NOTE 9 - PREFERRED STOCK

Below is a summary of the Series I and Series II Preferred Stock:

	12/31/2012				12/31/2011
Convertible Redeemable Preferred Stock	Shares				Shares
	Issued and				Issued and
	Outstanding		Amount		Outstanding		Amount
Series I		-	$	-		947,058	$	4,735,291
Discount on Series I				-				(2,505,680	)
		-	$	-		947,058	$	2,229,611

Series II		-	$	-		665,339	$	3,326,697
Discount on Series II				-				(2,348,096	)
		-	$	-		665,339	$	978,601

	12/31/2012				12/31/2011
Convertible Preferred Stock	Shares				Shares
	Issued and				Issued and
	Outstanding		Amount		Outstanding		Amount
Series II		665,339	$	2,157,238		-	$	-
		665,339	$	2,157,238		-	$	-

At December 31, 2012 and 2011, the Company charged to additional paid in capital amortization relating to the discount on preferred stock of $3,684,317 and $2,990,327, respectively.

As of December 31, 2012, the $2,157,238 of Series II Preferred Stock has been reclassified on the balance sheet to permanent Stockholders' Equity and identified as Series II Convertible Preferred Stock. Furthermore, the accrued dividends relating to the Series II Convertible Preferred Stock have also been reclassified to Stockholders' Equity. This reclassification was a result of the agreement indicated within this footnote between Brightline and the Company which amended the shares to no longer be subject to potential cash redemption.

Preferred Stock issued in 2010

Between June 3 and 7, 2010, we entered into 5 private placement subscription agreements with investors pursuant to which we sold 92.1 units consisting of Preferred Stock and warrants, for an aggregate offering price of $921,000. Each of the units (individually, a "Unit" and collectively, the "Units") consists of 2,000 shares of the Series I 8% Convertible Preferred Stock ("Preferred Stock") at an Original Issue Price of $5.00 per share, with rights to: (i) a dividend which accrues cumulatively on a daily basis at the rate of 8% per annum of the Original Issue Price payable in shares of the Common Stock; (ii) conversion into such a number of shares of Common Stock determined by dividing the Original Issue Price by the Conversion Price, initially, $1.00; (iii) a liquidation preference equal to the sum of the Original Issue Price and an amount equal to 8% of the Original Issue Price for each 12 months that passed since the date of issuance of any of the Preferred Stock; and (iv) mandatory redemption, by the Company, 24 months from the date of issuance of the Preferred Stock at a redemption price equal to the Original Issue Price plus any accrued but unpaid dividends. The dividend component on liquidation and redemption is payable in shares of the Common Stock of the Company. Payment of the dividend, mandatory redemption and any provisions requiring payment on the Preferred Stock are deferred until the 2008 Notes due in 2010 and the 2009 Notes due in 2011 and 2012 are paid in full. As of December 31, 2012, there were no 2008 Notes or 2009 Notes outstanding. Such deferral, even if the maturity dates on the Notes are extended, will not constitute a default under the Preferred Stock terms. The Preferred Stock terms may be amended by the Company and the consent of the holders of the majority of the outstanding shares and such majority may also waive an adjustment to the Conversion Price.

The Preferred Stock is convertible into a total of 921,000 shares of Common Stock. The Investors also received one five-year warrant for each Unit purchased, to purchase 15,000 shares of Common Stock per unit with an exercise price of $1.50 per share ("Warrants"). The total warrants issued to the investors were 1,381,500. Brightline Ventures I, LLC, invested $782,000 of the total amount set forth in the preceding paragraph. Current Z Trim Director Edward Smith, III, is a managing partner of Brightline Capital Management, LLC, which is the investment manager of Brightline Ventures I, LLC. Further, current Z Trim Director Morris Garfinkle invested $30,000 of the total amount set forth in the preceding paragraph.

On July 29, 2010 the Company filed a registration statement with the SEC covering all of the shares of common stock underlying the Series 1 Preferred Stock, dividends thereon, and accompanying warrants, purchased by the 5 investors between June 3 and 7, 2010. This registration statement went effective on August 5, 2010.

On September 7, 2010, we entered into a private placement subscription agreement with an investor pursuant to which we sold 30 units consisting of Preferred Stock and warrants, for an aggregate offering price of $300,000. Each of the units (individually, a "Unit" and collectively, the "Units") consists of 2,000 shares of the Series I 8% Convertible Preferred Stock ("Preferred Stock") at an Original Issue Price of $5.00 per share, with rights to: (i) a dividend which accrues cumulatively on a daily basis at the rate of 8% per annum of the Original Issue Price payable in shares of the Common Stock; (ii) conversion into such a number of shares of Common Stock determined by dividing the Original Issue Price by the Conversion Price, initially, $1.00; (iii) a liquidation preference equal to the sum of the Original Issue Price and an amount equal to 8% of the Original Issue Price for each 12 months that passed since the date of issuance of any of the Preferred Stock; and (iv) mandatory redemption, by the Company, 24 months from the date of issuance of the Preferred Stock at a redemption price equal to the Original Issue Price plus any accrued but unpaid dividends. The dividend component on liquidation and redemption is payable in shares of the Common Stock of the Company. Payment of the dividend, mandatory redemption and any provisions requiring payment on the Preferred Stock are deferred until the 2008 Notes due in 2010 and the 2009 Notes due in 2011 and 2012 are paid in full. As of December 31, 2012, there were no 2008 Notes or 2009 outstanding.Such deferral, even if the maturity dates on the Notes are extended, will not constitute a default under the Preferred Stock terms. The Preferred Stock terms may be amended by the Company and the consent of the holders of the majority of the outstanding shares and such majority may also waive an adjustment to the Conversion Price.

The Preferred Stock is convertible into a total of 300,000 shares of Common Stock. The investor also received one five-year warrant for each Unit purchased, to purchase 15,000 shares of Common Stock per unit with an exercise price of $1.50 per share ("Warrants"). The total warrants issued to the investor were 450,000. Brightline Ventures I, LLC, invested $300,000 of the total amount set forth in the preceding paragraph. Current Z Trim Director Edward Smith, III, is a managing partner of Brightline Capital Management, LLC, which is the investment manager of Brightline Ventures I, LLC.

Between October 13 and November 12, 2010, we entered into private placement subscription agreements with Brightline, and sold 22.6 Units consisting of Preferred Stock and warrants, for an aggregate offering price of $226,000, under the same terms and conditions as set forth above. The Preferred Stock is convertible into a total of 226,000 shares of Common Stock, and Brightline received an additional 339,000 warrants with an exercise price of $1.50 per share.

Between December 15 and 29, 2010, we entered into 2 private placement subscription agreements with investors pursuant to which we sold 333.7291 units consisting of Preferred Stock and warrants, for an aggregate offering price of $3,337,291. Each of the units (individually, a "Unit" and collectively, the "Units") consists of 2,000 shares of the Series I 8% Convertible Preferred Stock ("Preferred Stock") at an Original Issue Price of $5.00 per share, with rights to: (i) a dividend which accrues cumulatively on a daily basis at the rate of 8% per annum of the Original Issue Price payable in shares of the Common Stock; (ii) conversion into such a number of shares of Common Stock determined by dividing the Original Issue Price by the Conversion Price, initially, $1.00; (iii) a liquidation preference equal to the sum of the Original Issue Price and an amount equal to 8% of the Original Issue Price for each 12 months that passed since the date of issuance of any of the Preferred Stock; and (iv) mandatory redemption, by the Company, 24 months from the date of issuance of the Preferred Stock at a redemption price equal to the Original Issue Price plus any accrued but unpaid dividends. The dividend component on liquidation and redemption is payable in shares of the Common Stock of the Company. Payment of the dividend, mandatory redemption and any provisions requiring payment on the Preferred Stock are deferred until the 2008 Notes due in 2010 and the 2009 Notes due in 2011 and 2012 are paid in full. As of December 31, 2012, there were no 2008 Notes or 2009 Notes outstanding. Such deferral, even if the maturity dates on the Notes are extended, will not constitute a default under the Preferred Stock terms. The Preferred Stock terms may be amended by the Company and the consent of the holders of the majority of the outstanding shares and such majority may also waive an adjustment to the Conversion Price. 

The Preferred Stock is convertible into a total of 3,337,291 shares of Common Stock. The Investors also received one five-year warrant for each Unit purchased, to purchase 15,000 shares of Common Stock per unit with an exercise price of $1.50 per share ("Warrants"). The total warrants issued to the investors were 5,005,937. Brightline Ventures I, LLC, invested $3,087,291 of the total amount set forth in the preceding paragraph. Current Z Trim Director Edward Smith, III, is a managing partner of Brightline Capital Management, LLC, which is the investment manager of Brightline Ventures I, LLC.

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.

Preferred Stock issued in 2011

In January 2011, the Company's external Directors, Mark Hershhorn, Morris Garfinkle, Brian Israel and Edward Smith each agreed to apply $15,000 of their Directors' fees (20% of which was past due), to the purchase of Units pursuant to the terms of the preferred stock series I. As such, we entered into 4 private placement subscription agreements with investors pursuant to which we issued 6 units consisting of Preferred Stock and warrants, for an aggregate offering price of $60,000. On March 18, 2011, we entered into a private placement subscription agreement with Brightline pursuant to which we sold 332.6697 units consisting of Preferred Stock and warrants, for an aggregate offering price of $3,326,697. Each of the units (individually, a "Unit" and collectively, the "Units") consists of 2,000 shares of the Series II 8% Convertible Preferred Stock ("Series II Preferred Stock") at an Original Issue Price of $5.00 per share, with rights to: (i) a dividend which accrues cumulatively on a daily basis at the rate of 8% per annum of the Original Issue Price payable in shares of the Common Stock; (ii) conversion into such a number of shares of Common Stock determined by dividing the Original Issue Price by the Conversion Price, initially, $1.00; (iii) a liquidation preference equal to the sum of the Original Issue Price and an amount equal to 8% of the Original Issue Price for each 12 months that passed since the date of issuance of any of the Series II Preferred Stock; and (iv) mandatory redemption, by the Company, 24 months from the date of issuance of the Series II Preferred Stock at a redemption price equal to the Original Issue Price plus any accrued but unpaid dividends. The dividend component on liquidation and redemption is payable in shares of the Common Stock of the Company. Payment of the dividend, mandatory redemption and any provisions requiring payment on the Series II Preferred Stock are deferred until the 2008 Notes due in 2010 and the 2009 8% Senior Secured Convertible Notes due in 2011 and 2012 (the "2009 Notes") are paid in full or until any such restrictions are waived. As of December 31, 2012, there were no 2008 Notes or 2009 Notes outstanding. Such deferral, even if the maturity dates on the Notes are extended, will not constitute a default under the Series II Preferred Stock terms.

The Series II Preferred Stock terms may be amended by the Company and the consent of the holders of the majority of the outstanding shares of Preferred Stock and such majority may also waive an adjustment to the Conversion Price. The Series II Preferred Stock is convertible into a total of 3,326,698 shares of Common Stock, exclusive of the shares of Common Stock issuable in connection with the 8% dividend. Brightline also received one five-year warrant for each Unit purchased, pursuant to which the holder may purchase 15,000 shares of Common Stock per Unit with an exercise price of $1.50 per share ("Warrants"). The total warrants issued were 4,990,046. Current Z Trim Director Edward Smith, III, is a managing partner of Brightline Capital Management, LLC, which is the investment manager of Brightline Ventures I, LLC.

We also entered into a registration rights agreement with Brightline pursuant to which we agreed to file with the Securities and Exchange Commission a registration statement covering the resale of the Common Stock underlying the Series II Preferred Stock and Warrants. In connection with the offering, Brightline, as the holder of a majority of the warrants issued in connection with the 2009 Notes (the "2009 Warrants") waived any price adjustment with respect to the 2009 Warrants. Brightline also waived any price adjustment with respect to the warrants issued in connection with the Series I 8% Convertible Preferred Stock (the "Series I Preferred Stock Warrants") it purchased from the Company.

We also entered into registration rights agreements 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 all issued Preferred Stock (Series I and II) and accompanying Warrants. This registration statement was filed on June 2, 2011, and went effective on June 3, 2011.

Preferred Stock converted into Common Stock in 2011

Between December 22, 2011 and December 30, 2011, holders of Company's Series I 8% Convertible, Redeemable Preferred Stock ("Series I Preferred Stock") elected to convert an aggregate of 21,800 shares of the Company's Series I Preferred Stock, plus accrued but unpaid dividends of $17,440 on such shares of Series I Preferred Stock, into an aggregate of 126,440 shares of the Company's common stock, par value $0.00005 per share ("Common Stock"), pursuant to the terms of the Statement of Resolution Establishing the Series I Preferred Stock. For each converted share of Series I Preferred Stock, the holder thereof was entitled to receive such number of shares of Common Stock as determined by dividing (x) the Original Series I Issue Price of $5.00 per share plus the amount represented by accrued but unpaid dividends on such share by (y) the Conversion Price of $1.00 applicable to such share.

Preferred Stock converted into Common Stock in 2012

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

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

On December 7, 2012, Brightline converted $2,559,752 (including accrued dividends) of Series I Convertible, Redeemable Preferred Stock into 2,559,752 shares of the Company's Common Stock. Again on December 29, 2012, Brightline converted $905,348 (including accrued dividends) of Series I Convertible, Redeemable Preferred Stock into 905,348 shares of the Company's Common Stock.

On December 11, 2012, the Company's external Directors, Mark Hershhorn, Morris Garfinkle, Brian Israel and Edward Smith each agreed to convert $17,403 (including accrued dividends) of Series I Convertible, Redeemable Preferred Stock into 17,403 shares of the Company's Common Stock prior to its maturity. The aggregate conversion by the directors was $69,612. As a result of this early conversion the Company recorded a loss of $728 for the twelve months ended December 31, 2012.

On December 15, 2012, an Investor converted $290,000 (including accrued dividends) of Series I Convertible, Redeemable Preferred Stock into 290,000 shares of the Company's Common Stock.

On August 13, 2012, the Company entered into an agreement with Brightline pursuant to which Brightline agreed to convert $7,721,988 (exclusive of dividends) worth of Series I and II Preferred Stock into 7,721,988 shares of the Company's Common Stock at the earlier of either the maturity date of the security or the closing of any approved transaction with Maxim Group, LLC. In consideration for the foregoing conversion of Series I and II Preferred Stock by Brightline on or before their respective maturity dates, the Company modified the following warrants held by Brightline to provide them with the ability to exercise such warrants on a cashless basis: (i) warrants to purchase an aggregate of 11,582,983 shares of Common Stock with an exercise price of $1.50 per share, which were issued to Brightline in transactions where Brightline acquired shares of the Company's Series I and II Preferred Stock; and (ii) warrants to purchase an aggregate of 2,859,375 shares of Common Stock with an exercise price of $1.50 per share, which equals one half of the outstanding and unexercised warrants issued to Brightline in other transactions where Brightline provided financing to the Company. Prior to December 31, 2012, all Series I Preferred shares held by Brightline were converted to common shares consistent with the amendment. The remaining Series II Preferred shares held of 665,339 shares and $3,326,697 was reclassified to permanent equity based on the removal of the redemption feature associated with the preferred stock. The value reclassified was equal to the carrying value of the shares on the date the agreement was modified. This value was $2,157,238 based on a gross value of $3,326,697 and a remaining discount of $1,169,459. Furthermore, the accrued dividends relating to the Series II Convertible Preferred Stock have also been reclassified to Stockholders' Equity. These reclassifications were necessary based on the preferred shares no longer being subject to potential cash redemption.

At December 31, 2012, the Company has no outstanding Series I Convertible, Redeemable Preferred Stock. As of December 31, 2011, the Company had a total of 947,058 (convertible into 4,735,290 shares of common stock exclusive of dividends) shares of its Series I Convertible, Redeemable Preferred Stock outstanding. At December 31, 2012, the Company had a total of 665,339 shares (convertible into 3,326,697 shares of common stock exclusive of dividends) of its Series II Convertible Preferred Stock outstanding. The Series II Convertible Preferred Stock matures in March, 2013. At December 31, 2011, the Company had a total of 665,339 (convertible into 3,326,697 shares of common stock exclusive of dividends) of its Series II Convertible, Redeemable Preferred Stock outstanding. All of the of shares of Series II Convertible Preferred Stock outstanding as of December 31, 2012 are owned by related parties.

As of December 31, 2012 and 2011, the Company had accrued dividends of $476,857 and $650,616, respectively.. The payable at December 31, 2012 was classified as Stockholders' Equity due to its being payable with common shares only. The related dividends are included within common stock payable for $476,857 as of December 31, 2012. Dividends are accrued quarterly at 8% as described in the preceding paragraphs. Dividends accrued are recorded to additional paid-in-capital and are deducted from net income/(loss) on the Statement of Operations. Based on the $1.00 conversion price, 476,857 and 650,616 shares would be owed upon conversion of the dividends payable as of December 31, 2012 and 2011, respectively.