS A HISTORY OF OPERATING LOSSES AND CANNOT GUARANTEE PROFITABLE OPERATIONS IN THE FUTURE. ANY FAILURE ON OUR PART TO ACHIEVE PROFITABILITY MAY CAUSE US TO REDUCE OR EVENTUALLY CEASE OPERATIONS.

The Company incurred a net loss of $7,416,927 for the twelve months ending December 31, 2008, and had an accumulated deficit of $71,662,875.  The Company reported a net loss of $12,784,853 for the twelve months ending December 31, 2007. At December 31, 2007, the Company reported an accumulated deficit of $64,171,085.

If the Company continues to incur significant losses, our cash reserves may be depleted earlier than currently anticipated, and the Company may be required to limit our future growth objectives to levels corresponding with our then available cash reserves.

OUR AUDITORS HAVE EXPRESSED SUBSTANTIAL DOUBT REGARDING OUR ABILITY TO CONTINUE AS A GOING CONCERN.

As of the date of our most recent audit, which included the fiscal years ended December 31, 2008 and 2007, we had not generated sufficient revenues to meet our cash flow needs.  As a result, our auditors have expressed substantial doubt about our ability to continue as a going concern.  Although we have generated revenue, we are still operating at a net loss, and may continue to incur losses for a period of time.  We cannot assure you that we will be able to obtain sufficient funds from our operating or financing activities to support our continued operations.  If we cannot continue as a going concern, we may need to substantially revise our business plan or cease operations, which may reduce or negate the value of your investment.

OUR SUCCESS IS DEPENDENT ON MARKET ACCEPTANCE OF OUR PRODUCT.

The Company has not conducted, nor have others made available to us, results of market research indicating how much market demand exists for Z Trim, our functional food ingredient.  We cannot assure you that we will be able to gain the market acceptance necessary to achieve profitability.

WE MAKE NO PROJECTIONS REGARDING THE VIABILITY OF OUR FUNCTIONAL FOOD INGREDIENT AND WE CANNOT ASSURE YOU THAT WE WILL ACHIEVE THE RESULTS DESCRIBED.

We make no projection with respect to our future income, assets or business. No expert has reviewed our business plan for accuracy or reasonableness. It is likely that our actual business and results of operations will differ from those presented herein.
 
WE HAVE A SIGNIFICANT PORTION OF OUR CURRENT REVENUES AND ORDER BOOKINGS WITH A SMALL NUMBER OF CUSTOMERS.

Revenues recognized over the past year and order bookings received to date are concentrated with a small number of customers.  The loss of one or more of our customers or material changes to the contracts with or payment terms of these customers may result in a significant business interruption through reduced revenues, reduced cash flows, delays in revenues or cash flows and such delays or reductions could have a material impact on the future revenue growth and profitability of the Company.

WE WILL NEED ADDITIONAL FUNDING AND SUCH FUNDING MAY NOT BE AVAILABLE. IF SUCH FUNDING IS AVAILABLE, IT MAY NOT BE OFFERED ON SATISFACTORY TERMS.

We will require additional financing to fund ongoing operations, as our current sales and revenue growth are insufficient to meet our operating costs. Our inability to obtain necessary capital or financing to fund these needs will adversely affect our ability to fund operations and continue as a going concern. Our inability to obtain necessary capital or financing to fund these needs could adversely affect our business, results of operations and financial condition. Additional financing may not be available when needed or may not be available on terms acceptable to us. If adequate funds are not available, we may be required to delay, scale back or eliminate one or more of our business strategies, which may affect our overall business results of operations and financial condition.   

OUR MANUFACTURING FACILITY IS CURRENTLY OPERATING AT A LOSS.

We are presently operating at a negative gross margin in that the cost of production exceeds the sales price of the product.  The changes that are being made to the manufacturing process to allow us to produce at a positive gross margin have yet to be completed and may not be successful.  The current manufacturing facility is merely a pilot plant.  In order to fully implement our business plans we will need to move the operations to a larger facility, develop strategic partnerships or find other means to produce greater volumes of finished product.

WE RELY UPON A LIMITED NUMBER OF PRODUCT OFFERINGS.

The majority of the products that we have sold as of December 31, 2008 have been based on corn and oat. Although we will market our products, as an active food ingredient for inclusion in other companies’ products, and in other ways, a decline in the market demand for our products, could have a significant adverse impact on us.

THE AVAILABILITY AND COST OF AGRICULTURAL PRODUCTS THAT WE USE IN OUR BUSINESS ARE SUBJECT TO WEATHER AND OTHER FACTORS BEYOND OUR CONTROL.

All of our current products depend on our proprietary technology using agricultural products, mainly corn and oat. Historically, the costs of corn and oat are subject to substantial fluctuations depending upon a number of factors which affect commodity prices in general and over which the Company has no control, including crop conditions, weather, government programs and purchases by foreign governments. Commodity price changes may result in unexpected increases in raw material, packaging, and energy costs. If we are unable to increase productivity to offset these increased costs or increase our prices, we may experience reduced margins and profitability. We currently do not hedge against changes in commodity prices.

THE COMPANY IS SUBSTANTIALLY DEPENDENT ON ITS MANUFACTURING FACILITIES; ANY OPERATIONAL DISRUPTION COULD RESULT IN A REDUCTION OF THE COMPANY’S SALES VOLUMES AND COULD CAUSE IT TO INCUR SUBSTANTIAL LOSSES.
 
The Company’s revenues are and will continue to be derived from the sale of functional food ingredients made from dietary fiber that the Company’s manufactures at its facility. The Company’s operations may be subject to significant interruption if its facility experiences a major accident or is damaged by severe weather or other natural disasters. In addition, the Company’s operations may be subject to labor disruptions and unscheduled downtime, or other operational hazards inherent in the industry, such as equipment failures, fires, explosions, abnormal pressures, blowouts, pipeline ruptures, transportation accidents and natural disasters. Some of these operational hazards may cause personal injury or loss of life, severe damage to or destruction of property and equipment or environmental damage, and may result in suspension of operations and the imposition of civil or criminal penalties. The Company’s insurance may not be adequate to fully cover the potential operational hazards described above or that it will be able to renew this insurance on commercially reasonable terms or at all.

THE AGREEMENT GOVERNING THE COMPANY’S CONVERTIBLE NOTES CONTAIN VARIOUS COVENANTS THAT LIMIT ITS ABILITY TO TAKE CERTAIN ACTIONS AND THE COMPANY’S FAILURE TO COMPLY WITH ANY OF THE DEBT COVENANTS COULD HAVE A MATERIAL ADVERSE EFFECT ON THE COMPANY’S BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The agreements governing the company’s outstanding convertible notes contain a number of significant covenants that, among other things, limit its ability to incur additional debt or liens or redeem any of its outstanding capital stock.
 
9
 WE FACE COMPETITION.

Competition is intense in our targeted industries, including nutraceuticals, functional food ingredients, oils, gums and a large number of businesses engaged in the various fat replacement industries. Many of our competitors have established reputations for successfully developing and marketing their products, including products that are widely recognized as providing similar calorie reduction. In addition, many of our competitors have greater financial, managerial, and technical resources than the Company has.   If we are not successful in competing in these markets, we may not be able to attain our business objectives.

OUR INABILITY TO SECURE AND PROTECT OUR INTELLECTUAL PROPERTY MAY RESULT IN COSTLY AND TIME-CONSUMING LITIGATION AND COULD IMPEDE US FROM EVER ATTAINING MARKET SUCCESS.

We hold several patents as well as copyrights and trademarks with respect to our products and expect to continue to file applications in the future as a means of protecting our intellectual property. In addition, we seek to protect our proprietary information and know-how through the use of trade secrets, confidentiality agreements and other similar security measures. With respect to patents, there can be no assurance that any applications for patent protection will be granted, or, if granted, will offer meaningful protection.  The technology employed by Z Trim in its products is licensed to the company by the United States Department of Agriculture. The USDA patent expires 2015. Although the company has additional process patents on file and intends to file a patent for NanoGum in the next few months, there can be no assurance that new patents will in fact issue or that they will provide effective protection.

Additionally, there can be no assurance that competitors will not develop, patent or gain access to similar know-how and technology, or reverse engineer our products, or that any confidentiality agreements upon which we rely to protect our trade secrets and other proprietary information will be adequate to protect our proprietary technology. The occurrence of any such events could have a material adverse effect on our results of operations and financial condition.

CONFIDENTIALITY AGREEMENTS WITH EMPLOYEES AND OTHERS MAY NOT ADEQUATELY PREVENT DISCLOSURE OF TRADE SECRETS AND OTHER PROPRIETARY INFORMATION AND MAY NOT ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY.

We rely on trade secrets to protect our technology, especially where we do not believe patent protection is appropriate or obtainable. However, trade secrets are difficult to protect. In order to protect our proprietary technology and processes, we also rely in part on confidentiality and intellectual property assignment agreements with our corporate partners, employees, consultants, outside scientific collaborators and sponsored researchers and other advisors. These agreements may not effectively prevent disclosure of confidential information nor result in the effective assignment to us of intellectual property, and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information or other breaches of the agreements. In addition, others may independently discover our trade secrets and proprietary information, and in such case we could not assert any trade secret rights against such party. Enforcing a claim that a party illegally obtained and is using our trade secrets is difficult, expensive and time consuming, and the outcome is unpredictable. In addition, courts outside the United States may be less willing to protect trade secrets. Costly and time-consuming litigation could be necessary to seek to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.

 IF OUR FOOD PRODUCTS BECOME ADULTERATED, MISBRANDED, OR MISLABELED, WE MIGHT NEED TO RECALL THOSE ITEMS AND MAY EXPERIENCE PRODUCT LIABILITY CLAIMS IF CONSUMERS ARE INJURED.

We may need to recall some of our products if they become adulterated, misbranded, or mislabeled. A widespread product recall could result in significant losses due to the costs of a recall, the destruction of product inventory, and lost sales due to the unavailability of product for a period of time. We could also suffer losses from a significant product liability judgment against us. A significant product recall or product liability case could also result in adverse publicity, damage to our reputation, and a loss of consumer confidence in our food products, which could have a material adverse effect on our business results and the value of our brands.

OUR COMPETITORS MAY DESIGN PRODUCTS AROUND OUR INTELLECTUAL PROPERTY PROTECTION.

We hold an intellectual property portfolio, including patent, trademark, copyright and trade secret protection.  Our competitors, however, may design around our patent claims, rendering our patent protection ineffective against such competitor.  Similarly, our competitors may independently develop technology similar to our trade secrets and technical know-how.  Such occurrences could increase competitive pressure on our marketing and sales efforts.

OUR INTELLECTUAL PROPERTY RIGHTS ARE VALUABLE, AND ANY INABILITY TO PROTECT THEM COULD REDUCE THE VALUE OF OUR PRODUCTS, SERVICES AND BRAND.

Our patents, trademarks, trade secrets, copyrights and other intellectual property rights are important assets for us. Various events outside of our control pose a threat to our intellectual property rights as well as to our products and services. For example, effective intellectual property protection may not be available in every country in which our products and services are distributed.  Also, the efforts we have taken to protect our proprietary rights may not be sufficient or effective.  Any significant impairment of our intellectual property rights could harm our business or our ability to compete.  Also, protecting our intellectual property rights is costly and time consuming.  Any increase in the unauthorized use of our intellectual property could make it more expensive to do business and harm our operating results.

Although we seek to obtain patent protection for our innovations, it is possible we may not be able to protect some of these innovations.  In addition, given the costs of obtaining patent protection, we may choose not to protect certain innovations that later turn out to be important.  Furthermore, there is always the possibility, despite our efforts, that the scope of the protection gained will be insufficient or that an issued patent may be deemed invalid or unenforceable.

WE MAY NOT BE SUCCESSFUL IN AVOIDING CLAIMS THAT WE INFRINGE OTHERS’ PROPRIETARY RIGHTS AND COULD BE REQUIRED TO PAY JUDGMENTS OR LICENSING FEES.

Any infringement claim, whether meritorious or not, could be time consuming and result in costly litigation, and could require us to discontinue any of our practices that are found to be in violation of another party’s rights.  Any failure to maintain rights to our intellectual property used in our business could adversely affect the development, functionality, and commercial value of our products.

GOVERNMENT REGULATION

We are subject to extensive regulation, and compliance with existing or future laws and regulations may require us to incur substantial expenditures or require us to make product recalls. New regulations or regulatory-based claims could adversely affect our business. We are subject to a broad range of federal, state, local and foreign laws and regulations intended to protect public health and the environment. Food production and marketing are highly regulated by a variety of federal, state, local, and foreign agencies. Changes in laws or regulations that impose additional regulatory requirements on us could increase our cost of doing business or restrict our actions, causing our results of operations to be adversely affected. In addition, we advertise our products and could be the target of claims relating to alleged false or deceptive advertising under federal, state, and foreign laws and regulations and of new laws or regulations restricting our right to advertise products.  Our operations are also subject to regulation by various federal agencies, including the Alcohol and Tobacco Tax Trade Bureau, the Occupational Safety and Health Administration, the Food and Drug Administration and the Environmental Protection Agency, and by various state and local authorities. Such regulation covers virtually every aspect of our operations, including production facilities, marketing, pricing, labeling, packaging, advertising, water usage, waste water discharge, disposal of hazardous wastes and omissions and other matters. Violations of any of these laws and regulations may result in administrative, civil or criminal penalties being levied against us, permit revocation or modification, performance of environmental investigatory or remedial activities, voluntary or involuntary product recalls, or a cease and desist order against operations that are not in compliance. These laws and regulations may change in the future and we may incur material costs in our efforts to comply with current or future laws and regulations or to affect any product recalls. These matters may have a material adverse effect on our business.
 
10
IF Z TRIM’S PRODUCTS DO NOT SATISFY CERTAIN GOVERNMENTAL REGULATIONS,  Z TRIM  MAY BE  UNABLE TO OBTAIN  REGULATORY  APPROVAL  OR MAY BE REQUIRED TO OBTAIN MULTIPLE LICENSES TO SELL OUR PRODUCTS.


Z TRIM has self-certified that all components of its products are generally recognized as safe or GRAS according to the U.S. Food and Drug Administration regulations.  A GRAS  designation  exempts the products from the regulations of the U.S. Department of Agriculture,  permitting the sale of the  products  anywhere  in the United  States  without obtaining  a  license.   Should  the    products  lose  their  GRAS designation,  Z TRIM will be required to sell the  products as feed additives  by  obtaining a license to sell from each  individual  state in which sales  would  occur.  There  is no  assurance  that  Z TRIM  would  be  able to successfully  obtain or  maintain  licenses  in all  states  in which  sales are expected to be made or that the cost of obtaining and maintaining these licenses would not limit its ability to sell its products.

WE ARE SUBJECT TO PERIODIC LITIGATION AND OTHER REGULATORY PROCEEDINGS, WHICH COULD RESULT IN UNEXPECTED EXPENSE OF TIME AND RESOURCES.

We are a defendant from time to time in lawsuits and regulatory actions relating to our business, including litigation brought by former employees. Due to the inherent uncertainties of litigation and regulatory proceedings, we cannot accurately predict the ultimate outcome of any such proceedings. An unfavorable outcome could have an adverse impact on our business, financial condition and results of operations. In addition, any significant litigation in the future, regardless of its merits, could divert management’s attention from our operations and result in substantial legal fees.

WE HAVE IDENTIFIED MATERIAL WEAKNESSES IN OUR INTERNAL CONTROL OVER FINANCIAL REPORTING, WHICH COULD IMPACT NEGATIVELY OUR ABILITY TO REPORT OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION ACCURATELY AND IN A TIMELY MANNER.

As required by Section 404 of the Sarbanes-Oxley Act of 2002, management has conducted an evaluation of the effectiveness of our internal control over financial reporting at December 31, 2008. We identified two material weaknesses in our internal control over financial reporting and concluded that, as of December 31, 2008, we did not maintain effective control over financial reporting based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. For a detailed description of these material weaknesses, see Item 9A, “Controls and Procedures.” In our Annual Report on Form 10-K.  Each of our material weaknesses results in more than a remote likelihood that a material misstatement of the annual or interim financial statements that we prepare will not be prevented or detected. As a result, we must perform additional work to obtain reasonable assurance regarding the reliability of our financial statements.  Our internal controls over financial reporting were also ineffective as of December 31, 2007 as reported in our Form 10-KSB/A for that period.

If we are unsuccessful in implementing or following our remediation plan, or fail to update our internal control over financial reporting as our business evolves or to integrate acquired businesses into our controls system, we may not be able to timely or accurately report our financial condition, results of operations or cash flows or to maintain effective disclosure controls and procedures. If we are unable to report financial information in a timely and accurate manner or to maintain effective disclosure controls and procedures, we could be subject to, among other things, regulatory or enforcement actions by the SEC, securities litigation and a general loss of investor confidence, any one of which could adversely affect our business prospects and the market value of our common stock.

MARKET RISKS

OUR STOCK IS NO LONGER LISTED ON THE AMERICAN STOCK EXCHANGE AND NOW TRADES ON THE OTC BULLETIN BOARD.

Since our common stock is currently traded on the OTC Bulletin Board, investors may find it difficult to obtain accurate quotations of our common stock and may experience a lack of buyers to purchase such stock or a lack of market makers to support the stock price. Being a penny stock also could limit the liquidity of our common stock and limit the coverage of our stock by analysts.  The OTC Bulletin Board generally provides less liquidity than Amex and the Pink Sheets generally provide less liquidity than the OTC Bulletin Board.  Stocks trading on both the OTC Bulletin Board and the Pink Sheets may be very thinly traded and highly volatile, and quotations for Pink Sheet companies are generally very difficult to obtain, if available at all.  Therefore, should the Company’s stock be quoted on the Pink Sheets, holders of the Company’s common stock may be unable to sell their shares at any price, whether or not such shares have been registered for resale.  A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the marketplace of willing buyers and sellers of our common shares at any given time. This presence depends on the individual decisions of investors and general economic and market conditions over which we have no control. Given the lower trading volume of our common shares, significant sales of our common shares, or the expectation of these sales, could cause our share price to fall. Also, as a result of the Company’s withdrawal from Amex, the Company will not be required to seek, and will, generally, not seek, shareholder approval in connection with its equity offerings.  Being a penny stock also could limit the liquidity of our common stock and limit the coverage of our stock by analysts.

THE FLUCTUATION IN OUR STOCK PRICE MAY RESULT IN A DECLINE IN THE VALUE OF YOUR INVESTMENT.

The price of our common stock may fluctuate widely, depending upon many factors, including the differences between our actual financial and operating results and those expected by investors and analysts, changes in analysts' recommendations or projections, short selling of our stock in the market, changes in general economic or market conditions and broad market fluctuations. Companies that experience volatility in the market price of their securities often are subject to securities class action litigation. This type of litigation, if instituted against us, could result in substantial costs and divert management's attention and resources away from our business.

SHARES ELIGIBLE FOR FUTURE SALE MAY ADVERSELY AFFECT THE MARKET.

From time to time, certain of our shareholders may be eligible to sell all or some of their shares of Common Stock by means of ordinary brokerage transactions in the open market pursuant to Rule 144, promulgated under the Securities Act, subject to certain limitations. In general, pursuant to Rule 144, a stockholder, who is not an affiliate of the company and  who has satisfied a six-month holding period may, under if there is current information publicly available concerning the company,. Rule 144 also permits, the sale of securities, without any limitation, by our shareholders that are non-affiliates that have satisfied a one-year holding period. Any substantial sale of our Common Stock pursuant to Rule 144 or pursuant to any resale prospectus may have a material adverse effect on the market price of the Common Stock.

THE ISSUANCE OF ADDITIONAL COMMON STOCK COULD RESULT IN PRICE REDUCTIONS AND SUBSTANTIAL DILUTION.

Additional sales of substantial amounts of the Common Stock could reduce the market price for the common stock. We will need additional equity funding to provide the capital to achieve our objectives. Such equity issuance would cause a substantially larger number of shares to be outstanding, thereby diluting the ownership interest of our existing shareholders. In addition, public sales of substantial amounts of the Common Stock after this registration statement could reduce the market price for the Common Stock. If we raise capital in the future by issuing additional equity securities, investors may experience a decline in the value of their securities purchased in this offering. We are authorized to issue up to 200,000,000 shares of our common stock, of which 2,597,879 were outstanding at the close of business on February 6, 2009, and 10,000,000 shares of preferred stock, of which none were outstanding at the close of business on February 6, 2009. Our Articles of Incorporation (as amended to date) gives our Board of Directors authority to issue the undesignated shares of preferred stock with such designations, rights, preferences and limitations as the Board may determine. At the close of business on February 6, 2009, we had outstanding convertible notes convertible into 928,541 shares of our common stock (the “Notes”) and warrants to purchase an aggregate 1,947,761 shares of our common stock, outstanding options to purchase approximately 419,582 shares of our common stock.  At February 6, 2009, we also had approximately 19,580,418 shares of our common stock reserved for future stock options under our 2004 Equity Incentive Plan.  On March 2, 2009, we issued an additional 1,320,000 stock options under the 2004 Equity Incentive Plan (and simultaneously cancelled 242,315 stock options), and 60,000 shares of common stock under said plan.  On March 25, 2009, we issued an additional 30,000 shares of common stock under said plan.  The issuance of shares of our common stock upon conversion of the Notes and exercise of outstanding options and warrants, or in other transactions would cause dilution of existing stockholders’ percentage ownership of the Company. Holders of our common stock do not have preemptive rights, meaning that current shareholders do not have the right to purchase any new shares in order to maintain their proportionate ownership in the Company. Such stock issuances and the resulting dilution could also adversely affect the price of our common stock.
 
11
THE NUMBER OF SHARES OF OUR COMMON STOCK OUTSTANDING AND ISSUABLE UPON THE CONVERSION OR EXERCISE OF CONVERTIBLE NOTES AND WARRANTS HAS INCREASED SUBSTANTIALLY AS A RESULT OF  PRIVATE PLACEMENTS AND SETTLEMENT OF LITIGATION, AND CERTAIN PURCHASERS BENEFICIALLY OWN SIGNIFICANT BLOCKS OF OUR COMMON STOCK. UPON REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, THESE SHARES WILL BE GENERALLY AVAILABLE FOR RESALE IN THE PUBLIC MARKET.

Upon the closing of private placements on November 12, September 2, and June  18, 2008 we entered into subscription agreements pursuant to which we sold an aggregate of 44.57 units consisting of convertible notes and warrants, for an aggregate offering price of $4,457,000, which is the total principal amount of the Notes.  Each of the units (individually, a “Unit” and collectively, the “Units”) consists of a $100,000 24-month senior secured promissory note (each a “Note” and collectively the “Notes”) convertible, on a post Reverse Split basis, at the rate of $4.80 per share into 20,833 shares of our common stock, $.00005 par value (the “Common Stock”), bearing interest at the rate of 8% per annum, which interest is accrued in Common Stock at the rate of $4.80 per share.  The Notes are convertible, on a post Reverse Split basis, into an aggregate total of 928,541 shares of Common Stock.  Investors of each Unit also received two five-year warrants, one to purchase, on a post Reverse Split basis, 7,692 shares of Common Stock per unit with an exercise price of $0.30 per share (the “$0.30 Warrants”), and the other to purchase, on a post Reverse Split basis,  5,128 shares of Common Stock per unit with an exercise price of $4.80 per share (the “$4.80 Warrants” and, together with the $0.30 Warrants, collectively the “Warrants”).  The aggregate number of shares, on a post split basis, issuable pursuant to all warrants issued to the note-holders is 571,405.  We also entered into registration rights agreements in connection with the private placement pursuant to which we have agreed to file with the Securities and Exchange Commission (the “SEC”) a registration statement covering the resale of the Common Stock underlying the Notes and the Warrants.  We paid a placement agent a 13% cash commission in connection with the private placement.  The placement agent also received expense reimbursement, and a five-year warrant to purchase, on a post split basis, an aggregate of 165,707 shares of Common Stock for all Units sold, with an exercise price of $4.80 per share and 66,667 at an exercise price of $0.30.  In addition, the placement agent’s warrants carry registration rights that are the same as those afforded to investors in the private placement.  A total of 232,374 warrants were issued to the placement agent.  The conversion price of the notes and the exercise price of the warrants will automatically be reset to the price of this current offering.  In consideration of an amendment to the notes deleting a prohibition against reverse stock splits and effective after the 1 for 30 reverse stock split, the company issued additional warrants to the Noteholders for an aggregate of 928,541 shares at an exercise price post split of $.01 per share.

In August 2008 the Company settled all outstanding litigation with George Foreman Enterprises (the “Settlement”).   In addition to certain cash payments, the Company agreed to issue, to George Foreman Enterprises, on a post reverse stock split basis, a total of 100,000 shares of the Company's common stock, and to register such shares on a best efforts basis.  The issuance of the Notes and warrants in the private placement, the new warrants for the consent to the amendment relating to the reverse stock split and the shares in the Settlement triggered the anti-dilution provisions of outstanding convertible securities and resulted in substantial dilution to shareholders who held our common stock prior to the private placement and the Settlement. Under the registration rights agreements, we have agreed to file a registration statement with the Securities and Exchange Commission, or the SEC, covering the resale of the 928,541 shares of common stock issuable upon conversion of the Notes, the 1,947,761 shares of common stock issuable upon exercise of all outstanding warrants and the 100,000 shares issued in connection with the Settlement. Upon such registration of the shares issued in connection with the Settlement, these shares will become generally available for immediate resale in the public market. The market price of our common stock could fall due to an increase in the number of shares available for sale in the public market.

OUR STOCK PRICE MAY DROP UNEXPECTEDLY DUE TO SHORT SELLING OF OUR COMMON STOCK IN THE MARKET.

Regulation SHO began on January 3, 2005 and was adopted to update short sale regulation in light of numerous market developments since short sale regulation was first adopted in 1938. We have experienced and may continue to experience unexpected declines in our stock price due to manipulation of the market by individuals who profit by short selling our common stock. Short selling occurs when an individual borrows shares from an investor through a broker and then sells those borrowed shares at the current market price. The "short seller" profits when the stock price falls because he or she can repurchase the stock at a lower price and pay back the person from whom he or she borrowed, thereby making a profit. We cannot assure you that short sellers will not continue to drive the stock price down in the future, causing decline in the value of your investment.

THE TRADING PRICE OF THE COMMON STOCK IS VOLATILE, WHICH COULD CAUSE THE VALUE OF AN INVESTMENT IN OUR SECURITIES TO DECLINE.

The market price of shares of our Common Stock has been volatile.    The market price of our common stock has in the past been highly volatile. In fiscal year 2007, the price of our common stock traded, at post-reverse split prices, in the range of $48.00 to $10.50; during fiscal 2008, our stock traded in the range of $14.40 to $0.60 per share. This volatility is likely to continue for the foreseeable future. Factors affecting potential volatility include:

·  
developments and resolution of current litigation that we are a party to;
·  
our cash resources and our ability to obtain additional funding;
·  
announcements of private or public sales of securities
·  
announcements by us or a competitor of business development or exhibition projects;
·  
our entering into or terminating strategic business relationships;
·  
changes in government regulations;
·  
changes in our revenue or expense levels;
·  
fluctuations in operating results and general economic and other external market factors
·  
negative reports on us by security analysts;
·  
announcements of new products or technologies by us or our competitors.

The occurrence of any of these events may cause the price of the Common Stock to fall. In addition, the stock market in general has experienced volatility that often has been unrelated to the operating performance or financial condition of individual companies. Any broad market or industry fluctuations may adversely affect the trading price of our Common Stock, regardless of operating performance or prospects.

THE IMPLEMENTATION OF SFAS NO. 123R HAS REDUCED AND MAY CONTINUE TO REDUCE OUR REPORTED EARNINGS, WHICH COULD RESULT IN A DECLINE IN OUR STOCK PRICE.

As part of our compensation to employees, directors and consultants, we issue equity awards, primarily in the form of stock options and warrants. Many of the companies within our industry and with whom we compete for skilled employees use stock-based compensation as a means to attract personnel, although not all do and many do not issue the same level of awards.. As a result, the impact of the January 1, 2006 implementation of SFAS No. 123R may be more significant for us as compared to other companies. In addition, if we unexpectedly hire additional employees or acquire another company, the impact of the implementation of SFAS No. 123R may be more significant for us than previously forecasted. To the extent investors believe the costs incurred for SFAS No. 123R by the Company are higher than those incurred by other companies, our stock price could be negatively impacted.

WE DO NOT PLAN TO PAY DIVIDENDS TO HOLDERS OF COMMON STOCK.

We do not anticipate paying cash dividends to the holders of the Common Stock at any time. Accordingly, investors must rely upon subsequent sales after price appreciation as the sole method to realize a gain on investment. There are no assurances that the price of Common Stock will ever appreciate in value. Investors seeking cash dividends should not buy our securities.

12
ITEM 8.  FINANCIAL STATEMENTS

     See consolidated financial statements starting on page F-1 and the related footnotes thereto.


ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

     On December 17, 2008, our Board of Directors approved the change of accountants from Blackman Kallick, LLP to M&K CPAs, LLC.  There are no disagreements with our accountant  on accounting and financial disclosure.

ITEM 9A. CONTROLS AND PROCEDURES

 Evaluation of Disclosure Controls and Procedures.

We carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined) in Exchange Act Rules 13a – 15(c) and 15d – 15(e)).  Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of the end of the period covered in this report, our disclosure controls and procedures were not effective to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the required time periods and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

 
Our Principal Executive Officer and 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 and our principal executive and financial officer have determined that our disclosure controls and procedures are effective at doing so, 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 simple error or mistake. Additionally, controls can be circumvented if there exists in an individual a desire to do so. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
 
Furthermore, smaller reporting companies face additional limitations. Smaller reporting companies employ fewer individuals and find it difficult to properly segregate duties. Often, one or two individuals control every aspect of the Company's operation and are in a position to override any system of internal control. Additionally, smaller reporting companies tend to utilize general accounting software packages that lack a rigorous set of software controls.

 
Management’s Annual Report on Internal Control over Financial Reporting.
 
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a- 15(f) under the Securities Exchange Act, as amended.  Management, with the participation of the Chief Executive and Chief Financial Officers, evaluated the effectiveness of the Company’s internal control over financial reporting as of December 31, 2008.  In making this assessment, management used the criteria set forth by the committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework.  A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.  We have identified the following material weaknesses:

 
1.  
As of December 31, 2008, we did not maintain effective controls over the control environment.  Specifically we have not developed and effectively communicated to our employees our accounting policies and procedures.  This has resulted in inconsistent practices.   Since these entity level programs have a pervasive effect across the organization, management has determined that these circumstances constitute a material weakness.

2.  
As of December 31, 2008, we did not maintain effective controls over financial statement disclosure. Specifically, controls were not designed and in place to ensure that all disclosures required were originally addressed in our financial statements.   Accordingly, management has determined that this control deficiency constitutes a material weakness.

3.  
As of December 31, 2008, we did not maintain effective controls over financial reporting which resulted in the restatement of several previously filed financial statements.  Specifically, controls were not designed and in place to ensure that the financial impact of certain complex equity transactions were appropriately and correctly reported.  Furthermore, specific controls were not designed and in place to ensure that the depreciation of leasehold improvements was calculated and reported correctly.

Because of these material weaknesses, management has concluded that the Company did not maintain effective internal control over financial reporting as of December 31, 2008, based on the criteria established in “Internal Control-Integrated Framework” issued by the COSO.

Changes in Internal Control Over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting through the date of this report or during the quarter ended December 31, 2008, that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Independent Registered Accountant’s Internal Control Attestation

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting.  Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
 
Corrective Action

We have restated our financial statements in order to reflect the proper treatment of depreciation for leasehold improvements.  See Note 20 of our financial statements.

Management plans to provide future investments in the continuing education of our accounting and financial professionals.
 
13

ITEM 9B. OTHER INFORMATION

None.


                                    PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE


AGE
  
NAME
    
POSITION
           
52
  
Steve J. Cohen
    
Director and President
           
56
  
Michael J. Theriault
    
Chief Operating Officer
         
until August 18, 2008
           
66
  
Triveni P. Shukla
    
Director and Executive VP
           
38
  
Brian Chaiken
    
Chief Financial Officer
           
59
  
Mark Hershhorn
    
Director
           
51
  
Brian Israel
    
Director
           
63
  
Sheldon Drobny
    
Director
         
elected December 30, 2008; resigned March 21, 2009
55
  
Morris Garfinkle
    
Director, appointed March 25, 2009
           
51
  
Michael Donahue
    
Director from December 14, 2007
         
to December 30, 2008
           
56
  
Randal Hoff
    
Director from December 19, 2007
         
to December 30, 2008
           
61
  
Harvey Rosenfeld
    
Director from December 19, 2007
         
to December 30, 2008

STEVE J. COHEN, the Company's President has been employed by Z Trim since 2002 when he was hired as its director of investor relations.  He was promoted to Vice President of Corporate Development in 2003 and to President in March of 2006 when he also began serving on the Board of Directors.  In August of 2007 Mr. Cohen assumed the role of chief executive officer.  Prior to joining Z Trim, Mr. Cohen had 25 years' experience at the Chicago Mercantile Exchange where he worked in various brokerage house positions as well as a trader. Mr. Cohen attended college at the University of Illinois and Oakton Community College.  Mr. Cohen was a member of the U.S. Olympic team at the 1988 Olympics in Seoul and was a coach for the U.S. Olympic Team at the 2000 Olympics in Sydney Australia.
 
TRIVENI P. SHUKLA, Ph.D. is the Executive Vice President, Manufacturing & Technology for Z Trim Holdings, Inc., and has been with the Company since January 1, 2004, and was appointed to serve as a director on December 19, 2007.   Prior to joining Z Trim, Dr. Shukla was the President of F.R.I. Enterprises LLC from 1985 through March 2003.  Dr. Shukla served as Corporate Manager, R&D, Technical Service, and Engineering for the Krause Milling Company, which became part of ADM in 1985, from 1973 through 1984.  Dr. Shukla served as Associate Director, Research and Planning, for Phelco-Land O’Lake from 1969 through 1973. He was in charge of quality control for the National Dairy Research Institute, India and was the youngest gazetted Officer approved by Union Public Service Commission, India.  Dr. Shukla was a third party expert for International Finance Corporation/Word Bank from  1991 through 2001. Dr. Shukla has provided advisory services to the following companies around the globe: US Feed Grains Council, Indian Council of Agricultural Research, Winrock International, Labbat Anderson Group,  Anheuser-Busch,  A.E. Staley, American Maize Co., Bimbo (Mexico), Cedarburg Dairy/Kemp, Cargill, ConAgra, Experience Inc., Frigo Cheese Co./Unigated Ltd., Grupo Minsa s.a. de c.v. (Mexico), Heinz Co./Ore-Ida Foods, Heinz Co./Foodways Natl., Hershey Foods Corporation, Illinois Cereal Mills, Kraft-General Foods,  Mexican Accent Inc., Monsanto Company, Nabisco Brands, National Honey Board, Nagarjuna Chemicals and Vertilizers, India, Oscar Meyer Foods/Philip Morris, Procter & Gamble, Quaker Oats, Sigma Alimentos/Grupo Alpha (Mexico), Group Minsa of Mexico and Matrix Group of Malaysia.  Dr. Shukla’s advisory services have been of the nature of privatization, business planning, innovation and R&D, plant start-up, and management of intangible assets.  Dr. Shukla has designed turnkey facilities in Colombia, India, Malaysia, and Taiwan.  Some of Dr. Shukla’s accomplishments include:
 
·             Congressional Liaison, Institute of Food Technology’s research Committee
 
·             Chairman, Technical Board, American Corn Miller’s Federation, Washington, D.C.(1977-1984)
 
·             Industry Member USDA’s NC-51 (1980-84)
 
·             Panelist at Harvard’s Agriculture and Biotechnology Program
 
·             Member, Scientific Advisory Panel, American Association of Cereal Chemists (1999-Present)
 
·             Cornerstone Member, Council of Agricultural Science and Technology
 
·             Member, Board of Directors, Matrix Specialties, K.L., Malaysia
 
·             Business Planning Advisor to Universal Food’s, Milwaukee, WI and Pinahs Co., Waukesha, WI
 
Dr. Shukla received his B.Sc. (Agricultural Engineering) from the University of Gorakhpur, India, First in the University, and his M.Sc. (Food/ Engineering) from Agra University, India, First in the Faculty of Agriculture, and his Ph.D. (Food/Dairy Technology) from University of Illinois, Urbana-Champaign.
 
BRIAN CHAIKEN, J.D., was hired by the Company to serve as General Counsel and Vice President of Business Development in July of 2006.  In January of 2008, Mr. Chaiken was appointed to be the Company’s Chief Financial Officer.  In January of 2009, Mr. Chaiken was appointed the role of Chief Legal Officer as well.  He received his Bachelor of Science in Accountancy from the University of Illinois, Champaign-Urbana and passed the CPA examination on his first sitting.  Mr. Chaiken obtained his Juris Doctor from DePaul University, and is a member of the Illinois and Florida Bars, as well as those of the Northern District Court of Illinois, United States Court of Appeals of the 11th Circuit and the Southern District Court of Florida.  Prior to joining Z Trim, Mr. Chaiken spent five years as the Executive Vice-President of Legal Affairs for Supra Telecommunications and Information Systems, Inc., a Competitive Local Exchange Carrier (telecommunications provider) in South Florida.  There, Mr. Chaiken was a senior executive for a company with more than 300 employees in Florida, Costa Rica and the Dominican Republic.  He was instrumental in helping the company grow annual revenues from $10 million to approximately $150 million over an 18 month period.  He successfully litigated and arbitrated multi-million dollar disputes involving trademark, anti-trust, fraud, bankruptcy and complex commercial transactions.
 
14
BRIAN S. ISRAEL was appointed on May 23, 2007 to fill a vacancy on the Company’s Board of Directors.  He presently serves as Chairman of the Compensation and Nominating Committees.  Mr. Israel spent more than 20 years in the real estate finance industry, during which he managed teams responsible for production, operations, risk management, product and policy development, technology and project management functions for a major national lender and a large regional commercial bank. In his most recent position, he served From March 1989 to January 2004 as Vice President and Division Administrator for the Residential Mortgage Division of Harris Trust and Savings Bank's Consumer lending Center. Since retiring from the corporate world in January of 2004, he has dedicated his time and energy primarily to Community Service in the non-profit sector as President of the River North Residents Association, which works with city officials and local businesses to enhance the quality of life for nearly 10,000 members through advocacy for responsible development and commerce, improvements to infrastructure and amenities, and the creation, protection and improvement of public open space.
 
He is a Mentor and a member of the Advisory Council of Big Brothers Big Sisters of Metropolitan Chicago, President of the Chicago Hospitality Resource Partnership, and a member of the Ely Chapter of Lambda Alpha International.  He also provides strategic planning, training and project management services to businesses and non-profit entities as an independent consultant and serves as President of North Shore Custom Homes, Ltd., a developer of upscale residential real estate.
 
MARK HERSHHORN has a background in the marketing and operations of nutrition systems, food industry marketing and transactional television.  Mark was appointed to the Company’s Board of Directors on December 19, 2007.  From August 1998 to present, Mark has served as President and co-owner of CKS & Associates Management LLC; President and CEO of CKS & Associates; CEO of Midwest Real Estate Investment LLC; General Partner of New Horizons West 1LP, and CEO of New Horizons Real Estate Holdings LLC.  During much of the 1990’s, Mark served as President, CEO and director of National Media Corporation (NYSE-NMC) and as Chairman of the company’s international subsidiary, Quantum International Ltd.  Prior to that, Mark served as Senior Vice President of food operations and joint ventures for Nutri/System, Inc.  During the 1980’s, Mark was Chief Financial Officer, Treasurer, Vice President and director of the Franklin Mint.  Mark has also held positions with companies such as Price-Waterhouse, Pfizer Diagnostics, and Wallace and Wampole Laboratories.  Mark received his BS Degree in Economics from Rutgers University and an MBA from the Wharton School of Finance, University of Pennsylvania.
 
SHELDON DROBNY has a long and distinguished background in the accounting and financial industries.  He has held the position of Chairman and Principal of Paradigm Group II LLC (“Paradigm”) from 1991 to date.  Paradigm is an investment firm he founded with over $200 million worth of investments in over 40 companies.  He is a board member of numerous Paradigm Group II portfolio companies, including:  Cypress Bioscience (Chaired Audit Committee), TL Contact, XML Global (Chairman), Vertaport, Inc. and others.  Sheldon started his career with the Internal Revenue Service, and then became the managing partner in the firm of Adler Drobny Fischer LLC.  He received his Bachelor of Science in Business Administration from Roosevelt University. He is a Certified Public Accountant, having received the Elijah Watts Sells award, given to the top 25 out of 20,000 CPA candidates in the United States.  He is also admitted to practice before the U.S. Tax Court as a non-attorney, one of fewer than 200 non-attorneys to receive such distinction.  He is affiliated with the following organizations:  American Institute of Certified Public Accountants, Illinois CPA Society, University of Illinois Foundation Member, University of Illinois Chicago Circle Campus – Board of Visitors, University of Illinois Presidents Council – Certificate of Appreciation, Woodrow Wilson Council of the Woodrow Wilson International Center for Scholars, Simon Wiesenthal Center – International Leadership Council.
 
MORRIS GARFINKLE is the Founder, President and CEO of GCW Consulting, a consulting firm based out of Arlington, Virginia.  He received his Juris Doctor from Georgetown University and his B.S. in Economics (cum Laude) from the Wharton School of Finance & Commerce, University of Pennsylvania.  Mr. Garfinkle has over 35 years of experience in restructuring, mergers and acquisitions, investment assessment, competitive positioning, strategic planning and capital raising.  His clients have included United Airlines Creditors' Committee, Pension Benefit Guaranty Corporation, Air China and Dallas-Fort Worth International Airport, among many others.  He also served on the Board of Directors of HMSHost from 2000 - 2006.
 
MICHAEL DONAHUE established a communications, marketing and issue management firm in 2006.  From 1987 to 2006, Mr. Donahue worked for McDonald’s Corporation.  During the first ten years of his career with McDonald’s, Mr. Donahue served in increasingly responsible positions to become an officer and senior executive as Vice President of Communications.  Before joining McDonald’s, Mr. Donahue spent five years as a Manager/Director with the Illinois Retail Merchants Association, National Federation of Independent Business and 3M Corporation where he created favorable environments for small businesses to conduct business with minimal regulatory restriction. He then transitioned into public office to assist the incumbent Governor to address small business concerns as Deputy Director for the State of Illinois Commerce Department.
 
RANDAL HOFF is a senior executive with over thirty years of diverse general management, sales, financial, and administrative experience with the industrial group of a $2.5 billion multinational food company.  Mr. Hoff has been Vice-President and General Manager of McCormick and Co, Inc.’s McCormick Flavor Division since 2000, where he managed the Ingredient, Seasoning and Flavor sub-divisions for their industrial business in the United States.  He was additionally responsible for McCormick Canada and McCormick Pesa, the industrial divisions of McCormick in Canada and Mexico, with total sales of approximately $400 million with over 1100 employees and 6 manufacturing plants.  From 1998 to 2000, Mr. Hoff was the Vice President – Sales and Marketing for McCormick Flavor Division, managing a direct sales force of over 20 Account Managers, 3 Regional Directors and sales organization to cover all major multi-national consumer product food companies in the United States.  Mr. Hoff has a B.A. in Accounting and Economics from Augustana College, an MBA in Finance and MIS from Northwestern University,  J.L. Kellogg Graduate School of Management, and is a Certified Public Accountant.
 
HARVEY ROSENFELD has been the Chairman and CEO of U.S.A. Group, Inc. since July of 1987.  He founded the third party administration company to provide plan services to wholesale and retail sectors of the employee benefits marketplace.  Mr. Rosenfeld served as Vice President and Group Manager of Continental Illinois Bank from 1979 to 1987.
 

 The term of office of each director expires at each annual meeting of stockholders and upon the election and qualification of his successor. There are no arrangements with any director or officer regarding their election or appointment.  There are no family relationships between any of our directors or executive officers.

15
AUDIT COMMITTEE

The Board of Directors has an Audit Committee composed of one director, Morris Garfinkle, who is considered an “independent director" under the rules of the American Stock Exchange and the Securities and Exchange Commission.  The Board of Directors has determined that Morris Garfinkle qualifies as an "audit committee financial expert" under SEC rules.  The function of the Audit Committee is to assist the Board of Directors in preserving the integrity of the financial information published by the Company through the review of financial and accounting controls and policies, financial reporting systems, alternative accounting principles that could be applied and the quality and effectiveness of the independent public accountants.

COMPENSATION OF DIRECTORS

Our outside directors currently received $1,500 per meeting as cash compensation.  This practice began as of December 19, 2007.  Prior to that, no directors received any cash compensation for serving on our board, but were eligible to receive options and/or restricted shares of our common stock pursuant to our 2004 Stock Equity Plan. In 2008, the Board approved a grant of 200,000 shares of common stock per external director, as well as the ability to participate in a pool of an additional 500,000 shares of common stock based on the amount of time spent per director on Company affairs outside of monthly board meetings.  The cumulative minimum number of annual External Director work hours required prior to any distribution of the pool is 1,000.  The Board has determined that the External Directors did not achieve a total of 1,000 work hours in 2008, and therefore the additional 500,000 shares of common stock shall not be distributed to the External Directors.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Pursuant to Section 16(a) of the Exchange Act and the rules promulgated thereunder, officers and directors of the company and persons who beneficially own more than 10% of our common shares are required to file with the SEC and furnish to the Company reports of ownership and change in ownership with respect to all equity securities of the company. Based solely on our review of the copies of such reports received by us during or with respect to the fiscal year ended December 31, 2008 and all prior years, and written representations from such reporting persons, we believe that those persons who were our officers, directors and 10% shareholders during any portion of the fiscal year ended December 31, 2008, complied with all Section 16(a) filing requirements applicable to such individuals with the exception of the following late filings: (a) Mr. Mark Hershhorn was late filing a Form 4, and (b) Mr. Drobny was late filing a Form 3.  Additionally, based on the best information available to the Company, the Company believes that Mr. Drobny is late in filing a Form 4 with respect to the sale of approximately 30,566 shares of stock.

CODE OF ETHICS

The Company has adopted a "Code of Ethics and Business Conduct," which is applicable to all Company directors, executive officers and employees, including the principal executive officer and the principal financial and accounting officer. The "Code of Ethics and Business Conduct" is available on the Company's website at http://www.ztrim.com. The Company will post amendments to or waivers under this Code on its website.


ITEM 11. EXECUTIVE COMPENSATION.

The following table summarizes the compensation  earned in the fiscal years ended December 31, 2008 and 2007 by our chief  executive  officer and the two most highly paid  executive  officers  whose total  salary and bonus awards  exceeded  $100,000 for the fiscal years ended  December 31, 2008 and 2007. In this document, we refer to these individuals as our "named executive officers."

                                                                SUMMARY COMPENSATION TABLE
                              LONG-TERM COMPENSATION

                      ANNUAL COMPENSATION
               
AWARDS SHARES
               
UNDERLYING
NAME AND PRINCIPAL
      
OTHER
  
RESTRICTED STOCK
POSITION
  
YEAR
SALARY
BONUS
COMPENSATION
OPTION AWARDS
                 
Steve J. Cohen
              
Director and President
2008
$143,367
   --
  --
  
  --
     
2007
$131,175
   --
  --
  
  --
                 
Trveni Shukla
              
Director and Exec. VP
2008
$137,100
   --
  --
  
  --
     
2007
$119,400
   --
  --
  
  --
                 
Brian Chaiken
  
2008
$113,000
   --
  --
  
  --
Chief Financial Officer
2007
$107,400
   --
  --
  
  --
                 
Gregory J. Halpern
              
Former Director and CEO
2007
$119,099
   --
  --
  
  --
                 
Alan Orlowsky
              
Former Director and CFO
2007
$106,608
   --
  --
  
  --

OPTION GRANTS

The following table contains information concerning the grant of options to purchase shares of our common stock to each of the named executive officers during the fiscal year ended December 31, 2008. The percentage of total options granted to employees set forth below is based on an aggregate of 100,000 shares subject to options granted in 2008.  All options are fully vested and exercisable.


16



                            OPTION GRANTS IN LAST FISCAL YEAR
                      INDIVIDUAL GRANTS
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                     PERCENT OF
                        NUMBER OF                                     TOTAL
                        SECURITIES                                      OPTIONS
                        UNDERLYING                                   GRANTED                         TO EXERCISE OR
                        OPTIONS                                            EMPLOYEES                      BASE PRICE                              EXPIRATION
NAME           GRANTED                                          IN 2008                                ($/SHARE)                                  DATE
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Steve J. Cohen                 0                                         -                                    -                              -
Triveni P. Shukla              0                                         -                                    -                              -
Brian Chaiken                   0                                         -                                    -                              -           


     OPTIONS EXERCISED DURING 2008 AND OPTIONS VALUES AT DECEMBER 31, 2008
 
The following table contains information regarding options exercised during 2008 and unexercised options held at December 31, 2008, by the named executive officers. All of the unexercised options are exercisable.

                        EXERCISED AND UNEXERCISED
                  OPTIONS FOR 2008

                                        IN-THE-MONEY                                      OUT-OF-MONEY
                                                                                OPTIONS AT                                           OPTIONS
  SHARES                                                      DECEMBER 31, 2008                               DECEMBER 31, 2008
                 AQUIRED ON        VALUE                        EXERCISABLE/                                       EXERCISABLE/
NAME                    EXERCISED          REALIZED                   UNEXERCISABLE                                   UNEXERCISABLE

Gregory J. Halpern        0                    $--                                           0                                             -
Steve J. Cohen               0                    $--                                           0                       39,166
Alan G. Orlowsky          0                    $--                                           0                   45,666
Triveni P. Shukla           0                    $--                                           0                                                        28,000
Brian Chaiken                 0                    $--                                          0                                                        16,666


Note:  All of the options listed on here in for Mr. Cohen, Mr. Shukla and Mr. Chaiken were cancelled, and new options were issued on March 2, 2009 to such individuals as set forth below.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

     The  following  table  sets  forth  information  regarding  the  beneficial ownership  of  our  common  stock  as  of  March 24,  2009,  by  the  following individuals, entities or groups:

     o    each  person or entity  who we know  beneficially  owns more than five percent of our outstanding common stock;

     o    each of the named executive officers;

     o    each director and nominee; and

     o    all directors and executive officers as a group.

Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and includes voting or investment power with respect to the shares. In computing the number of shares beneficially owned by a person and the  percentage  ownership  of that  person,  shares of common  stock subject  to  options  and  warrants  held  by that  person  that  are  currently exercisable or convertible or will become  exercisable or convertible  within 60 days  after  March 24,  2009 are  deemed  outstanding,  while the shares are not deemed  outstanding for purposes of computing  percentage  ownership of any other person.  Except as otherwise indicated, and subject to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all shares of common stock held by them.
 
17
Applicable percentage  ownership  in  the  following  table  is  based  on 2,687,879  shares of common  stock  outstanding  as of March 24,  2009.  Except as provided below, the address for each stockholder listed in the table is c/o Z Trim Holdings, Inc., 1011 Campus Drive, Mundelein, Illinois 60060.


       
NUMBER OF
  
PERCENTAGE OF
NAME OF
    
SHARES
    
SHARES
BENEFICIAL OWNER
    
BENEFICIALLY OWNED
BENEFECIALLY OWNED
               
BENEFICIAL OWNERS
          
               
Nurieel Akhamzadeh (1)
  
136,126
    
5.06%
4020 Moorpark Ave., #117
          
San Jose, CA 95117
            
               
FORMER DIRECTORS AND EXECUTIVE OFFICERS
        
               
Gregory J. Halpern (2)
  
345,532
    
12.9%
Alan G. Orlowsky (3)
  
44,167
    
1.64%
Michael Donahue (4)
  
9,999
    
0.37%
Randal Hoff
    
6,666
    
0.25%
Harvey Rosenfeld
    
22,795
    
0.85%
Sheldon Drobny (5)
    
125,020
    
4.65%
               
CURRENT DIRECTORS AND EXECUTIVE OFFICERS
        
               
Steve J. Cohen (6)
    
210,003
    
7.81%
Triveni Shukla (7)
    
210,000
    
7.81%
Mark Hershhorn (8)
    
68,556
    
2.55%
Brian Israel (9)
    
43,332
    
1.61%
Morris Garfinkle
    
30,000
    
1.12%
Brian Chaiken (10)
    
210,000
    
7.81%
               
Total of All Current Directors and Executive Officers
      
       
771,891
    
28.72%
               
               
(1) Numbers based on NOBO list dated February 5, 2009; includes 83,333 warrants
(2) Numbers based on Form 4 filed on June 20, 2008 with the SEC, less shares returned to Company pursuant to settlement reached September 26, 2008
    
(3) All 44,167 are options to purchase shares of common stock
    
(4) Includes 3,333 options to purchase  shares of common stock
    
(5) Numbers based on NOBO list dated February 5, 2009; includes ownership of note convertible into 52,083 shares and 47,397 warrants
(6) Includes 210,000 options to purchase shares of common stock
    
(7) Includes 210,000 options to purchase shares of common stock
    
(8) Includes ownership of notes and warrants convertible into 26,890 shares of common stock
(9) Includes 6,666 options to purchase shares of common stock
    
(10) Includes 210,000 options to purchase shares of common stock
    

 

ITEM  13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE


The Company's independent directors are: Mark Hershhorn, Brian Israel, and Morris Garfinkle. In compliance with the American Stock Exchange's rules for director independence, more than 50% of the Company's directors are independent.

 
18

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

     The following is a summary of the fees billed to us by Spector & Wong, LLP for professional services rendered for the fiscal year ended December 31, 2008 and December 31, 2007, respectively:

              FEE CATEGORY                                                                 2008              2007
         --------------------------                                                                ----------------- -----------------

         --------------------------                                                                ----------------- -----------------
         Audit Fees (1)                                                             $1,150           $56,889
         --------------------------                                                                ----------------- -----------------
         Audit-Related Fees (2)                                                                  --                   --
         --------------------------                                                                ----------------- -----------------
         Tax Fees (3)                                                                 --                   --
         --------------------------                                                                 ----------------- -----------------
         All Other Fees (4)                                                                               --                   --
         --------------------------                                                                ----------------- -----------------
         Total Fees                                                             $1,150           $56,889
         --------------------------                                                                ----------------- -----------------

The following is a summary of the fees billed to us by Blackman Kallick, LLP for professional services rendered for the fiscal year ended December 31, 2008 and December 31, 2007, respectively:

              FEE CATEGORY                                                                2008              2007
         --------------------------                                                                ----------------- -----------------

         --------------------------                                                                ----------------- -----------------
         Audit Fees (1)                                                                 $326,451        $107,780
         --------------------------                                                                ----------------- -----------------
         Audit-Related Fees (2)                                                                      --                   --
         --------------------------                                                                ----------------- -----------------
         Tax Fees (3)                                                                         --                   --
         --------------------------                                                                ----------------- -----------------
         All Other Fees (4)                                                                               --             $295,115
         --------------------------                                                                ----------------- -----------------
         Total Fees                                                             $326,451        $402,895
         --------------------------                                                                ------------------ -----------------

 The following is a summary of the fees billed to us by M&K, CPAs, PLLC for professional services rendered for the fiscal year ended December 31, 2008 and December 31, 2007, respectively:

              FEE CATEGORY                                                                2008              2007
         --------------------------                                                                ----------------- -----------------

         --------------------------                                                                ----------------- -----------------
         Audit Fees (1)                                                                 $50,700             --
         --------------------------                                                                ----------------- -----------------
         Audit-Related Fees (2)                                                                       --                   --
         --------------------------                                                                ----------------- -----------------
         Tax Fees (3)                                                                                          --                   --
         --------------------------                                                                ----------------- -----------------
         All Other Fees (4)                                                                                --                   --
         --------------------------                                                                ----------------- -----------------
         Total Fees                                                            $50,700              --
         --------------------------                                                                ------------------ -----------------

(1) Audit Fees consist of fees billed for professional services rendered for the audit of our  financial  statements  and for  reviews of the  interim  financial statements included in our quarterly reports on Form 10-Q.

(2) Audit-Related Fees consist of fees billed for professional services rendered for  audit-related  services,  including  consultation  on SEC  filings  and the issuance  of  consents  and  consultations  on other  financial  accounting  and reporting related matters.

(3) Tax Fees consists of fees billed for professional services relating to tax compliance and other tax advice.

(4) All Other Fees consist of fees billed for all other services.  These fees consist of fees for services stemming from the internal investigation of internal controls and equity transactions referenced hereinabove, as well as for a forensic accounting relating to prior management.  The engagements from which these fees stem were initiated in late August or early September 2007 and were substantially completed in early November 2007.

PRE-APPROVAL POLICY

Our  Audit  Committee  Charter  provides  that the  Audit  Committee  shall pre-approve  all  auditing  services,   internal  control-related  services  and permitted  non-audit services  (including the terms thereof) to be performed for us by  our  independent  auditor,  subject  to  the de  minimis  exceptions  for non-audit services described in Section  10A(i)(1)(B) of the Securities Exchange Act of 1934,  as  amended,  which are  approved  by the  Committee  prior to the completion of the service. The Committee may also form and delegate authority to sub-committees consisting of one or more members when appropriate, including the authority to grant  pre-approvals  of audit and  permitted  non-audit  services, provided that decisions of such  subcommittee  to grant  pre-approvals  shall be presented to the full  Committee at its next  scheduled  meeting.  In accordance with the pre-approval policy, the Audit Committee has approved certain specified audit and non-audit services to be  provided  by M&K CPAS, PLLC for up to twelve (12) months from the date of the pre-approval. Any additional services to be provided by our independent auditors following such pre-approval requires the additional pre-approval of the Audit Committee.

19


PART IV

ITEM 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES

A list of the exhibits required to be filed as part of this report are presented in the Exhibit Index.

                                   SIGNATURES
 
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized as of April 14, 2009.

                                Z TRIM HOLDINGS, INC.

                                By: /s/ Steven J. Cohen
                                --------------------------
                                Steven J. Cohen
                                Director, and
                                Chief Executive Officer

     In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities as of April 14, 2009.

/s/ Steven J. Cohen
----------------------
Steven J. Cohen
Director and Chief Executive Officer
(principal executive officer)

/S/ Brian Chaiken
--------------------
Brian Chaiken
Chief Financial Officer
(principal financial
or accounting officer)

/S/ Mark Hershhorn
----------------------
Mark Hershhorn
Director

/S/ Brian Israel
---------------------
Brian Israel
Director

/S/ Triveni P. Shukla
----------------------
Triveni P. Shukla
Director

/S/ Morris Garfinkle
----------------------
Morris Garfinkle
Director
 
20
INDEX OF EXHIBITS

EXHIBIT NO.                       DESCRIPTION

3(i)
Articles of Incorporation of Z Trim Holdings, Inc. (filed as Exhibit 2.1 to the Company's Form 10-SB filed on August 21, 2000, and as Exhibit 3.3 to the Company's Form 10-QSB filed on August 16, 2004, and incorporated herein by reference).

3(ii)
Bylaws of Z Trim Holdings, Inc., as amended (filed as Exhibit 2.2 to the Company’s Registration Statement on Form 10-SB, Exhibit 3(ii) to the Company’s Form 8-K filed on November 2, 2007, and as Exhibit 3(ii) to the Company’s Form 8-K filed on November 16, 2007, and incorporated herein by reference).

4.1
Specimen Certificate for common stock (filed as Exhibit 3.1 to the Company's Form 10-SB filed on August 21, 2000, and incorporated herein by reference).

4.2
Form of Subscription Agreement (filed as Exhibit 4.1 to the Company's Form 8-K filed on March 30, 2006 and incorporated herein by reference).

4.3
Form of Warrant to Purchase Common Stock (filed as Exhibit 4.2 to the Company's Form 8-K filed on March 30, 2006 and incorporated herein by reference).

4.4
Form of Registration Rights Agreement (filed as Exhibit 4.3 to the Company's Form 8-K filed on March 30, 2006 and incorporated herein by reference).

4.5
Form of Subscription Agreement (filed as Exhibit 4.5 to the Company’s Form 10-KSB filed on April 2, 2007 and incorporated herein by reference).

4.6
Form of Warrant to Purchase Common Stock (filed as Exhibit 4.6 to the Company’s Form 10-KSB filed on April 2, 2007 and incorporated herein by reference).

4.7
Form of Registration Rights Agreement (filed as Exhibit 4.7 to the Company’s Form 10-KSB filed on April 2, 2007 and incorporated herein by reference).

10.1
Steve Cohen Employment Agreement (filed as Exhibit 10.12 to the Company’s Form 10-QSB for the quarter ending June 20, 2006 and incorporated herein by reference).

10.2
Brian Chaiken Employment Agreement, dated October 17, 2007 (filed as Exhibit 10.2 to the Company’s Form 10-KSB filed on April 14, 2008 and incorporated herein by reference).

10.3
Michael J. Theriault Employment Agreement (filed as Exhibit 10.2 to the Company’s Form 10-KSB filed on April 2, 2007 and incorporated herein by reference).

10.4
Z Trim Holdings, Inc. 2004 Equity Incentive Plan (filed as Appendix C to the Z Trim's Proxy Statement for its Annual Meeting conducted on June 16, 2004 and approved by its Shareholders on that date and incorporated herein by reference).

10.5
Industrial Lease Agreement between CLO Enterprises and Z Trim Holdings, Inc. dated May 20, 1999 (filed as Exhibit 6.7 the Company’s Registration Statement on Form 10-SB and incorporated herein by reference).

10.6
Industrial Lease Agreement between CLO Enterprises and Z Trim Holdings, Inc. dated June 18, 1999 (filed as Exhibit 6.8 to Z Trim's Registration Statement on Form 10-SB and incorporated herein by reference).

10.7
Assignment of License Agreement between UTEK Corporation, Z Trim Holdings, Inc. and Brookhaven Science Associates dated March 26 2003 (filed as Exhibit 10.14 to Z Trim's Form 10-QSB for the quarter ending September 30, 2003 and incorporated herein by reference).

10.8
Assignment of License Agreement between UTEK Corporation, Z Trim Holdings, Inc. and University of Illinois dated July 9, 2003 (filed as Exhibit 10.15 to Z Trim's Form 10-QSB for  the quarter ending September 30, 2003 and incorporated herein by reference).

10.9
Assignment of License Agreement between Z Trim Holdings, Inc. and Brookhaven Science Associates dated July 22, 2003 (filed as Exhibit 10.16 to Z Trim's Form 10-QSB for the quarter ending September 30, 2003 and incorporated herein by reference).

23.1*
Consent of Blackman Kallick, LLP.

23.2*
Consent of M&K CPAs, LLC.

31.1*
Statement Under Oath of Principal Executive Officer of the Company pursuant to Section 302 of Sarbanes-Oxley Act of 2002.

31.2*
Statement Under Oath of Principal Financial Officer of the Company pursuant to Section 302 of Sarbanes-Oxley Act of 2002.

32.1*
Statement Under Oath of Principal Executive Officer of the Company pursuant to Section 906 of Sarbanes-Oxley Act of 2002.

32.2*
Statement Under Oath of Principal Financial Officer of the Company pursuant to Section 906 of Sarbanes-Oxley Act of 2002.

----------------------
*Filed herewith




21

 
 
 

INDEX TO FINANCIAL STATEMENTS

                                                                                                                                                                     PAGE
                                                                                                                                                                      -------


Report of Independent Registered Public Accounting Firm                                                                            F-2

Consolidated Balance Sheets for the years ended December 31, 2008 and 2007 (restated)                                                            F-4

Consolidated Statements of Operations for the years ended December 31, 2008 and 2007 (restated)                                                      F-6

Consolidated Statements of Stockholders' Equity for the years ended
   December 31, 2008 and 2007 (restated)                                                                                             F-7

Consolidated Statements of Cash Flows for the years ended December 31, 2008 and 2007 (restated)                                                     F-8

Notes to Consolidated Financial Statements                                                                                      F-9










F-1


 
 
 


 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
To the Board of Directors and
 
 
Stockholders of Z Trim Holdings, Inc.
 
 
We have audited the accompanying consolidated balance sheets of Z Trim Holdings, Inc. as of December 31, 2008, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the year then ended. These consolidated financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. The financial statements for year ended December 31, 2007 were audited by other auditors whose reports expressed unqualified opinions on those statements.
 
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
 
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Z Trim Holdings, Inc. as of December 31, 2008, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the Unites States of America.
 
We have also audited the adjustments described in Note 20 that were applied to restate the 2007 financial statements to correct an error.  In our opinion, such adjustments are appropriate and have been properly applied. We were not engaged to audit, review, or apply any procedures to the 2007 or prior financial statements of the Company other than with respect to the adjustments and, accordingly we do not express an opinion or any other form of assurance on the 2007 financial statements taken as a whole.
 
The accompanying consolidated financial statements have been prepared assuming that the company will continue as a going concern.  As discussed in Note 2 to the consolidated financial statements, the company has suffered recurring losses from operations and requires additional financing to continue in operation.  These conditions raise substantial doubt about its ability to continue as a going concern.  Management’s plans in regard to these matters are also described in Note 2.  The consolidated financial statements do not include any adjustments that might result from the outcome of the uncertainty.

As discussed in Note 20 to the financial statements, the Company has restated its financial statements as of and for the year ended December 31, 2007 to correct errors in its accounting of the depreciation of leasehold improvements.  Unaudited information is presented in Note 20 for the three quarterly periods in the year ended December 31, 2008.


/s/ M&K CPAs,PLLC
Houston, Texas
April 14, 2009
F-2
 

 
 
 


 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors and
Stockholders of Z Trim Holdings, Inc.
Mundelein, Illinois

We have audited, before the effects of the adjustment for the correction of the error described in Note 20, the accompanying consolidated balance sheet of Z Trim Holdings, Inc. as of December 31, 2007 and the related consolidated statements of operations, changes in stockholders’ equity (deficit) and cash flows for the year then ended.  The 2007 consolidated financial statements before the effects of the adjustments discussed in Note 20 are not presented herein.  The 2007 consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.   Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
 
In our opinion, except for the error described in Note 20, the 2007 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Z-Trim Holdings, Inc. as of December 31, 2007, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

We were not engaged to audit, review, or apply any procedures to the adjustments for the correction of the error described in Note 20 and, accordingly, we do not express an opinion or any other form of assurance about whether such adjustments are appropriate and have been properly applied. Those adjustments were audited by M&K CPAs, PLLC.

The accompanying 2007 consolidated financial statements have been prepared assuming that the company will continue as a going concern.  As discussed in Note 2 to the consolidated financial statements, the company has suffered recurring losses from operations and requires additional financing to continue in operation.  These conditions raise substantial doubt about its ability to continue as a going concern.  Management’s plans in regards to these matters are also described in Note 2.  The 2007 consolidated financial statements do not include any adjustments that might result from the outcome of uncertainty.


/s/ Blackman Kallick, LLP
Chicago, Illinois
April 14, 2008

 
 
F-3
 


 

 
 
 

         
Z TRIM HOLDINGS, INC. AND SUBSIDIARIES
        
CONSOLIDATED BALANCE SHEETS
        
         
DECEMBER 31, 2008 and 2007
        
         
         
         
ASSETS
        
         
         
         
   
12/31/2008
  
12/31/2007
       
(Restated)
Current Assets
        
Cash and cash equivalents
  
 $            592,696
  
 $         2,436,581
Accounts receivable (net of allowance of $10,067 in 2008
      
and  $1,005 in 2007)
  
206,231
  
                    7,522
Employees'  Advances
  
                           -
  
                    2,624
Inventory
  
                182,971
  
                592,666
Prepaid expenses and other assets
  
                  86,445
  
                149,973
Net assets of discontinued operations
  
                           -
  
                        485
         
Total current assets
  
            1,068,343
  
            3,189,851
         
Property and equipment, net
  
            4,061,436
  
            4,990,186
         
Long Term Assets
        
Deposit on Fixed Asset
  
                240,000
  
                           -
         
         
Other Assets
        
Intangible assets, net
  
                           -
  
                140,001
        Prepaid Loan  Cost - Long Term, Net
  
                880,650
  
                           -
Deposits
  
                  14,453
  
                  14,453
         
Total other assets
  
                895,103
  
                154,454
         
TOTAL ASSETS
  
 $         6,264,882
  
 $         8,334,491
         
 
The accompanying notes are an integral part of the consolidated financial statements.
 
F-4

 
 
 

 
Z TRIM HOLDINGS, INC. AND SUBSIDIARIES
        
CONSOLIDATED BALANCE SHEETS
        
         
DECEMBER 31, 2008 and 2007
        
         
         
         
LIABILITIES AND STOCKHOLDERS' EQUITY
        
         
         
         
   
12/31/2008
  
12/31/2007
       
(Restated)
Current Liabilities
        
Accounts payable
  
 $            544,325
  
 $            709,029
Accrued expenses and other
  
                335,718
  
            2,039,308
Other Liabilities
  
                           -
  
                150,000
         
Total Current Liabilities
  
                880,043
  
            2,898,337
         
         
             Convertible Notes Payable, Net
  
            2,559,736
  
                           -
         
         
Total Liabilities
  
            3,439,779
  
            2,898,337
         
Stockholders' Equity
        
Common stock, $0.00005 par value; authorized 200,000,000
      
shares; issued and outstanding 2,597,879 and
        
2,401,879 shares, respectively
  
                    3,904
  
                    3,600
  Common stock to be issued
  
                           -
  
                           -
Additional paid-in capital
  
          74,484,074
  
          69,603,639
Accumulated deficit
  
        (71,662,875)
  
        (64,171,085)
         
Total Stockholders' Equity
  
            2,825,103
  
            5,436,154
         
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
  
 $         6,264,882
  
 $         8,334,491
         
The accompanying notes are an integral part of the consolidated financial statements.
 
F-5

 
 
 

Z TRIM HOLDINGS, INC. AND SUBSIDIARIES
      
CONSOLIDATED STATEMENTS OF OPERATIONS
      
       
FOR THE YEARS ENDED DECEMBER 31
2008
  
2007
     
(Restated)
REVENUES:
      
  Products
 $            720,899
  
 $            616,799
  Services
                         -
  
                        49
    Total revenues
               720,899
  
               616,848
       
COST OF REVENUES:
      
  Products
            2,429,620
  
            3,085,328
    Total cost of revenues
            2,429,620
  
            3,085,328
       
GROSS MARGIN
          (1,708,721)
  
          (2,468,480)
       
OPERATING EXPENSES:
      
Selling, general and administrative
            4,245,405
  
            9,362,791
Impairment of intangible assets
               136,668
  
                         -
Amortization of intangible assets
                   3,333
  
                 13,333
Loss(Gain) on asset disposals, net
               (74,987)
  
               107,905
    Total operating expenses
            4,310,419
  
            9,484,029
       
OPERATING LOSS
          (6,019,140)
  
        (11,952,509)
       
OTHER INCOME (EXPENSES):
      
Rental and other income
                 24,451
  
                 44,105
Interest income
                 20,526
  
               173,256
Interest expense
             (670,562)
  
                 (3,570)
Recovery of (provision for) loan
                         -
  
               300,000
Settlement (loss) gain
             (772,202)
  
          (1,360,981)
    Total other income (expenses)
          (1,397,787)
  
             (847,190)
       
LOSS FROM CONTINUING OPERATIONS
 $       (7,416,927)
  
 $     (12,799,699)
       
DISCONTINUED OPERATIONS
      
Income from discontinued operations
      
(net of applicable tax of $0 in 2008 and 2007)
 $                      -
  
 $              14,846
       
NET LOSS
 $       (7,416,927)
  
 $     (12,784,853)
       
Deemed Dividend
(74,863)
    
       
NET LOSS  ATTRIBUTABLE TO COMMON STOCKHOLDERS
 $       (7,491,790)
  
 $     (12,784,853)
       
NET LOSS PER SHARE - BASIC AND DILUTED
 $                (2.95)
  
 $                (5.44)
       
Weighted Average Number of Shares Basic and Diluted
            2,540,032
  
          2,348,474
 
The accompanying notes are an integral part of the consolidated financial statements.
 
F-6

 
 
 
 
 

Z TRIM HOLDINGS, INC. AND SUBSIDIARIES
        
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
      
             
             
             
 
Shares of
  
Additional
      
 
Common
Common
Paid-In
Unamortized
Accumulated
  
 
Stock
Stock
Capital
Expenses
Deficit
Total
Balance at December 31, 2006
         2,066,149
 $             3,096
 $ 57,520,009
 $    (113,339)
 $  (51,386,232)
 $   6,023,534
             
  Stock issued for services
                   205
                       0
             6,765
    
             6,765
  Stock and warrants issued for cash, net of fees
            296,000
                   444
      7,837,556
    
      7,838,000
  Stock issued for settlement
                9,500
                     14
           29,499
    
           29,513
  Exercise of stock warrants and options
              33,805
                     51
         872,231
    
         872,282
  Cashless exercise of warrants
                   386
                       1
                   -
    
                    1
  Stock options issued expense
    
      3,487,579
    
      3,487,579
  Amortization of services
      
        113,339
  
         113,339
  Retired shares
              (4,167)
                     (6)
      
                  (6)
  Retired shares in process
                     -
  
       (150,000)
    
       (150,000)
  Net loss
        
     (12,784,853)
  (12,784,853)
             
Balance at December 31, 2007 (Restated)
         2,401,878
 $             3,600
 $ 69,603,639
 $               -
 $  (64,171,085)
 $   5,436,154
             
  Common Stock issued for settlement loss
            208,167
312
      1,353,388
    
      1,353,700
  Stock issued for directors fees
              33,333
50
         229,950
    
         230,000
  Cancellation of retired shares in process
  
10
149,990           
   
         150,000
  Rescinded Shares
(45,500)        
(68)
         (74,432)
    
         (74,500)
  Warrants issued for settlement loss
    
         524,665
    
         524,665
  Warrants issued for placement fees
    
         309,547
    
         309,547
   Discount on convertible debt
    
      2,247,784
    
      2,247,784
   Deemed Dividend
    
           74,863
  
            (74,863)
                   -
   Stock Based Compensation
    
           40,613
    
           40,613
   Options issued for compensation
    
           24,067
    
           24,067
   Net loss
        
       (7,416,927)
    (7,416,927)
Balance at December 31, 2008
         2,597,878
                3,904
 $ 74,484,074
 $               -
 $  (71,662,875)
 $   2,825,103
 
The accompanying notes are an integral part of the consolidated financial statements.
 
F-7
 

 
 
 

       
Z TRIM HOLDINGS, INC. AND SUBSIDIARIES
      
CONSOLIDATED STATEMENTS OF CASH FLOWS
      
       
FOR THE YEARS ENDED DECEMBER 31
 2008
  
 2007
     
 (Restated)
CASH FLOWS FROM OPERATING ACTIVITIES
      
Net loss
                  (7,416,927)
  
                (12,784,853)
Less: Income from discontinued operations, net of tax
                                 -
  
                         14,846
Adjustments to reconcile loss from continuing operations to
      
net cash used in operating activities:
      
Depreciation and amortization
                    1,228,335
  
1,005,665
Loss on asset disposal
                                 -
  
                       107,905
Provision for bad debt
                                 -
  
                           1,005
Issuance of common stock and warrants for services
                                 -
  
                           6,765
 Amortization of services
                                 -
  
                       113,339
Stock based compensation
                         40,613
  
                    3,487,579
Shares issued for settlemnet loss
                       513,700
  
                                 -
Shares issued for director fees
                       230,000
  
                                 -
Warrants issued for settlement los
                         68,519
  
                                 -
BCF Amortization
                       350,520
  
                                 -
Recovery of loan loss
                                 -
  
                     (300,000)
Impairment of intangible assets
                       136,668
  
                                 -
Stock and warrant settlements
                                 -
  
                    1,357,373
Changes in operating assets and liabilities
      
Accounts receivable
                     (198,708)
  
                           3,418
Inventory
                       409,695
  
                     (388,130)
Prepaid expenses and other assets
                         66,637
  
                       (58,180)
Deposits
                                 -
  
                         (3,350)
Increase/(Decrease) in:
      
Accounts payable and accrued expenses
                     (548,082)
  
                       902,284
CASH USED FOR OPERATING ACTIVITIES
                  (5,119,030)
  
                  (6,564,026)
       
CASH FLOWS FROM INVESTING ACTIVITIES
      
Purchase of Fixed Assets
                     (340,820)
  
                     (784,685)
Proceeds from asset disposals
                                 -
  
                         67,475
CASH USED FOR INVESTING ACTIVITIES
                     (340,820)
  
                     (717,210)
       
CASH FLOWS FROM FINANCING ACTIVITES
      
Loan Costs
                     (766,535)
  
                                 -
Net proceeds from sales of stock
                                 -
  
                    7,838,001
Rescinded Shares
                       (74,499)
  
                                 -
 Borrowing on Debt
                    4,457,000
  
                                 -
Exercise of options and warrants
                                 -
  
                       872,290
Payments on capital lease obligations
                                 -
  
                       (14,074)
Proceeds from notes receivable for stock, net
                                 -
  
                       300,000
  Decrease in note receivable for stock
                                 -
  
                                 -
CASH PROVIDED BY FINANCING ACTIVITIES
                    3,615,966
  
                    8,996,217
NET (DECREASE)INCREASE IN CASH
                  (1,843,884)
  
                    1,714,981
       
Net cash and cash equivalents provided (used) by discontinued operations
                                 -
  
                                 -
       
Operating cash from discontinued operations
                                 -
  
                         46,557
       
CASH AT BEGINNING OF YEAR
                    2,436,581
  
                       675,043
CASH AT YEAR END
                       592,696
  
                    2,436,581
Supplemental Disclosures of Cash Flow Information:
      
Interest paid
    
                           3,570
Issuance of common stock and warrants for services
    
                           6,765
Stock subscription payable
                                 -
  
                       150,000
  Issuance of common stock  for issuance of stock
      
        Deferred Loan Costs
                       309,547
    
        Discount on Convertible Debentures
                    2,247,784
    
        Warrants issued for settlement loss-Zaghi
                       368,822
    
        Common Stock issued for settlement-Zaghi
                       839,850
    
         Warrants issued for settlement loss-Basic Investors
                         87,324
    
         Common Stock issued for Stock payable
                       149,990
    
          Deemed Dividend
                         74,863
    
          Options issued for compensation
                         24,067
    
       
The accompanying notes are an integral part of the consolidated financial statements.
 
F-8

 
 
 


Z Trim Holdings, Inc. and Subsidiaries
Notes To Consolidated Financial Statements
December 31, 2008
 
NOTE 1 – NATURE OF BUSINESS
 
Nature of Business

Z Trim Holdings, Inc. is a food technology deployment company that produces, markets and distributes functional food ingredients, emulsions and systems for both domestic and international markets.
 
Z Trim®, a USDA-developed, minimally processed, non-caloric functional food ingredient made from healthy dietary fiber, is central to the company’s intellectual property portfolio. Z Trim Holdings has an exclusive license from the USDA to make, use and sell Z Trim both domestically and internationally.  Currently, Z Trim is made from corn and oat, but it can be produced from virtually any cellulose, the substance that makes up most of a plant’s cell walls, and is one of the most abundant organic compounds on earth.
 
Current Z Trim products include gel and powder used to replace portions of fat, gums, starches and carbohydrates in foods.   The Company’s core product portfolio of wellness foods and dietary fiber food ingredients includes corn Z Trim, non-GMO oat Z Trim, and functional emulsions and gels.    Z Trim is now being used by manufacturers, restaurants, schools, and consumers on 6 continents to replace as much as 80% of the fat and calories, as well as offering innovative and functional alternatives to gums, modified starches and phosphates in foods without changing taste, texture, appearance or digestive properties in the doughs, fillings and icings of baked goods, dairy products, extruded snacks, desserts, sauces, dressings, meats and many other foods.
 
 
NOTE 2 – GOING CONCERN
 
The Company's consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business.  In the near term, the Company expects operating costs to continue to exceed funds generated from operations.  As a result, the Company expects to continue to incur operating losses and may not have enough capital to grow its business in the future.  The Company can give no assurance that it will achieve profitability or be capable of sustaining profitable operations.  As a result, operations in the near future are expected to continue to use working capital.

To successfully grow the business, the Company must decrease its cash outflows, improve its cash position and its revenue base, and succeed in its ability to raise additional capital through a combination of primarily public or private equity offerings or strategic alliances.

The Company is currently in the process of obtaining additional financing for its current operations.
 
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Principle of Consolidation and Presentation
 
The accompanying consolidated financial statements include the accounts of Z Trim Holdings, Inc. and its subsidiaries after elimination of significantly all intercompany accounts and transactions.
 
 
On September 17, 2007, the Company resolved to discontinue all subsidiaries, other than FiberGel.  Accordingly, the accompanying consolidated financial statements for the years ended December 31, 2008 and 2007 have been restated to present the results of two out of three segments as discontinued operations.
 
 
F-9
 

 
 
 

Z Trim Holdings, Inc. and Subsidiaries
Notes To Consolidated Financial Statements
December 31, 2008
 
NOTE 3–SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
Use of Estimates
 
The preparation of the accompanying consolidated financial statements in conformity with accounting principles generally accepted in the United States (U.S. GAAP) requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
 
Revenue Recognition
 
The Company generally recognizes product revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is probable. In instances where the final acceptance of the product is specified by the customer, revenue is deferred until all acceptance criteria have been met. No provisions were established for estimated product returns and allowances based on the Company’s historical experience.
 
Allowance for Doubtful Accounts
 
Management of the Company makes judgments as to its ability to collect outstanding receivables and provide allowances for the portion of receivables when collection becomes doubtful. Provisions are made based upon a specific review of all significant outstanding invoices. For those invoices not specifically reviewed, provisions are provided at differing rates, based upon the age of the receivable. In determining these percentages, management analyzes its historical collection experience and current economic trends. If the historical data the Company uses to calculate the allowance for doubtful accounts does not reflect the future ability to collect outstanding receivables, additional provisions for doubtful accounts may be needed and the future results of operations could be materially affected. As of December 31, 2008, the allowance for doubtful accounts was $10,067.  As of December 31, 2007 the allowance for doubtful accounts was $1,005.
 
Cash and cash equivalents
 
For purposes of the statement of cash flows, the Company considers all highly liquid investments with a maturity of three months or less to be cash equivalents.  There were no cash equivalents as of December 31, 2008 and 2007.
 
Fair value of financial instruments
 
All financial instruments are carried at amounts that approximate estimated fair value.
 
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.
 
Property and Equipment
 
Property and equipment are stated at cost.  Maintenance and repair costs are expensed as incurred.  Depreciation is calculated on the accelerated and straight-line methods over the estimated useful lives of the assets. Estimated useful lives of five to ten years are used for machinery and equipment, office equipment and furniture, and automobile. Estimated useful lives of up to five years are used for computer equipment and related software. Depreciation and amortization of leasehold improvements are computed using the term of the lease.
 
Intangible Assets
 
Intangible assets are carried at the purchased cost less accumulated amortization. Amortization is computed over the estimated useful lives of the respective assets, generally from fifteen to twenty years.
 
 
F-10
 

 
 
 

Z Trim Holdings, Inc. and Subsidiaries
Notes To Consolidated Financial Statements
December 31, 2008
 
NOTE 3 –SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
Impairment of Long-Lived Assets
 
Long-lived assets and certain identifiable intangible assets to be held and used are reviewed for impairment whenever events or changes in circumstance indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. Measurement of an impairment loss for long-lived assets and certain identifiable intangible assets that management expects to hold and use is based on the fair value of the asset. Long-lived assets and certain identifiable intangible assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell.
 
Income Taxes
 
The Company and its subsidiaries are included in the consolidated federal income tax return filed by the Parent.  The amount of current and deferred taxes payable or refundable is recognized as of the date of the financial statements, utilizing currently enacted tax laws and rates.  Deferred tax expenses or benefits are recognized in the financial statements for the changes in deferred tax liabilities or assets between years.
 
Advertising Costs
 
The Company expenses all advertising costs as incurred.  The amount for 2008 was $55,981.  The amount for 2007 was $465,713.
 
Income (Loss) Per Common Share
 
 
Basic net income (loss) per share includes no dilution and is computed by dividing net income (loss) available to common stockholders by the weighted average number of common stock outstanding for the period. Diluted earnings per share is computed by dividing net income by the weighted average number of shares outstanding and, when diluted, potential shares from options and warrants to purchase common stock using the treasury stock method. Diluted net loss per common share does not differ from basic net loss per common share since potential shares of common stock are anti-dilutive for all periods presented.
 
 
Cashless Exercise of Warrants
 
 
The Company has issued warrants to purchase common stock where the holder is entitled to exercise the warrant via a cashless exercise, 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
 
Effective January 1, 2006, the Company adopted the fair value recognition provisions of FASB Statement No. 123(R), “Share-Based Payment” (SFAS 123R), using the modified-prospective-transition method. Under that transition method, compensation cost recognized in 2006 includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006 based on the grant date fair value calculated in accordance with the original provisions of SFAS 123, and (b) compensation cost for all share-based payments granted subsequent to December 31, 2005, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123(R).
 
As a result of adopting SFAS 123(R) on January 1, 2006, the Company recognized pre-tax compensation expense related to stock options of $266,214 and $3,487,579 for years ended December 31, 2008 and 2007, respectively.  The 2007 stock option expense includes an additional charge of $1,731,545 from the modification of 13,791,773 out-of-money options.  Of these options, 345,000 were granted a two year extension, 45,000 of these options were modified for an increase of $2.70 to the exercise price, 310,000 were re-issued and granted a one year extension not to exceed an exercise date of August 20, 2010 and 13,091,773 were granted a one year extension not to exceed an exercise date of August 20, 2010.

 Reclassifications
 
In 2007, certain prior period items had been reclassified from operating expenses to cost of goods sold in order to correct an error. This reclassification affected neither the net loss nor the accumulated deficit of the Company.  Specifically, manufacturing overhead costs in the amount of $1,183,724 were previously combined with selling, general and administrative expenses in 2006.  Manufacturing overhead costs were reclassified as products expense in the cost of revenues for the years ended December 31, 2007 and 2006.
 
F-11



Z Trim Holdings, Inc. and Subsidiaries
Notes To Consolidated Financial Statements
December 31, 2008

 
NOTE 3 –SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
On August 6, 2008, in connection with the United States Securities and Exchange Commission’s review of our financial statements, we determined that we needed to amend our financial statements for the year end 2007 in order to clarify certain information, be compliant with federal rule and regulations and correct an error relating to an expense recognized in the first quarter of 2007 that should have been incurred in the fourth quarter of 2004. Specifically, the Company’s recognition of expense of $2,182,175 relating to the release of restrictions on shares of stock on March 9, 2007 was incorrect.  The Company has restated the transaction to fully recognize the expense when the shares of stock were issued, in the fourth quarter of 2004.  As a result, the investor relation expense of $2,182,175 that was recognized in the first quarter of 2007 has been removed against additional paid in capital.  Further, as a result of the recognition of expense as of the fourth quarter 2004, the valuation of the unrecognized stock at fourth quarter of 2004 was $1,170,000 less than the valuation in the first quarter of 2007. This results in an increase in investor relations expense in 2004 of $1,012,175 and a reduction in retained earnings in 2004 of $1,012,175, with a corresponding reduction in retained earnings for all periods thereafter.  For the year ended December 31, 2007, the net result was an increase to retained earnings of $1,170,000.  Further, the net loss per share for the year ending December 31, 2007 was reduced from $0.21 per share to $0.18 per share.
 
Reverse Split
 
 
Effective February 6, 2009, we had a 30 to 1 reverse stock split.  All information in this Form 10-K has been retrospectively adjusted to reflect the reverse stock split as it took place as of the earliest period presented.
 
New Accounting Pronouncements
 
In May 2007, the FASB issued FASB Staff Position No. FIN 48-1 (“FSP 48-1”), Definition of Settlement in FASB Interpretation No. 48.  FSP 48-1 amended FIN 48 to provide guidance on how an enterprise should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits.  FSP 48-1 required application upon the initial adoption of FIN 48.  The adoption of FSP 48-1 did not affect the Company’s consolidated financial statements.
 
 
In February 2007, the Financial Accounting Standards Board (“FASB”) issued Financial Accounting Standards (“FAS”) No. 159, The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115, which permits entities to choose to measure many financial instruments and certain other items at fair value at specified election dates. A business entity is required to report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. This statement is expected to expand the use of fair value measurement. FAS No.159 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is currently evaluating the impact of this standard.
 
 
In September 2006, the FASB issued FAS No. 157, Fair Value Measurements. FAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This statement addresses how to calculate fair value measurements required or permitted under other accounting pronouncements. Accordingly, this statement does not require any new fair value measurements. However, for some entities, the application of the statement will change current practice. FAS No. 157 is effective for the Company beginning January 1, 2008. The Company is currently evaluating the impact of this standard.
 
 
In December 2007, the FASB issued SFAS No. 141 (R), Business Combinations, and SFAS No. 160, Non-controlling Interests in Consolidated Financial Statements.  SFAS N. 141 (R) requires an acquirer to measure the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree at their fair values on the acquisition date, with goodwill being the excess value over the net identifiable assets acquired.  SFAS No. 160 clarifies that a non-controlling interest in a subsidiary should be reported as equity in the consolidated financial statements.  The calculation of earnings per share will continue to be based on income amounts attributable to the parent.  SFAS No. 141 (R) and SFAS No. 160 are effective for financial statements issued for fiscal years beginning after December 15, 2008.  Early adoption is prohibited.  We have not yet determined the effect on our consolidated financial statements, if any, upon adoption of SFAS No. 141 (R) or SFAS No. 160.
 
EITF 07-5, “Determining Whether an Instrument (or imbedded Feature) Is Indexed to an Entity’s Own Stock” will become effective for the Company on March 31, 2009.  The Company’s warrants and its Convertible 8% Senior Secured Notes issued in 2008 have reset provisions to the exercise price and conversion price if the Company issues equity or other derivatives at a price less than the exercise price set forth in such warrants and notes. Upon the effective date, the provisions of this EITF will require a reclassification to liability based on the reset feature of the warrant agreements if the Company sells equity or derivatives at a price below the exercise price of the warrants or notes.
 
F-12
 



Z Trim Holdings, Inc. and Subsidiaries
Notes To Consolidated Financial Statements
December 31, 2008

NOTE 4 – INVENTORY
 
 
At December 31, inventory consists of the following:
 

 
12/31/2008
  
12/31/2007
Raw materials
 $      35,471
  
 $      30,402
Packaging
            1,114
  
         67,422
Work-in-process
            1,879
  
            4,850
Finished goods
       133,649
  
       489,992
Other Inventory
         10,858
  
                   -
  Total inventory
 $    182,971
  
 $    592,666
       
       
       

 
 NOTE 5 – PROPERTY AND EQUIPMENT, NET
 
At December 31, property and equipment, net consists of the following:
 

 
12/31/2008
  
12/31/2007
Production, engineering and other equipment
$5,301,635
  
$5,213,084
Leasehold improvements
$2,801,053
  
$2,798,971
Office equipment and furniture
$598,860
  
$591,384
Computer equipment and related software
$140,245
  
$185,603
Construction in process - Equipment
$53,361
  
$62,701
Construction in process - Leasehold Impr
$18,855
  
$2,159
 
$8,914,009
  
$8,853,902
Accumulated depreciation
($4,852,573)
  
($3,863,716)
Property and equipment, net
$4,061,436
  
$4,990,186
 
 
Depreciation expense was $1,029,568 and $992,362 for the years ended December 31, 2008 and 2007, respectively.
 
 
As of December 31,2008 the company has prepaid $240,000 for a double drum dryer which was installed in 2009.
 
NOTE 6 – INTANGIBLE ASSETS
 
 
During 2008, no significant intangible assets were acquired and the license rights were impaired as management deemed no future economic benefit and wrote off $136,668.
 
 
At December 31, 2008, intangible assets, net, consist of the following:
 

License Rights to
        
 Website
  
2008
  
2007
         
Gross Carrying Amount
  
 $      200,000
  
 $         200,000
         
Accumulated Amortization
  
 $    (200,000)
  
    $          (59,999)
         
Net
  
$                -
  
 $         140,001
         

Amortization of intangibles was $3,333 and $13,333 for the years ended December 31, 2008 and 2007, respectively.
 
A reduction of intangible assets in the amount of $136,668 was taken in the 1st quarter of 2008.
F-13
 

 
 
 


Z Trim Holdings, Inc. and Subsidiaries
Notes To Consolidated Financial Statements
December 31, 2008
 
NOTE 7 – ACCRUED EXPENSES
 
At December 31, accrued expenses consist of the following:
 

 
12/31/2008
  
12/31/2007
Accrued legal
 $                     -
  
 $      458,145
Accrued payroll and taxes
                31,795
  
           66,102
Accrued settlements
              100,000
  
      1,327,873
Accrued Interest
              124,090
  
                   -
Accrued expenses and other
                79,873
  
         187,188
Total accrued expenses & other
 $           335,718
  
 $   2,039,308

 
NOTE 8–CONVERTIBLE NOTES/ PRIVATE PLACEMENTS
 
 
Private Placement Offerings
 
 
On June 18, 2008, the Company issued 8% Convertible Senior Secured Notes in the aggregate principal amount of $1,400,000 (“Notes”).  Interest is accrued quarterly in registered shares of common stock of the Company at $7.80 per share.  Upon the event of a default, the stated interest rate of the Notes will be increased to 18% per annum. The Notes mature in two years from date of issuance.  The Notes and accrued interest are payable in full at maturity.  All amounts due under the Notes may be converted at any time, in part or in whole, at the written election of the holder thereof, into shares of the Company’s common stock at a conversion price of $7.80 per share.  The Notes are secured by a first priority perfected interest in all the assets of the Company.
 
 
Each $100,000 principal amount of Notes is convertible, at the option of the holders, into 12,821 shares of the Company’s common stock.  Holders of each $100,000 principal amount of Notes received two five-year warrants, one to purchase 7,692 shares of Common Stock with an exercise price of $0.30 per share (the “$0.30 Warrants”), and the other to purchase 5,128 shares of Common Stock with an exercise price of $7.80 per share (the “$7.80 Warrants” and, together with the $0.30 Warrants, collectively the “Warrants”).  The total warrants issued were 179,487 with a fair value of $1,288,447.  Proceeds from the Notes have been allocated to Convertible Notes Payable and Additional Paid-In Capital based upon the fair value of these financial instruments in accordance with Accounting Principles Board Opinion No. 14, “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants.” The Notes have a beneficial conversion feature, which have a value of $670,955, as defined by Emerging Issues Task Force Issue No. 98-5, “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios.”  The warrants value and the beneficial conversion value are discounted against the Notes and are being amortized as interest expense using the effective interest method over the term of the Notes.  The warrant and beneficial conversion feature exceeded the face value of the note and the total amortization as of September 18, 2008 (effective date of reset provision) is $125,402.
 
 
The terms of the Notes require redemption in cash at 115% of face value upon certain defaults that are indexed to risks other than interest or credit risk.  The put feature should be separately accounted for as a derivative under FASB Statement No. 133 (SFAS 133), “Accounting for Derivative Instruments and Hedging Activities.” The Company’s assessment of the value of the put feature is de minimus, as the events triggering a put feature are in the control of the Company.
 
 
In connection with the issuance of the Notes and Warrants, the Company incurred $1,094,507 of issuance costs, which primarily consisted of investment banker fees in cash and warrants and legal and other professional fees.  The costs have been allocated to the Warrants and Notes based upon the fair value of these financial instruments.  The costs allocated to the warrants totaled $350,242 and the costs allocated to the Notes totaled $744,265. The total costs allocated to the notes are being amortized as interest expense using the effective interest method over the term of the Notes. The total amortization of deferred loan costs as of September 18, 2008 (effective date of reset provision) is $81,229.
 
F-14
 

 
 
 


Z Trim Holdings, Inc. and Subsidiaries
Notes To Consolidated Financial Statements
December 31, 2008
 
NOTE 8–CONVERTIBLE NOTES/ PRIVATE PLACEMENTS (CONTINUED)
 
The Notes were sold to an “accredited investor” within the meaning of Rule 501 under the Securities Act of 1933, as amended (the “Securities Act”), in reliance upon the private placement exemption afforded by Section 4(2) of the Securities Act and of Regulation D promulgated under the Act.  In connection with the issuance of the Notes, the Company entered into registration rights agreements and has agreed to file with the Securities and Exchange Commission a registration statement covering the resale of the Common Stock underlying the Notes and the Warrants.
 
On September 2, 2008, the Company entered into private placement subscription agreements pursuant to which we sold 23.7 units consisting of convertible notes and warrants, for an aggregate offering price of $2,370,000.  Each of the units (individually, a “Unit” and collectively, the “Units”) consists of a $100,000 24-month senior secured promissory note (each a “Note” and collectively the “Notes”) convertible at the rate of $7.80 per share into 12,821 shares of our common stock, $.00005 par value (the “Common Stock”), bearing interest at the rate of 8% per annum, which interest is accrued quarterly in Common Stock at the rate of $7.80 per share.  Investors of each Unit also received two five-year warrants, one to purchase 7,692 shares of Common Stock with an exercise price of $0.30 per share (the “$0.30 Warrants”), and the other to purchase 5,128 shares of Common Stock with an exercise price of $7.80 per share (the “$7.80 Warrants” and, together with the $0.30 Warrants, collectively the “Warrants”).  The Notes and accrued interest are payable in full at maturity.  We also entered into registration rights agreements in connection with the private placement pursuant to which we have agreed to file with the Securities and Exchange Commission a registration statement covering the resale of the Common Stock underlying the Notes and the Warrants.  The total warrants issued were 303,846 with a fair value of $1,295,208.  Proceeds from the Notes have been allocated to Convertible Notes Payable and Additional Paid-In Capital based upon the fair value of these financial instruments in accordance with Accounting Principles Board Opinion No. 14, “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants.” The Notes were evaluated and did not have a beneficial conversion feature, as defined by Emerging Issues Task Force Issue No. 98-5, “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios.”  The warrants value and the beneficial conversion value are discounted against the Notes and are being amortized as interest expense using the effective interest method over the term of the Notes. The warrant and beneficial conversion feature value totaled $1,295,208 and the total amortization as of September 18, 2008 (effective date of reset provision) is $0.

In connection with the issuance of the Notes and Warrants, the Company incurred $645,328 of issuance costs, which primarily consisted of investment banker fees in cash and warrants and legal and other professional fees.  The costs have been allocated to the Warrants and Notes based upon the fair value of these financial instruments.  The costs allocated to the warrants totaled $206,505 and the costs allocated to the Notes totaled $438,823. The total costs allocated to the notes are being amortized as interest expense using the effective interest method over the term of the Notes. The total amortization of deferred loan costs as of September 18, 2008 (effective date of reset provision) is $0.
 
On November 12, 2008, we entered into private placement subscription agreements pursuant to which we sold 6.87 units consisting of convertible notes and warrants, for an aggregate offering price of $687,000.  Each of the units (individually, a “Unit” and collectively, the “Units”) consists of a $100,000 24-month senior secured promissory note (each a “Note” and collectively the “Notes”) convertible at the rate of $4.80 per share into 208,333 shares of our common stock, $.00005 par value (the “Common Stock”), bearing interest at the rate of 8% per annum, which interest is accrued in Common Stock at the rate of $4.80 per share.  The notes are convertible into a total of 143,125 shares of Common Stock.  Investors of each Unit also received two five-year warrants, one to purchase 7,692 shares of Common Stock per unit with an exercise price of $0.30 per share (the “$0.30 Warrants”), and the other to purchase 5,128 shares of Common Stock per unit with an exercise price of $4.80 per share (the “$4.80 Warrants” and, together with the $0.30 Warrants, collectively the “Warrants”).  The total warrants issued to the note-holders were 88,077.  Proceeds from the Notes have been allocated to Convertible Notes Payable and Additional Paid-In Capital based upon the fair value of these financial instruments in accordance with Accounting Principles Board Opinion No. 14, “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants.” The Notes were evaluated and did not have a beneficial conversion feature, as defined by Emerging Issues Task Force Issue No. 98-5, “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios.”  The warrants value and the beneficial conversion value are discounted against the Notes and are being amortized as interest expense using the effective interest method over the term of the Notes. The warrant and beneficial conversion feature value totaled $160,131 and the total amortization as of December 31, 2008 is $6,672.  We also entered into registration rights agreements in connection with the private placement pursuant to which we have agreed to file with the Securities and Exchange Commission a registration statement covering the resale of the Common Stock underlying the Notes and the Warrants.
 
In connection with the issuance of the Notes and Warrants, the Company incurred $162,832 of issuance costs, which primarily consisted of investment banker fees in cash and warrants and legal and other professional fees.  The costs have been allocated to the Warrants and Notes based upon the fair value of these financial instruments.  The costs allocated to the warrants totaled $52,106 and the costs allocated to the Notes totaled $110,726. The total costs allocated to the notes are being amortized as interest expense using the effective interest method over the term of the Notes.
 
As a result of the conversion rate being set at $4.80 for these agreements, the conversion rate for the convertible notes and $7.80 warrants entered into by the company in June and September of 2008 are automatically reset to $0.16.  The impact of this change on the June and September notes, increases the number of shares obtained from conversion from 483,333 to 785,417, decreases deferred loan costs from $1,739,835 to $1,351,616 and decreases the total warrant and beneficial conversion feature value from 2,695,208 to 1,962,251.  As of December 31, 2008, total amortization of the deferred loan costs is $195,432 and total amortization of the debt discount for the June and September notes is $343,848.

The Company also reduced the conversion rate of the placement fee warrants granted to JP Turner resulting in a deemed dividend of $74,863 consistent with EITF 98-5.  The deemed dividend was valued using the Black Scholes model immediately before and after the reduction consistent with paragraph 51 of SFAS 123R.
 
F-15



Z Trim Holdings, Inc. and Subsidiaries
Notes To Consolidated Financial Statements
December 31, 2008
 
We determined that all of the securities sold and issued in the private placement were exempt from registration under the Securities Act of 1933, as amended (the “Act”) pursuant to Section 4(2) of the Act and Rule 506 of Regulation D promulgated under the Act. We based this determination on the non-public manner in which we offered the securities and on the representations of the persons purchasing such securities, which included, in pertinent part, that such persons were "accredited investors" within the meaning of Rule 501 of Regulation D promulgated under the Act, and that such persons were acquiring such securities for investment purposes for their own respective accounts and not as nominees or agents, and not with a view to resale or distribution, and that each such person understood such securities may not be sold or otherwise disposed of without registration under the Act or an applicable exemption therefrom.  In connection with the issuance of the Notes, the Company entered into registration rights agreements and has agreed to file with the Securities and Exchange Commission a registration statement covering the resale of the Common Stock underlying the Notes and the Warrants.

On February 2, 2007, the Company entered into an agreement with J.P. Turner & Company, L.L.C. to sell shares of the Company’s common stock, par value $0.00005 per share (“Common Stock”), and warrants exercisable for Common Stock (the “Warrants”).  The purchase price was $30.00 per share, which was greater than 70% of the volume weighted average price of the Company’s common stock for the 90 days from the day prior to the closing date, which was March 29, 2007.  The investors also received a 25% stock warrant at an exercise price equal to 120% of the purchase price.  The Warrants have a term of 5 years.
 
The offering closed on March 29, 2007.  In the aggregate the Company sold 266,666 shares of its common stock and 66,666 warrants.  J.P. Turner & Company, L.L.C received a placement fee of 10% of the gross proceeds and 15% warrant coverage with an exercise price equal to the purchase price.  The Company received $6,958,000 in proceeds, which is net of offering costs and commissions of $1,042,000.

Pursuant to the registration rights agreements, we are required to file a registration statement within 60 days of the final sale of the units.  Once filed, we have 120 days to have the registration declared effective or we will be required to pay a penalty of 1.5% of the total proceeds for each 30 day period of non-compliance.

In March 2008 we filed an S-3 registration statement within the time necessary to be in compliance with our outstanding registration rights agreements and responded to all SEC comments in a timely manner. The statement has yet to be declared effective.  We are currently not eligible to file a registration statement due to our late filing of our second quarter 10Q in 2008.  Pursuant to Section 2(a) of our registration rights agreements we will now have an obligation to submit registration statements within 10 days of becoming eligible.  Pursuant to EITF 00-19-2 we have not accrued penalties associated with the registration rights agreement as management has determined that a loss is not probable.
 
In May 2007, the Company conducted a self-underwritten offering of the Company’s common stock.  The stock was sold for $100,000 per unit.  Each unit consisted of 3,333 shares of common stock and 833 warrants.  The warrants are exercisable at $36.00 per share and expire in five (5) years after purchase of the above-described unit.  The Company sold and issued 29,333 shares and received proceeds of $880,000 under the offering.  The Company has received a stock subscription for 5,000 shares of its common stock and 1,250 warrants under the offering.
 
NOTE 9 – STOCKHOLDERS' EQUITY
 
Release of Common Stock Stop Order
 
On November 22, 2004, the Company entered into a two-year engagement with David Shemesh and Mordechai Tobian for investor relations services in consideration of 75,000 shares of restricted common stock of the Company (the "Shemesh/Tobian Shares") and a warrant to purchase 9,166 shares of restricted common stock at $24.00 per share through November 21, 2007.
 
Based on a closing price of the Company's common stock of $23.70 on November 22, 2004, the Company recorded paid-in-capital of $1,777,500 as of that date and began to recognize investor relation expenses on a quarterly basis over the life of the two-year contract.
 
On August 24, 2005, the Company took the position that Shemesh and Tobian had failed to perform as agreed and the Company purported to rescind the contract. Simultaneously, the Company placed a stop order on the Shemesh/Tobian Shares. Through that date, the Company had recognized $765,325 of expense relating to the contract. Accordingly, at September 30, 2005 the Company wrote off the remaining $1,012,175 against paid-in-capital.
 
Shemesh and Tobian disputed the Company's basis for rescinding the contract and because they were referred to the Company by Farhad Zaghi, the Company's purported rescission became an issue in the Company's ongoing litigation with Zaghi and his affiliates. In order to eliminate one of the issues of contention between the parties and facilitate further settlement negotiations, on March 9, 2007, the Company released the stop order on the Shemesh/Tobian Shares and allowed the shares to be traded.  The Company recognized an expense to investor relations of $2,182,175, based on the closing price on March 9, 2007.
 
On August 6, 2008, in connection with the United States Securities and Exchange Commission’s review of our financial statements, we determined that we needed to amend our financial statements for the year end 2007 in order to clarify certain information, be compliant with federal rule and regulations and correct an error relating to an expense recognized in the first quarter of 2007 that should have been incurred in the fourth quarter of 2004. Specifically, the Company’s recognition of expense of $2,182,175 relating to the release of restrictions on shares of stock on March 9, 2007 was incorrect.  The Company has restated the transaction to fully recognize the expense when the shares of stock were issued, in the fourth quarter of 2004.  As a result, the investor relation expense of $2,182,175 that was recognized in the first quarter of 2007 has been removed against additional paid in capital.  Further, as a result of
the recognition of expense as of the fourth quarter 2004, the valuation of the unrecognized stock at fourth quarter of 2004 was $1,170,000 less than the valuation in the first quarter of 2007. This results in an increase in investor relations expense in 2004 of $1,012,175 and a reduction in retained earnings in 2004 of $1,012,175, with a corresponding reduction in retained earnings for all periods thereafter.  For the year ended December 31, 2007, the net result was an increase to retained earnings of $1,170,000.  Further, the net loss per share for the year ending December 31, 2007 was reduced from $6.30 per share to $5.40 per share.
 
Common Stock Issued for Settlement
 
 
During 2008, the Company issued 208,167 shares of common stock pursuant to three settlement agreements, more fully described in Note 12 herein.  During 2007, the Company issued 9,500 shares of common stock valued at $29,513 pursuant to settlement agreements.  In 2008, 9,166 of those shares were rescinded.
                                                                            
F-16




Z Trim Holdings, Inc. and Subsidiaries
Notes To Consolidated Financial Statements
December 31, 2008

 
 
 
Director’s Grant of Equity
 
 
On January 3, 2008, the Board of Directors approved a compensation plan that includes a grant of 6,666.67 shares of common stock to each of the five external directors.  A tax gross up of up to 35% will be included, not to exceed $10,000.  These shares were issued on May 15, 2008.  The fair market value of the stock on May 15, 2008 was $.23 or $6.90 on a post-reverse split basis, which results in a total cost of $230,000 for the shares granted.  No additional or bonus shares were granted to any Director.
 
 
Rescinded/Retired Shares of Common Stock
 
 
During 2008, the Company rescinded 34,666 shares of common stock, relating to the return of stock received by virtue of the exercise of stock options by the Company’s former CEO, Greg Halpern and 10,833 shares were retired relating to Wexler, Willow Cove, and David Dabney.  As of December 31, 2008, a total of 45,500 shares were rescinded and/or retired. During 2007, the Company retired 4,167 shares of common stock.
 
 
Common Stock Issued for Cash/Services
 
 
In 2008, the Company did not issue any shares for common stock other than to Directors as described above.  In 2007, the Company issued 205 shares of common stock for services rendered totaling $6,765 and 296,000 shares of common stock for cash, net fees of $7,838,000.
 
 
NOTE 10 – NET LOSS PER SHARE
 
The computation of basic and diluted net loss per share is as follows:
   
Year Ended
  
                      Year Ended
   
December 31
  
                      December 31
   
2008
  
2007
Numerator:
        
Net Loss From Continuing Operations
  
 $ (7,416,927)
  
 $ (12,799,699)
Deemed  Dividend/ Income from discontinuing operations
  
 $      (74,863)
  
 $         14,846
Net Loss  Attributable to Common Stockholders
  
 $ (7,491,790)
  
 $ (12,784,853)
Denominator:
        
         
Weighted average number of shares outstanding
  
      2,540,032
  
       2,348,474
         
Net loss per share from continuing operations- basic and diluted
  
 $          (2.92)
  
 $            (5.45)
Income per share from discontinued operations - basic and diluted
  
 $          (0.03)
  
 $             0.01
Net loss per share-basic and diluted
  
 $          (2.95)
  
 $            (5.44)
 
As the Company incurred net losses for the year ended December 31, 2008 and 2007, the effect of dilutive securities totaling 210,382 and 100,220 equivalent shares, respectively, has been excluded from the calculation of diluted loss per share because the effect was anti-dilutive.
 
F-17
 
 

 


Z Trim Holdings, Inc. and Subsidiaries
Notes To Consolidated Financial Statements
December 31, 2008
 
 
NOTE 11 – STOCK OPTION PLAN AND WARRANTS
 
Exercising of Stock Warrants and Options
 
During 2008, no stock warrants or options were exercised.
 
 
During 2007, 33,805 stock warrants and options were exercised.  The Company received total proceeds of $872,231.  The 2007 warrants exercised are net of 29,333 shares rescinded by the Board of Directors on April 30, 2007.
 
 
On August 20, 2007, the Board cancelled all outstanding options held by the former CEO Gregory J. Halpern and his family.  This resulted in the cancellation of 115,422 options.
 
 
Common Stock Issued on the Cashless Exercise of Warrants
 
 
No common stock was issued on the cashless exercise of warrants in 2008.  In February 2007 the Company issued 386 shares of common stock on the cashless exercise of warrants.
 
 
Stock Option Plan
 
 
The Company has a Stock Option Plan (the Plan) effective January 2, 1999 and amended in 2002 and 2004, which provides for the issuance of qualified options to all employees and non-qualified options to directors, consultants and other service providers.
 

   
2008
    
2007
  
     
Weghted
    
Weghted
   
Number
Average
  
Number
Average
   
of
Exercise
  
of
Exercise
   
Shares
Price
  
Shares
Price
Outstanding at beginning of year
  
        553,184
 $         31.20
  
676,192
 $         29.70
Granted
  
            3,333
 $           8.10
  
84,400
 $         35.70
Exercised
  
                    -
$               -
  
(15,111)
 $         23.10
Expired and Cancelled
  
      (125,435)
 $         27.71
  
(192,297)
 $         28.80
Outstanding at end of period
  
        431,082
 $         32.04
  
   553,184
 $         31.20
             
Exercisable at end of period
  
        429,415
 $         32.13
  
542,351
 $         29.40


F-18
 

Z Trim Holdings, Inc. and Subsidiaries
Notes To Consolidated Financial Statements
December 31, 2008
 
At December 31, 2008, the aggregate intrinsic value of all outstanding options was $0 with a weighted average remaining contractual term of 1.2 years, of which 429,415 of the outstanding options are currently exercisable with an aggregate intrinsic value of $0, a weighted average exercise price of $32.13 and a weighted average remaining contractual term of 1.2 years.  The total intrinsic value of options exercised during the year ended December 31, 2008 was $0.
 
 
The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option valuation model.  This model uses the assumptions listed in the table below.  Expected volatilities are based on the historical volatility of the Company’s stock.  The risk-free rate for periods within the expected life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.
 

 
2008
  
2007
Weighted average fair value per option granted
               $ 0.90
  
 $ 9.60
Risk-free interest rate
            3 - 4.6 %
  
3.07%
Expected dividend yield
                 0.00%
  
0.00%
Expected lives
                1 - 1.5
  
     3.00
Expected volatility
 86.32 - 130.22%
  
90.72%
 
At December 31, 2008, the Company recognized $30,637 in stock based compensation related to options granted in 2007 and vested in 2008.  On June 19, 2008, the Company granted 3,333 options to an employee.  25% of the options vested at the grant date.  The remaining 75% vest 25% every three months with the options becoming fully vested March 19, 2009.  At December 31, 2008, the Company recognized a total of $40,613 in stock based compensation.
 
 
During 2008, the Company issued a total of 33,333 shares of common stock under the Plan to its five external Directors.  As of December 31, 2008, the Company had reserved 20.0 million shares of Common Stock to be issued upon the exercise of qualified options issued under the Plan.  As of December 31, 2008, the Company had 6,117,536 million options available for grant under the Plan.
 
Stock options outstanding at December 31, 2008 are as follows:
 
       
Weighted
        
       
Average
  
Weighted
    
Range of
      
Remaining
  
Average
    
Exercise
  
Options
  
Contractual
  
Exercise
  
Options
Prices
  
Outstanding
  
Life
  
Price
  
Exercisable
 $0.30-$45.00
  
               414,582
  
               1.2
  
 $     30.60
  
               412,915
 $45.3-$90.00
  
                 16,500
  
               1.2
  
 $     70.50
  
                 16,500
   
               431,082
  
               1.2
  
 $     32.10
  
               429,415


As of December 31, 2008 and 2007, the Company has warrants outstanding to purchase 1,001,035 and 236,307 shares of the Company’s common stock, respectively, at prices ranging from $0.01 to $36.00 per share.  These warrants expire at various dates through November 2013.   There were 764,727 and 114,000 warrants issued in 2008 and 2007 respectively.  Included in the numbers for 2008, were 103,750 warrants issued pursuant to settlement agreements as set forth in more detail in Note 12 below, as well as 223,281 warrants issued to our placement agent as a result of our private placement as set forth in Note 8 above.
 
F-19

 
 
 
 
Z Trim Holdings, Inc. and Subsidiaries
Notes To Consolidated Financial Statements
December 31, 2008
 
NOTE 12 – SETTLEMENT LOSSES
 
In April 2007, the Company and two former investor relations consultants entered into revised settlement agreements to replace and rescind the original settlement agreements signed in October 2006.  As a result, an additional 333 shares of the Company’s common stock at a fair value of $29,500 were issued and recorded.  On April 1, 2007, 9,166 shares were issued in excess of the revised agreement and will be cancelled pending regulatory approval from the American Stock Exchange.
 
In July 2007, the Company paid court awarded costs of $3,608 in a patent infringement suit that was dismissed owing to a technicality.

On November 19, 2007, the Company settled a dispute with Basic Investors, Inc. and agreed to issue 12,500 warrants with a fair value of $87,324.
 
The Company executed an agreement with Farhad Zaghi on February 8, 2008.  Pursuant to the agreement, 100,000 shares of the Company’s common stock were issued at a fair value of $840,000 and 83,333 warrants are to be issued with a fair value of $400,549 as of March 31, 2008.  These losses were record in 2007, as the shares and warrants were originally issued in 2007.
 
 
In April 2008, the Company settled a case with a former employee, Daniel Caravette.  The Company agreed to pay $50,000 cash, and to provide 8,166 shares of unrestricted common stock with a fair value of $63,700 and 6,666 three-year warrants at a strike price of $7.80, with a fair value of $33,326, in exchange for a release of all claims.
 
On September 2, 2008, the Company announced an update with respect to its ongoing litigation with George Foreman Enterprises.  The parties have settled all outstanding litigation on amicable terms.  Pursuant to the Agreement, both Parties are obligated to dismiss with prejudice all existing claims between them, in both the Federal and State courts after Z-Trim satisfies all of its obligations in the Agreement.  Z Trim is obligated to pay to George Foreman Enterprises a total sum of $300,000 with $150,000 payable on September 3, 2008, and three additional payments of $50,000 each on January 1, 2009, February 1, 2009 and March 1, 2009, respectively.  Z Trim has further agreed to issue to George Foreman Enterprises a total of 100,000 shares of the Company's common stock with a fair value of $480,000 and to register such shares on a best efforts basis.  All other obligations between the parties have been mutually resolved and neither party has admitted wrong-doing or liability of any kind.  As of December 31, 2008, the remaining liability of $100,000 is recorded in accrued expenses.
 
 
The amount of the settlement losses for the twelve months ended December 31, 2008 was $772,202 for the three afore-mentioned agreements.  The amount of settlement losses for the twelve months ended December 31, 2007 was $1,357,373 in stock and warrants, and $3,608 in cash, for a total of $1,360,981,
 
 
 
NOTE 13 – INCOME TAXES
 
 
During 2008 and 2007, the Company incurred net losses, and therefore had no tax liability.  The net deferred tax asset generated by the loss carry forward has been fully reserved.  The cumulative net loss carry forward is approximately $52,613,125 and $45,196,198 for the years ended December 31, 2008 and 2007 respectively, and will expire in the years 2019 through 2028.
 
 
At December 31, 2008, the net deferred tax asset consisted of the following:
 
 
Net Operating Loss                                                                     $17,338,438
 
 
Less:  Valuation allowance                                                        ($17,338,438)
 
 
Net Deferred tax asset                                                                $_____0_____
 
F-20
Z Trim Holdings, Inc. and Subsidiaries
Notes To Consolidated Financial Statements
December 31, 2008
 
NOTE 14 – MAJOR CUSTOMERS AND CONCENTRATIONS
 
The Company’s customers are food manufacturers, school districts and the general public that orders directly over the internet.  There were two significant customers who accounted for 37% and 13% of total sales for the year ended December 31, 2008.  There was no significant customer for the year ended December 31, 2007. There were no outstanding amounts at December 31, 2007.
 
 
The Company maintains cash deposits with major banks, which from time to time may exceed federally insured limits.  At December 31, 2008 and 2007, $492,696 and $2,336,581, 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 15 – COMMITMENTS
 
 
Building Lease
 
 
The Company leases a combined production and office facility located in Mundelein, Illinois.  The facility is approximately 44,000 square feet.  The Company extended the lease until March 2010 and the required monthly rental payments increased to $21,000, exclusive of property taxes.   The Company also is responsible for payment of all property taxes.  Insurance and maintenance are billed when due.  If we were to lose this lease or not be able to extend our lease due to the specific requirements of our Company, the outcome to our operations could be substantial.
 
 
The Company had previously subleased approximately 9,800 square feet of the facility to two tenants.  Both tenants terminated their respective leases in 2008.
 
 
The Company also leases a 5,000 square foot warehouse in Mundelein, Illinois.  The lease commenced on August 1, 2007 and ends January, 2010.  The monthly net rent is $2,834.
 
 
The Company recognizes escalating lease expense on a straight line basis in accordance with FAS 13, Accounting for Leases.
 
 
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
2009
286,415
2010
65,919
2011
-
2012
-
2013
-
 
$ 352,334
 

Employment/ Separation Agreements
 
 
On January 14, 2008, the Company and Alan Orlowsky, the CFO, entered into a Separation and Release Agreement terminating the officer’s employment.  Pursuant to the agreement, Mr. Orlowsky received a lump-sum severance payment equal to six weeks salary and the immediate vesting of 8,333 options not previously vested.  At that time Mr. Orlowsky also resigned from the Board of Directors.
 
 
F-21
 
 
Z Trim Holdings, Inc. and Subsidiaries
Notes To Consolidated Financial Statements
December 31, 2008
 
 
NOTE 16 – PENDING LITIGATION/ CONTINGENT LIABILITY
 
 
On July 7, 2007, the Company was served with a complaint by Joseph Sanfilippo and James Cluck for violation of the Consumer Fraud Act, purportedly due to the Company’s refusal to allow for the exercise of 300,000 stock options.  Management believes that the allegations are frivolous and wholly without merit and will vigorously defend the claim.
 
 
NOTE 17 – GUARANTEES
 
 
The Company from time to time enters into certain types of contracts that contingently require the Company to indemnify parties against third party claims. These contracts primarily relate to: (i) divestiture agreements, under which the Company may provide customary indemnifications to purchasers of the Company’s businesses or assets; (ii) certain real estate leases, under which the Company may be required to indemnify property owners for environmental and other liabilities, and other claims arising from the Company’s use of the applicable premises; and (iii) certain agreements with the Company's officers, directors and employees, under which the Company may be required to indemnify such persons for liabilities arising out of their employment relationship.  The terms of such obligations vary. Generally, a maximum obligation is not explicitly stated. Because the obligated amounts of these types of agreements often are not explicitly stated, the overall maximum amount of the obligations cannot be reasonably estimated. Historically, the Company has not been obligated to make significant payments for these obligations, and no liabilities have been recorded for these obligations on its consolidated balance sheet as of December 31, 2008.
 
 
In general, the Company offers a one-year warranty for most of the products it sold.  To date, the Company has not incurred any material costs associated with these warranties.
 

NOTE 18 – RELATED PARTY TRANSACTIONS
 
As of December 31, 2007 there were employees’ advances of $2,624.  These advances were repaid during 2008.
 
In May 2007, the Board of Directors resolved to rescind a consulting agreement pursuant to which options were issued on October 5, 2006.  The agreement was with the brother of the Vice President.  The related options were exercised for 200,000 shares at $0.75 per share or $150,000 in October 2006.  The Board further resolved to approve the related party to use the proceeds to subscribe the shares pursuant to the Company’s May 2007 self-underwritten offering (see Note 8).  The subscription is pending regulatory approval from the American Stock Exchange.  Common stock and paid in capital were decreased and other liabilities was increased for $150,000.
 
NOTE 19 – SUBSEQUENT EVENTS
 
On February 6, 2009, the Company issued an additional 928,541 warrants with a strike price of $0.01.
 
 
In March of 2009, the Company issued 90,000 shares of common stock under the Plan to its three external Directors.  Also in March of 2009, the Company issued 1,320,000 stock options under the Plan.
 
 
NOTE 20 – RESTATEMENT OF THE YEARS ENDED 2006 AND 2007, AND PERIODS ENDED MARCH 31, JUNE 30 AND SEPTEMBER 30, 2008
 
 
The Company has restated its annual financial statements from amounts previously reported for periods ended December 31, 2006 and 2007.  The Company has determined that there were certain errors in amounts previously reported, due to an error in the computation of depreciation related to leasehold improvements.
 
 
In addition to restating the annual statements, the Company has included restatements of all unaudited quarterly financial statements for the year ended December 31, 2008.  It should be noted that the restated financial statements for the year ended December 31, 2007 have been audited, but that restated financial statements for the year ended December 31, 2006 are unaudited.
 
F-22

 
 
 
Z Trim Holdings, Inc. and Subsidiaries
Notes To Consolidated Financial Statements
December 31, 2008


Z TRIM HOLDINGS, INC. AND SUBSIDIARIES
                      
CONSOLIDATED BALANCE SHEETS
                      
                       
DECEMBER 31  2007  and  2006
                      
                       
ASSETS
                      
                 
Unaudited
    
 
2007
          
2006
        
 
As reported
  
Adjustments
  
As Restated
  
As reported
  
Adjustments
  
As Restated
Current Assets
                      
Cash and cash equivalents
$2,436,581
  
$0
  
$2,436,581
  
$675,043
  
$0
  
$675,043
Accounts receivable (net of allowance of $1,005 in 2007
        
                       -
            
and $0 in 2006)
               7,522
  
0
  
                7,522
  
11,945
  
0
  
11,945
Inventory
          592,666
  
0
  
           592,666
  
204,536
  
0
  
204,536
Prepaid expenses and other assets
          152,597
  
0
  
           152,597
  
94,417
  
0
  
94,417
Net assets of discontinued operations
                  485
  
0
  
                   485
  
32,196
  
0
  
32,196
                       
Total current assets
       3,189,851
  
0
  
        3,189,851
  
1,018,137
  
0
  
1,018,137
                       
Property and equipment, net
       6,221,653
  
(1,231,467)
 (a)
        4,990,186
  
6,262,971
  
(889,757)
 (a)
5,373,214
                       
Other Assets
                      
Intangible assets, net
          140,001
  
0
  
           140,001
  
153,334
  
0
  
153,334
Deposits
            14,453
  
0
  
              14,453
  
11,103
  
0
  
11,103
                       
Total other assets
          154,454
  
0
  
           154,454
  
164,437
  
0
  
164,437
                       
TOTAL ASSETS
$9,565,958
  
($1,231,467)
  
$8,334,491
  
$7,445,545
  
($889,757)
  
$6,555,788
                       
                       
LIABILITIES AND STOCKHOLDERS' EQUITY
                      
                       
Current Liabilities
                      
Accounts payable
$709,029
  
$0
  
$709,029
  
$355,679
  
$0
  
$355,679
Accrued expenses
2,039,308
  
0
  
2,039,308
  
162,500
  
0
  
162,500
Other liabilities
150,000
  
0
  
150,000
  
0
  
0
  
0
Capital lease obligations
0
  
0
  
0
  
14,074
  
0
  
14,074
                       
Total current liabilities
2,898,337
  
0
  
2,898,337
  
532,253
  
0
  
532,253
                       
Stockholders' Equity
                      
Common stock, $0.00005 par value; authorized 200,000,000
                      
shares; issued and outstanding 72,056,375 and
                      
61,984,484 shares, respectively
3,600
  
0
  
3,600
  
3,096
  
0
  
3,096
Additional paid-in capital
69,603,639
  
0
  
69,603,639
  
55,495,659
  
0
  
55,495,659
Unamortized expenses
0
  
0
  
0
  
(113,339)
  
0
  
(113,339)
Accumulated deficit
(62,939,618)
  
(1,231,467)
 (a)
(64,171,085)
  
(48,472,124)
  
(889,757)
 (a)
(49,361,881)
                       
Total stockholders' equity
6,667,621
  
(1,231,467)
  
5,436,154
  
6,913,292
  
(889,757)
  
6,023,535
                       
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$9,565,958
  
($1,231,467)
  
$8,334,491
  
$7,445,545
  
($889,757)
  
$6,555,788
                       
(a) Adjust Leasehold Improvements useful life to correctly state the net value of Fix Assets.
                
 
F-23
 
 
 

Z Trim Holdings, Inc. and Subsidiaries
Notes To Consolidated Financial Statements
December 31, 2008


Z TRIM HOLDINGS, INC. AND SUBSIDIARIES
                      
CONSOLIDATED STATEMENTS OF OPERATIONS
                      
                 
Unaudited
    
FOR THE YEARS ENDED DECEMBER 31
    
2007
      
 
  
 
2006
    
 
As reported
  
Adjustments
  
As Restated
  
As reported
  
Adjustments
  
As Restated
REVENUES:
                      
  Products
$616,799
  
$0
  
$616,799
  
$103,269
      
$103,269
  Services
49
  
0
  
49
  
735
      
735
    Total revenues
616,848
  
0
  
616,848
  
104,004
  
0
  
104,004
                       
COST OF REVENUES:
                      
  Products
2,776,362
  
308,966
 (a)
3,085,328
  
1,788,594
  
280,711
 (a)
2,069,305
    Total cost of revenues
2,776,362
  
308,966
  
3,085,328
  
1,788,594
  
280,711
  
2,069,305
                       
GROSS MARGIN
(2,159,514)
  
(308,966)
  
(2,468,480)
  
(1,684,590)
  
(280,711)
  
(1,965,301)
                       
OPERATING EXPENSES:
                      
Selling, general and administrative
9,330,046
  
32,745
 (a)
9,362,791
  
14,517,659
  
32,743
 (a)
14,550,402
Reduction of intangible assets
0
  
0
  
0
  
341,250
  
0
  
341,250
Amortization of intangible assets
13,333
  
0
  
13,333
  
34,333
  
0
  
34,333
Loss on asset disposals, net
107,905
  
0
  
107,905
  
0
  
0
  
0
    Total operating expenses
9,451,284
  
32,745
  
9,484,029
  
14,893,242
  
32,743
  
14,925,985
                       
OPERATING LOSS
(11,610,798)
  
(341,711)
  
(11,952,509)
  
(16,577,832)
  
(313,454)
  
(16,891,286)
                       
OTHER INCOME (EXPENSES):
                      
Rental and other income
44,105
  
0
  
44,105
  
42,000
  
0
  
42,000
Interest income
173,256
  
0
  
173,256
  
90,873
  
0
  
90,873
Recovery of loan loss
300,000
  
0
  
300,000
  
0
  
0
  
0
Interest expense
(3,570)
  
0
  
(3,570)
  
(14,059)
  
0
  
(14,059)
Settlement (loss) gain
(1,360,981)
  
0
  
(1,360,981)
  
7,500
  
0
  
7,500
    Total other income (expenses)
(847,190)
  
0
  
(847,190)
  
126,314
  
0
  
126,314
                       
LOSS FROM CONTINUING OPERATIONS
(12,457,988)
  
(341,711)
  
(12,799,699)
  
(16,451,518)
  
(313,454)
  
(16,764,972)
                       
DISCONTINUED OPERATIONS
                      
Income from discontinued operations
                      
(net of applicable tax of $0 in 2007 and 2006)
14,846
  
0
  
14,846
  
20,634
  
0
  
20,634
                       
NET LOSS
(12,443,142)
  
(341,711)
  
(12,784,853)
  
(16,430,884)
  
(313,454)
  
(16,744,338)
                       
Net Loss per Share from continuing operations
                      
 - Basic and Diluted
 $            (0.18)
      
 $             (0.18)
  
 $            (0.28)
      
 $            (0.28)
Net Loss per Share - Basic and Diluted
 $            (0.18)
      
 $             (0.18)
  
 $            (0.28)
      
 $            (0.28)
                       
Weighted Average Number of Shares Basic and Diluted
70,454,211
      
70,454,211
  
59,635,899
      
59,635,899
                       
(a) Adjust Leasehold Improvements useful life to correctly state the depreciation expense
                
                       

F-24
 
 

 
 
 
Z Trim Holdings, Inc. and Subsidiaries
Notes To Consolidated Financial Statements
December 31, 2008

CONSOLIDATED BALANCE SHEETS (Unaudited)
            
             
MARCH 31
            
             
             
ASSETS
            
             
   
As reported
  
Adjustments
  
As Restated
   
3/31/2008
  
3/31/2008
  
3/31/2008
Current Assets
            
Cash and cash equivalents
  
 $          996,426
      
 $      996,426
Accounts receivable (net of allowance of $1,005 in 2008
            
and  $1,005 in 2007)
  
                18,080
      
           18,080
Inventory
  
              672,740
      
         672,740
Prepaid expenses and other assets
  
              106,807
      
         106,807
             
Total current assets
  
          1,794,053
  
                     -
  
      1,794,053
             
Property and equipment, net
  
          6,072,324
  
          (87,779)
 (a)
      5,984,545
             
Other Assets
            
Deposits
  
                14,453
      
           14,453
             
Total other assets
  
                14,453
  
                     -
  
           14,453
             
TOTAL ASSETS
  
 $       7,880,830
  
 $      (87,779)
  
 $  7,793,051
             
             
LIABILITIES AND STOCKHOLDERS' EQUITY
            
             
   
Unaudited
        
   
As reported
  
Adjustments
  
As Restated
   
3/31/2008
  
3/31/2008
  
3/31/2008
Current Liabilities
            
Accounts payable
  
 $          893,147
      
 $      893,147
Accrued expenses and other
  
          1,017,562
      
      1,017,562
             
Total current liabilities
  
          1,910,709
  
                     -
  
      1,910,709
TOTAL LIABILITIES
  
          1,910,709
  
                     -
  
      1,910,709
             
Stockholders' Equity
            
Common stock, $0.00005 par value; authorized 200,000,000
            
shares; issued and outstanding 75,056,375 and
            
72,056,375 shares, respectively
  
                  3,753
      
              3,753
Additional paid-in capital
  
        70,792,295
      
   70,792,295
Accumulated deficit
  
      (64,825,927)
  
          (87,779)
 (a)
  (64,913,706)
             
Total stockholders' equity
  
          5,970,121
  
          (87,779)
  
      5,882,342
             
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
  
 $       7,880,830
  
 $      (87,779)
  
 $  7,793,051
             
(a) Adjust Leasehold Improvements useful life to correctly state the net value of Fixed Assets.
    
 
F-25
 
 
 

Z Trim Holdings, Inc. and Subsidiaries
Notes To Consolidated Financial Statements
December 31, 2008

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
            
FOR THE THREE MONTHS ENDED MARCH 31
            
   
As reported
  
Adjustments
  
As Restated
   
2008
  
2008
  
2008
REVENUES:
            
  Products
  
 $             66,444
      
 $        66,444
  Services
  
                         -
      
                     -
    Total revenues
  
                66,444
  
                     -
  
           66,444
             
COST OF REVENUES:
            
  Products
  
              493,705
  
79,409
 (a)
         573,114
    Total cost of revenues
  
              493,705
  
           79,409
  
         573,114
             
GROSS MARGIN
  
            (427,261)
  
          (79,409)
  
       (506,670)
             
OPERATING EXPENSES:
            
Selling, general and administrative
  
          1,318,530
  
8,370
 (a)
   1,326,900
Impairment of intangible assets
  
              136,668
      
      136,668
Amortization of intangible assets
  
                  3,333
      
           3,333
Loss on asset disposals, net
  
              (75,000)
      
       (75,000)
    Total operating expenses
  
          1,383,531
  
              8,370
  
      1,391,901
             
OPERATING LOSS
  
         (1,810,792)
  
          (87,779)
  
    (1,898,571)
             
OTHER INCOME (EXPENSES):
            
Rental and other income
  
                10,863
      
        10,863
Interest income
  
                13,836
      
        13,836
Interest expense
  
                      (35)
      
               (35)
Settlement (loss) gain
  
            (100,180)
      
    (100,180)
    Total other income (expenses)
  
              (75,516)
  
                     -
  
          (75,516)
             
LOSS FROM CONTINUING OPERATIONS
  
 $     (1,886,308)
  
 $      (87,779)
  
 $ (1,974,087)
             
             
NET LOSS
  
 $     (1,886,308)
  
 $      (87,779)
  
 $ (1,974,087)
             
Net Loss per Share from continuing operations
            
 - Basic and Diluted
  
 $                (0.03)
  
 $           (0.00)
  
 $           (0.03)
Net Loss per Share - Basic and Diluted
  
 $                (0.03)
  
 $           (0.00)
  
 $           (0.03)
             
Weighted Average Number of Shares Basic and Diluted
  
        75,056,375
  
   75,056,375
  
   75,056,375
             
(a) Adjust Leasehold Improvements useful life to correctly state the depreciation expense
        
 
F-26
 
 
 
Z Trim Holdings, Inc. and Subsidiaries
Notes To Consolidated Financial Statements
December 31, 2008

CONSOLIDATED BALANCE SHEETS (Unaudited)
            
             
JUNE 30
            
             
ASSETS
            
             
   
As reported
  
Adjustments
  
As Restated
   
6/30/2008
  
6/30/2008
  
6/30/2008
Current Assets
            
Cash and cash equivalents
  
 $          719,591
      
 $          719,591
Accounts receivable (net of allowance of $10,067 in 2008
            
and  $1,005 in 2007)
  
115,168
      
115,168
Inventory
  
              534,212
      
              534,212
Prepaid expenses and other assets
  
              530,723
      
              530,723
             
Total current assets
  
          1,899,694
  
                         -
  
          1,899,694
             
Property and equipment, net
  
          5,909,456
  
            (175,561)
 (a)
          5,733,895
             
Other Assets
            
Deposits
  
                14,453
      
                14,453
             
Total other assets
  
                14,453
  
                         -
  
                14,453
             
TOTAL ASSETS
  
 $       7,823,603
  
 $         (175,561)
  
 $       7,648,042
             
LIABILITIES AND STOCKHOLDERS' EQUITY
            
             
   
Unaudited
        
   
As reported
  
Adjustments
  
As Restated
   
6/30/2008
  
6/30/2008
  
6/30/2008
Current Liabilities
            
Accounts payable
  
 $          994,254
      
 $          994,254
Accrued expenses and other
  
              619,966
      
              619,966
             
Total Current Liabilities
  
          1,614,220
  
                         -
  
          1,614,220
TOTAL LIABILITIES
  
          1,614,220
  
                         -
  
          1,614,220
             
               Notes Payable - Long Term
  
                16,397
      
                16,397
             
Total Liabilities
  
          1,630,617
  
                         -
  
          1,630,617
             
Stockholders' Equity
            
Common stock, $0.00005 par value; authorized 200,000,000
            
shares; issued and outstanding 75,826,375 and
            
72,056,375 shares, respectively
  
                  3,815
      
                  3,815
Additional paid-in capital
  
        72,649,285
      
        72,649,285
Accumulated deficit
  
      (66,460,114)
  
            (175,561)
 (a)
      (66,635,675)
             
Total Stockholders' Equity
  
          6,192,986
  
            (175,561)
  
          6,017,425
             
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
  
 $       7,823,603
  
 $         (175,561)
  
 $       7,648,042
             
(a) Adjust Leasehold Improvements useful life to correctly state the net value of Fixed Assets.
    
 
F-27
 
 
 
Z Trim Holdings, Inc. and Subsidiaries
Notes To Consolidated Financial Statements
December 31, 2008


CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
            
FOR THE SIX MONTHS ENDED JUNE 30
            
   
As reported
  
Adjustments
  
As Restated
   
2008
  
2008
  
2008
REVENUES:
            
  Products
  
 $          238,307
      
 $          238,307
  Services
  
                         -
      
                         -
    Total revenues
  
              238,307
  
                         -
  
              238,307
             
COST OF REVENUES:
            
  Products
  
          1,047,917
  
              158,818
 (a)
          1,206,735
    Total cost of revenues
  
          1,047,917
  
              158,818
  
          1,206,735
             
GROSS MARGIN
  
            (809,610)
  
            (158,818)
  
            (968,428)
             
OPERATING EXPENSES:
            
Selling, general and administrative
  
          2,713,056
  
                16,741
 (a)
          2,729,797
Impairment of intangible assets
  
              136,668
      
              136,668
Amortization of intangible assets
  
                  3,333
      
                  3,333
Loss on asset disposals, net
  
              (74,987)
      
              (74,987)
    Total operating expenses
  
          2,778,070
  
                16,741
  
          2,794,811
             
OPERATING LOSS
  
         (3,587,680)
  
            (175,559)
  
         (3,763,239)
             
OTHER INCOME (EXPENSES):
            
Rental and other income
  
                17,663
      
                17,663
Interest income
  
                15,608
      
                15,608
Interest expense
  
              (23,043)
      
              (23,043)
Settlement (loss) gain
  
                32,891
      
                32,891
    Total other income (expenses)
  
                43,119
  
                         -
  
                43,119
             
LOSS FROM CONTINUING OPERATIONS
  
 $     (3,544,561)
  
 $         (175,559)
  
 $     (3,720,120)
             
NET LOSS
  
 $     (3,544,561)
  
 $         (175,559)
  
 $     (3,720,120)
             
Net Loss per Share from continuing operations
            
 - Basic and Diluted
  
 $                (0.05)
  
 $                (0.00)
  
 $                (0.05)
Net Loss per Share - Basic and Diluted
  
 $                (0.05)
  
 $                (0.00)
  
 $                (0.05)
             
Weighted Average Number of Shares Basic and Diluted
  
        75,804,708
  
        75,804,708
  
        75,804,708
             
(a) Adjust Leasehold Improvements useful life to correctly state the depreciation expense
      
 
F-28
 
 
 
Z Trim Holdings, Inc. and Subsidiaries
Notes To Consolidated Financial Statements
December 31, 2008

CONSOLIDATED BALANCE SHEETS (Unaudited)
            
             
SEPTEMBER 30
            
             
ASSETS
            
             
   
As reported
  
Adjustments
  
As Restated
   
9/30/2008
  
9/30/2008
  
9/30/2008
Current Assets
            
Cash and cash equivalents
  
 $       1,102,485
      
 $       1,102,485
Accounts receivable (net of allowance of $10,067 in 2008
            
and  $1,005 in 2007)
  
188,375
      
188,375
Inventory
  
              398,153
      
398,153
Prepaid expenses and other assets
  
              326,857
      
326,857
             
Total current assets
  
          2,015,870
  
                         -
  
          2,015,870
             
Property and equipment, net
  
          5,756,402
  
            (263,339)
 (a)
5,493,063
             
Other Assets
            
        Prepaid Loan  - Long Term
  
              711,811
      
              711,811
Deposits
  
                14,453
      
                14,453
             
Total other assets
  
              726,264
  
                         -
  
              726,264
             
TOTAL ASSETS
  
 $       8,498,536
  
 $         (263,339)
  
 $       8,235,197
             
LIABILITIES AND STOCKHOLDERS' EQUITY
            
             
   
Unaudited
        
Current Liabilities
  
9/30/2008
        
Accounts payable
  
 $          723,607
      
 $          723,607
Accrued expenses and other
  
              440,028
      
              440,028
             
Total Current Liabilities
  
          1,163,635
  
                         -
  
          1,163,635
TOTAL LIABILITIES
  
          1,163,635
  
                         -
  
          1,163,635
             
               Notes Payable - Long Term
  
              723,238
      
              723,238
             
Total Liabilities
  
          1,886,873
  
                         -
  
          1,886,873
             
Stockholders' Equity
            
Common stock, $0.00005 par value; authorized 200,000,000
            
shares; issued and outstanding 78,976,375 and
            
72,056,375 shares, respectively
  
                  3,972
      
                  3,972
  Common stock to be issued
  
                         -
        
Additional paid-in capital
  
        74,851,936
      
        74,851,936
Notes Receivable
            
Accumulated deficit
  
      (68,244,245)
  
            (263,339)
 (a)
      (68,507,584)
             
Total Stockholders' Equity
  
          6,611,663
  
            (263,339)
  
          6,348,324
             
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
  
 $       8,498,536
  
 $         (263,339)
  
 $       8,235,197
             
(a) Adjust Leasehold Improvements useful life to correctly state the net value of Fixed Assets.
    
 
F-29
 
 
 
Z Trim Holdings, Inc. and Subsidiaries
Notes To Consolidated Financial Statements
December 31, 2008

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
            
FOR THE NINE MONTHS ENDED SEPTEMBER 30
            
   
As reported
  
Adjustments
  
As Restated
   
2008
  
2008
  
2008
REVENUES:
            
  Products
  
 $          502,792
      
 $          502,792
  Services
  
                         -
      
                         -
    Total revenues
  
              502,792
  
                         -
  
              502,792
             
COST OF REVENUES:
            
  Products
  
          1,573,272
  
              238,228
 (a)
          1,811,500
    Total cost of revenues
  
          1,573,272
  
              238,228
  
          1,811,500
             
GROSS MARGIN
  
         (1,070,480)
  
            (238,228)
  
         (1,308,708)
             
OPERATING EXPENSES:
            
Selling, general and administrative
  
          3,551,374
  
                25,111
 (a)
          3,576,485
Impairment of intangible assets
  
              136,668
      
              136,668
Amortization of intangible assets
  
                  3,333
      
                  3,333
Loss on asset disposals, net
  
              (74,987)
      
              (74,987)
    Total operating expenses
  
          3,616,388
  
                25,111
  
          3,641,499
             
OPERATING LOSS
  
         (4,686,868)
  
            (263,339)
  
         (4,950,207)
             
OTHER INCOME (EXPENSES):
            
Rental and other income
  
                23,005
      
                23,005
Interest income
  
                18,286
      
                18,286
Interest expense
  
            (101,004)
      
            (101,004)
Settlement (loss) gain
  
            (582,111)
      
            (582,111)
    Total other income (expenses)
  
            (641,824)
  
                         -
  
            (641,824)
             
LOSS FROM CONTINUING OPERATIONS
  
 $     (5,328,692)
  
 $         (263,339)
  
 $     (5,592,031)
             
NET LOSS
  
 $     (5,328,692)
  
 $         (263,339)
  
 $     (5,592,031)
             
Net Loss per Share from continuing operations
            
 - Basic and Diluted
  
 $                (0.07)
  
 $                (0.00)
  
 $                (0.07)
Net Loss per Share - Basic and Diluted
  
 $                (0.07)
  
 $                (0.00)
  
 $                (0.07)
             
Weighted Average Number of Shares Basic and Diluted
  
        76,279,153
  
        76,279,153
  
        76,279,153
             
(a) Adjust Leasehold Improvements useful life to correctly state the depreciation expense
      
 
F-30