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EXCEL - IDEA: XBRL DOCUMENT - NXT Nutritionals Holdings, Inc.Financial_Report.xls
EX-32.1 - CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT - NXT Nutritionals Holdings, Inc.f10k2011ex32i_nxt.htm
EX-32.2 - CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT - NXT Nutritionals Holdings, Inc.f10k2011ex32ii_nxt.htm
EX-31.2 - CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT - NXT Nutritionals Holdings, Inc.f10k2011ex31ii_nxt.htm
EX-31.1 - CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT - NXT Nutritionals Holdings, Inc.f10k2011ex31i_nxt.htm


UNITED STATES 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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, 2011

o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission File No. 333-147631
 
NXT Nutritionals Holdings, Inc.
(Exact name of registrant as specified in its charter)

Delaware
 
26 -3186713
(State or other jurisdiction of
incorporation or organization)
 
 
(IRS Employer Identification No.)
933 E. Columbus Avenue
Suite C
Springfield, MA
 
01105
(Address of principal executive offices)
 
(Zip Code)

(413) 533-9300
(Registrant’s telephone number, including area code)

Securities registered under Section 12(b) of the Exchange Act:
     
Title of each class registered:
 
Name of each exchange on which registered:
None
 
None
 
Securities registered under Section 12(g) of the Exchange Act:
Common stock, par value $.001

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.        Yes  o     No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  o      No  x

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

 
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  x Yes  o No
  
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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
o
 
Accelerated filer
o
         
Non-accelerated filer
(Do not check if a smaller reporting company)
o
 
Smaller reporting company
x

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

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and ask price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter: $3,415,993.
 
As of April 16, 2012, the registrant had 73,953,106 shares of its common stock issued and outstanding.
 
DOCUMENTS INCORPORATED BY REFERENCE

None
 
 
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TABLE OF CONTENTS
 
     
PAGE
 
 
Forward Looking Statements
     
         
 
PART I
     
    4  
    12  
    19  
    19  
    19  
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PART II
       
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PART III
       
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PART IV
       
    46  
           
    48  
 
 
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FORWARD-LOOKING STATEMENTS

This report contains information that may constitute "forward-looking statements." Generally, the words "believe," "expect," "intend," "estimate," "anticipate," "project," "will" and similar expressions identify forward-looking statements, which generally are not historical in nature. However, the absence of these words or similar expressions does not mean that a statement is not forward-looking. All statements that address operating performance, events or developments that we expect or anticipate will occur in the future — including statements relating to volume growth, share of sales and earnings per share growth, and statements expressing general views about future operating results — are forward-looking statements. Management believes that these forward-looking statements are reasonable as and when made. However, caution should be taken not to place undue reliance on any such forward-looking statements because such statements speak only as of the date when made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. These risks and uncertainties include, but are not limited to, those described in Part I, "Item 1A. Risk Factors" and elsewhere in this report and those described from time to time in our future reports filed with the Securities and Exchange Commission.
 
PART I
 
ITEM 1.    BUSINESS
 
OVERVIEW
 
NXT Nutritionals Holdings, Inc. is a Delaware corporation incorporated in 2006 under the name Goldvale Resources, Inc.  We were originally organized to search for mining properties in British Columbia.
 
In February 2009, we completed a share exchange with NXT Nutritionals, Inc.  and the shareholders of NXT Nutritionals, pursuant to which we acquired all of the issued and outstanding common stock of NXT Nutritionals from the NXT Shareholders. In exchange, we issued to the NXT Shareholders 22,480,000 shares of our common stock, representing 63.06% of our outstanding shares of common stock (the “Share Exchange”).
 
As a result of the closing of the Share Exchange, NXT Nutritionals became our wholly-owned subsidiary. We also became of the indirect owner of NXT, LLC and Healthy Dairy, LLC, two subsidiaries of NXT Nutritionals.
 
Operating through NXT Nutritionals, we are engaged in developing and marketing of a proprietary, patent-pending, all–natural, healthy sweetener sold under the brand name SUSTA™ and other food and beverage products. SUSTA™ is being sold as a stand-alone product and it is the common ingredient for substantially all of our products.  We also market and sell Healthy Dairy® non-fat yogurt smoothies, which are enhanced by the revolutionary taste and nutritious ingredients contained in SUSTA™. Our mission is to provide consumers with unique, healthy and delicious products that promote a healthier lifestyle, especially for those concerned with obesity and diabetes.
 
Our current goal is to bring SUSTA™ to the retail marketplace nationwide, expand the Healthy Diary® product line by focusing on the food service channel, and eventually to expand the Healthy Dairy® to include product lines such as cup yogurt and ice cream.
  
Our current corporate structure is illustrated in the figure below:
 
 
4

 
 
 
 
 
PRODUCTS
 
SUSTA™ Natural Sweetener
 
SUSTA™ is a natural, healthy sweetener that has minimal calories and low glycemic index.  It is a proprietary blend of inulin fiber, fructose, botanical extracts, natural flavors, vitamins, minerals, and probiotics that is patented in New Zealand and patent-pending in the U.S. and Canada.
 
SUSTA ™ is used in coffees, teas, other beverages, cereals, and any other food that requires a sweetener. SUSTA™ is targeted at individuals craving sweeteners but not the calories from sugar, and is a better option than sugar for people with diabetes because it has approximately one-half gram per serving of fructose and a glycemic index that is one-third of regular sugar.
 
SUSTA™ sweetens the taste of food without the concerns with table sugar or chemicals.  It also contains healthy probiotics consisting of 100 million bacillus coagulas spores per serving.  In addition, SUSTA ™ contains a vital dietary fiber and antioxidants and key cellular nutrients such as B-Vitamins, Chromium, and Fiber which help to increase metabolism by making insulin more effective through the direction of sugars to energy rather than fat, and steering sugar into energy metabolism. The Dietary Fiber in SUSTA ™ is soluble with over 1 gram per serving and the antioxidant sources are from nutrients consisting primarily of Vitamin-C, Mineral Selenium, Chromium, Cinnamon, Bitter Melon, Goji, and Grape Seed.  These nutrients provide a full spectrum of Flavanol and bioactive compounds at a 20:1 ratio of concentration. Lastly, SUSTA™ simultaneously supports a healthy heart, bones, and immune system by converting Fiber into short chain fatty acids which further accelerates the absorption of important minerals such as Zinc, Calcium, and Magnesium from food.
 
 
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We are seeking to market SUSTA™ in three primary categories:
 
•           SUSTA™ as a table top sweetener alternative to sugar and other sweeteners,
 
•           SUSTA™ as an ingredient used in beverages, cereals, baked goods, dairy products, candy and chewing gum, and
 
•           NXT/SUSTA™ branded products including Healthy Dairy® and other SUSTA™ branded products to be launched by the Company.
 
Brand awareness of SUSTA™ will be driven by an aggressive marketing campaign and substantial incentive trial program.  Additionally, more traditional levers in the retail sales channel like advertising, trade incentives, price promotions, couponing, and demonstrations will be employed. We target consumer food and beverage companies to incorporate SUSTA™ into their products to provide a healthy alternative to sugar, artificial sweeteners and other natural sweeteners that do not provide the nutritional and health benefits of SUSTA™.
 
Healthy Dairy® Yogurt Smoothies
 
We have developed a line of SUSTA™ -enhanced, non-fat reduced-calorie yogurt smoothies, which are marketed as Healthy Dairy®.  Healthy Dairy® products combine appealing packaging, the health benefits of SUSTA™, and great taste. They are offered in 5 different flavors: strawberry, peach, mixed berry, tropical fruit, and strawberry-banana. Healthy Dairy® contains cultured pasteurized skim milk, real fruit, pure cane sugar, soluble fiber, tapioca starch, natural flavors, phytosterols (plant sterols), SUSTA™, antioxidant botanicals, and many beneficial vitamins totaling 170 calories per bottle for our 10-ounce bottle. Healthy Dairy® contains SUSTA™ and important nutrients that promote health and wellness with outstanding taste and sweetness with significantly fewer calories than the Company’s key competitors. We have shifted our focus on sales of Healthy Dairy® products from grocery chains to the food service category. We have developed a 7-ounce version of our Healthy Dairy® smoothie line as well as a line of 4-ounce yogurt cups branded under the Health Dairy trademark. These products and the 10-ounce Healthy Dairy® smoothies are being marketed and sold to the food service industry including but not limited to college campuses, the U.S. Military, airlines, elementary schools and restaurants. Our management believes this change in our business model will make us profitable in the future.
 
Product Sales Below is a breakdown of the gross sales for NXT Nutritionals for the 2011 and 2010 annual reporting periods. The gross sales amounts are broken down by product, Healthy Dairy ("HD") and SUSTA for each period when applicable.
 
HD 2010 Sales:
 
$
93,683
 
SUSTA 2010 Sales:
   
386,157
 
Total 2010 Sales:
 
$
477,840
 
 
HD 2011 Sales:
 
$
151,802
 
SUSTA 2011 Sales:
   
150,993
 
Total 2011 Sales:
 
$
302,795
 
         
OPERATIONS
 
The Company operates as a sales and marketing company that out-sources the distribution and manufacturing of its products. Our officers and directors are seasoned veterans of the food and beverage industry that support and supervise an in house staff and a national broker system. We drive sales to the grocery system and create marketing programs to drive consumer trial and purchase. Additionally we have hired a public relations company to drive brand awareness.
 
Research and development is performed by contract with one of the Company’s founders Dr. Richard Kozenko and Vickie Babcock, a food technologist. The R&D team also performs quality control of the products for the Company.
 
 
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Our internal staff manages our accounts receivable and accounts payable under the supervision of the CEO, COO, and CFO. They also arrange for the purchase of raw materials and the production of products.
 
SUSTA Natural sweetener is blended and packaged by a contract packer Subco Foods, Inc., which operates three production facilities in the Midwestern part of the United States. The Healthy Dairy Smoothies are made at Neoga Dairy, Inc. in Farmingdale New York.
 
SUSTA is distributed by a group of distributors that include C&S Wholesale Grocers, Inc. (“C&S”), White Rose Food (“White Rose”), Bozzuto’s, Inc. (“Bozzuto’s”) and United Natural Foods, Inc. (“UNFI”).  The Company also sells direct to several grocery chains.  We expect that the Healthy Dairy® branded products will be distributed by large scale distribution companies.
 
MARKET OPPORTUNITIES
 
With a significant growth market, SUSTA™ is much more than a next generation standalone sweetener. We will use this natural product as the basis for a growing line of healthy food products. Healthy Dairy® is a SUSTA™-enhanced product. With SUSTA™ as the base sweetener, we believe that there is an almost unlimited number of products that we can produce or license that will have immediate appeal to the growing number of refined averse and health conscious consumers.
 
We have encountered a decline since 2008 in the sales of Healthy Dairy® smoothies due to the change in our business focus from sales to grocery stores to the food service category. Our management believes this change in our business model will make us profitable in the future.
 
SUSTA™ Natural Sweetener
 
SUSTA™ is well-positioned to be a competitive natural alternative sweetener in the U.S. table top sweetener market. The rise in type-II diabetes and the epidemic proportion of obesity have resulted in an increased market demand for minimal calorie, natural and healthy sweeteners. SUSTA™ is uniquely formulated to take advantage of this demand, and is targeted at individuals craving sweeteners but neither not the calories from sugar nor the use of common artificial sweeteners..  It is a better option than sugar for people with diabetes because it has approximately one-half gram per serving of fructose and a glycemic index that is one-third of regular sugar. Our target demographics include:
 
·  
Diabetics, individuals on diets, and those proactively managing obesity. Given today’s environment, with the increase in obesity and diabetes, this is a mass market product.
 
·  
Head-of-household moms who bring healthy choices into the household. These moms, who range in age from 20 to 50 years old, make the key food purchase decisions for the household, are employed, and are concerned about health and fitness for their families.
 
·  
Consumers who shun synthetic sweeteners.  This list is headed by consumers who have an affinity for natural products, many of whom are fanatical as it relates to purchasing natural products. Consumers are increasingly aware that “you are what you eat” – this awareness has led to a change in consumer behavior as evidenced by the growth of the organic and all natural food sector.
 
·  
Individuals that have active lifestyles and are wellness advocates who tend to be sports enthusiasts, such as runners, bikers, climbers, walkers and devoted exercisers.
 
Healthy Dairy® Yogurt Smoothies
 
Healthy Dairy®, was previously sold in thousands of stores in 14 states. Currently, Healthy Dairy® yogurt cups, and smoothies in both 10 and 7 ounce portions are being marketed to the food service channel which includes the military, airlines, school systems and restaurants. We have shifted our focus on sales of Healthy Dairy products from grocery chains to the food service category because our management believes this change in our business model will make us profitable in the future. The drinkable yogurt market is a 6% share ($221 Million) of the $3.5 Billion yogurt market, and is growing annually by 5% in the U.S. and 10% globally. In addition, the Healthy Dairy® production line can be extended to launch new products such as Healthy Dairy® ice creams which will generate more market opportunities for the Company.
  
 
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MARKETING STRATEGY
 
Our initial efforts are focused on launching SUSTA™ into the U.S. table top sweetener market. We have targeted the natural sweeteners segment because it is less entrenched and has less formidable competitors. Brand awareness of SUSTA™ will be driven by an aggressive marketing and public relations campaign and a substantial sampling program. Additionally, more traditional levers like advertising, trade incentives, price promotions, couponing, and demonstrations will be employed. Because of the health benefits of SUSTA™, especially for diabetics, we will partner with a number of health organizations. Consumers will be able to buy SUSTA™ products online with a percentage of each sale allocated toward such charitable organizations with whom we partner. We have engaged three high profile celebrities, including Eddie George, Blair Underwood and Dara Torres, as our spokespersons who will help drive awareness of SUSTA™ by appearing in commercials, making public appearances, heading our cause marketing campaign and appearing on popular television shows.
 
Because an increasing number of consumers are learning and searching for information on the internet rather than via traditional advertising on TV or in print media, we will take advantage of social networking sites to enhance SUSTA™ brand awareness. Health Forum and SUSTA™ recipes contests will be part of our on-line strategy.
 
We have also developed a medical advisory board consisting of Dr. Paul S. Auerbach, James R. Gavin III, MD, PhD and Camillo Ricordi, M.D., whose mission is to advise us on scientific advances regarding our products as well as to communicate the health benefits of SUSTA™ to consumers.
 
DISTRIBUTION
 
We initially distributed our Healthy Dairy® through the mainstream grocery channel and eventually offered the products through several thousand locations up and down the East Coast. However, during the 2010 fiscal year, we have changed our business model from selling Healthy Dairy® to grocery stores to focusing on selling Healthy Dairy® to the food service category. We have begun shipments to the United States Naval Academy and the United States Air Force Academy. Currently, we do not have our Healthy Dairy product in any grocery stores.
 
We are seeking to distribute SUSTA™ through grocery stores.  Leading brokers in the country, including C&S, White Rose, Bozzuto’s and UNIF, have agreed to carry SUSTA™. We believes that we can utilize the relationship developed through our sales of Healthy Dairy® to allow us to quickly scale up our marketing efforts with SUSTA™. We will continue to sell SUSTA™ natural sweetener and SUSTABOWL™ (for baking) to grocery chains and to sell SUSTA™ and SUSTABOWL™ to the food service market.
  
The chart below indicates the stores currently carrying SUSTA™ :
 
 
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SUSTA™ and SUSTABOWL™ continue to be marketed to and sold in grocery stores and we continue to expand the number of locations in which these products are sold.
 
COMPETITION
 
SUSTA™ Natural Sweetener
 
SUSTA™’s major competitors in the table top sweetener market are:
 
·  
Splenda (61% market share)
 
·  
Equal (13% market share)
 
·  
Sweet’n Low (13% market share)
 
·  
Other (13% market share). This includes a variety of competitors – best known brands/producers in this segment include NutraSweet, ADM, & Cargill
 
(Source: IRI – Information Resources International)
 
Although we compete against all of the products and companies listed, there are major differences between our SUSTA™ and the competitive field in the retail marketplace for alternative sweeteners. SUSTA™ is an all-natural, low calorie sweetener that contains a proprietary blend of probiotics with 100 million Lacto Bacillus Coagulas Spores per 2 gram serving. SUSTA™ also contains botanical extracts including Cinnamon, Bitter Melon, Goji and Grape Seed, which provide a full spectrum of Flavanol and bioactive compounds at a 20:1 ratio of concentration. SUSTA™ also contains Dietary Soluble Fiber at over 1 gram per serving and antioxidant sources from nutrients such as Vitamin-C primarily with Mineral Selenium and Chromium that is unique in the retail marketplace today.
 
SUSTA™ as a nutritional sweetener aids in digestion and supports the immune system, is formulated with fiber, nutrients, antioxidants and probiotics and is low glycemic. SUSTA™ is like a sugar-shield in the food we eat because the presence of fiber will create less fatty lipids and make blood sugar more stable. The name of fiber used in SUSTA™ is an oligofructose (OFS), or similar forms named as insulin FOS, or oligosaccharides. Recent studies have indicated that a high fructose diet has a pro-oxidant effect in rats compared with a starch-based diet and OFS has already been shown to decrease plasma lipids in rats. Feeding rats a diet supplemented with OFS lowered TG plasma concentrations and prevented TG accumulation induced by fructose in the liver. Dietary OFS also modified the kinetic absorption of dietary carbohydrate, leading to modifications in lipid and glucose concentrations. Thus, lower glucose and insulin concentrations may contribute to the reduction in hepatic fatty acid and TG synthesis and thus to the hypolipidemic effect of OFS.(Source: Oligofructose Protects again the Hypertriglyceridemic and Pro-oxidative Effects of a High Fructose Diet in Rats, The American Society for Nutritional Sciences J. Nutr., June 2003). SUSTA™ works with the body naturally to help tame and transform problem-making, fast absorbing sugars and carbohydrates, into slower absorbing, healthier protected energy because the fiber in SUSTA™ changes the nature of how sugar is metabolized in the liver by reducing levels of blood lipids as compared to controls. The SUSTA™ research funded by us in 2004 at University of Scranton and performed by Joe Vinson, Ph.D. from University of Scranton Department of Chemistry and Food Science, demonstrated key ratios of agent to sugar in modifying blood sugar under the delta curve and the rate of return to baseline blood sugar levels. The research was performed with six double blind cross-over, healthy fasted student objects, who consumed a 70g sugar loaded test beverage with 6 blood draws over three hours. Dr. Joe Vinson was not affiliated with us.  The University of Scranton Department of Chemistry and Food Science was a nationally respected research department in food science. The research demonstrated that there was average of 331/3% less area for blood glucose under the delta curve in a 70g sugar beverage with SUSTA™ agent at an 8:1 ratio of sugar to agent as compared to control. In production formula at a 3:1 sugar to fiber ratio, there was 88% less area blood glucose under the delta curve as compared to control, and return to baseline blood sugar occurred in 15 minutes as compared to 30 minutes for control, which suggests less time of circulating insulin to clear lingering elevated blood glucose. These findings are the basis of structuring SUSTA™ which is a 2g serving size, with a ratio of twice or more fiber to fructose.
 
 
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In addition, the fiber in SUSTA™ influences gut hormones to reduce the release of gut glucogen which in turn modulates the release of glucogen which is designed to raise blood sugar. Intestinal hormones stimulate more than 50% of the insulin response after oral glucose administration. Short chain fatty acids stimulate mucosal adaptation and may alter proglucagon messenger RNA and release of the insulin secretagogue, glucagon-like peptide-1 (GLP-1). Sprague- Dawley rats ingested a fiber-free elemental diet or an elemental diet supplemented with 30% fiber providing similar energy and nutrients for 14 days. The cecal and colonic short chain fatty acids contents were significantly higher in the 30% fiber group. Ileal proglucagon messenger RNA levels were significantly higher in the 30% group vs. the 0% group (11.47 +/- 0.87 vs. 6.52 +/- 0.87 densitometer units), respectively. Similar trends were seen in the colon (13.36 +/- 1.0 vs. 10.90 +/- 0.77 densitometer units; P = 0.07). Plasma GLP-1, insulin, and C peptide levels 30 min postoral glucose were significantly higher in the 30% fiber group vs. the 0% group (19.8 +/- 1.2 vs. 15.4 +/- 1.2 pg/ml, 2.67 +/- 0.4 vs. 1.29 +/- 0.5 ng/ml, and 964.4 +/- 94.4 vs. 530.2 +/- 120.4 pM, respectively). Plasma glucose and glucagon did not differ between groups. A diet supplemented with fiber is able to significantly alter proglucagon gene expression and modulate GLP-1 and insulin secretion. These novel findings deepen our understanding of the beneficial role of fiber in improving glucose homeostasis. (Source: Dietary fiber modulates intestinal proglucagon messenger ribonucleic acid and postpradndial secretion of glucagon-like peptide-1 and insulin in rats, Endocrinology, Vol 1996).
 
SUSTA™ provides vital dietary fiber, antioxidants and key cellular nutrients that are needed for a smoother running, more calorie efficient metabolism. And importantly, SUSTA™ nutrition supports the health of the bones, heart, and immune system by converting fiber into short chain fatty acids which further accelerates the absorption of important minerals such as zinc, calcium, and magnesium from food. The gut bacteria will ferment the fiber provided by SUSTA™ into short chain fatty acids, the fermentation process not only helps to create healthy gut flora, thus calling the fiber a “periodic,” but in the process, creates a slightly acidic environment of organic acids in the gut that help facilitate the absorption process of dietary minerals related to the nutritional dynamics of bones and teeth. As mentioned above, soluble fiber, as OFS in SUSTA™, has a modulation effect on the de novo synthesis of triglycerides and cholesterol which are important markers in heart disease. In addition, SUSTA™, contains Vitamin C along with the key B-vitamins noted in enhancing of homocysteine control-folic acid, B12.B6, Homocysteine is a risk factor in a growing number of diseases including heart disease and various forms of bone diseases
 
Management views Splenda, Equal, Sweet’N Low and Truvia (the most prominent of the all natural brands based on the Stevia plant) as its main competitors. We will position SUSTA™ as a healthy, all natural, low calorie alternative to sugar and artificial sweeteners with our “Naturally Healthy, Naturally Sweet” campaign.
 
While McNeil Nutritionals has established Splenda as the dominant brand in the space, our management believes that with our differentiation marketing plan, which includes celebrity marketing, public relations, a major cause marketing program, and a massive sampling program, we will be ideally positioned to a) start off by taking market share from other all-natural sweeteners that do not have the features and health benefits of SUSTA™, and b) after establishing SUSTA™, we will begin to take market share from Splenda and the other major artificial sweetener brands. Executing this plan on a nationwide basis will be contingent on the Company’s ability to continue to raise capital.
 
 
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Healthy Dairy® Yogurt Smoothies
 
Healthy Dairy® contains plant sterols, which may reduce the risk of heart disease and help lower cholesterol when combined with a low saturated fat and cholesterol diet.
 
We  believe that today’s food service industry is concerned with living longer and providing healthier lives. As a result, we believe the food service industry will gradually switch to Healthy Dairy® as consumer awareness of our products increases upon the launch of our advertising, celebrity marketing and public relations campaigns. Our product has high nutritional content, no fat and is low in calories.
 
Claims from Competitor Regarding SUSTA
 
We have received a letter from one of our competitors in which the competitor claimed that a sample of the SUSTA product contained a non-natural product and therefore was misbranded within the meaning of the Federal Food, Drug, and Cosmetic Act.  In particular, the competitor claimed that it tested a sample of the SUSTA product and found that the sample contained sucralose.  Sucralose is an artificial sweetener which is found in a wide variety of consumer food products and is approved by the Food and Drug Administration.
 
The Company formulated SUSTA to be ”natural,” without any added synthetic ingredients.  This formulation of SUSTA does not include sucralose.  The Company requires all of its suppliers to certify that the ingredients that they provide to the Company are free of any non-natural ingredients, including sucralose and the Company has received written assurances from its suppliers that all of the ingredients that comprise SUSTA and SUSTABOWL are natural.
 
The Company has attempted to investigate the claim made by the competitor.  As part of this investigation, the Company requested a copy of the test results obtained by the competitor from its in-house laboratory.  However, the competitor has refused to provide the data that supports the alleged test results. As such, the Company is unable to fully investigate the accuracy of the claim.
 
The Company has also undertaken independent testing of samples of its products to determine whether any of them contain sucralose.  Based on that preliminary testing, which have been shared with the competitor, SUSTA and SUSTABOWL are not mislabeled.  The Company contacted its suppliers which have confirmed that there is no sucralose added to any part of the ingredients provided by the suppliers.  One supplier is continuing to review its internal procedures to ascertain why any trace of sucralose may have been found in any specific samples.  At the present time, the Company has been unable to conclude whether there is any trace of sucralose in any of the Company’s products which have previously been sold to customers as well as in the Company’s existing inventory.  Further scientific testing under the supervision and direction of expert legal counsel is underway.
 
If the Company determines that SUSTA products are mislabeled, the Company would take appropriate steps to remedy the matter, which may include a recall of some or all of such products at some level of distribution. If the Company were required to undertake a recall, the recall could have a material adverse effect on the Company’s financial condition and results of operations, including potential loss of reputation and future sales.
 
INTELLECTUAL PROPERTY
 
Patent
 
Following years of research and development, SUSTA™ has been developed into a proprietary formulation that is patented in New Zealand and patent-pending in the United States and Canada. A patent for the formulation was granted in Australia but has subsequently lapsed. The Company intends to pay the fee to have the patent reinstated in the near future. The patent for SUSTA™ is held by NXT, LLC, a wholly owned subsidiary of NXT Nutritionals, Inc.
 
The SUSTA™ provides a carbohydrate modifying formulation or agent of synergistic ingredients, pertaining to the metabolism of mono and disaccharides.  Metabolically, the formulation of the invention slows the absorption of sugars, modifies the release of insulin, and stabilizes blood sugar response.  Additionally, the oral ingestion of the formulation of the SUSTA™ prevents or reduces the formation of dental caries by inhibiting the metabolic capability of dental plaque-forming bacteria to convert sugars into erosive, tooth-decaying acids.
 
The formulations of SUSTA™ provide direct and indirect positive effects on sugar metabolism and blood sugar response.  Thus, the formulations of the invention, when consumed in normal amounts, do not adversely contribute or aggravate such conditions as obesity, diabetes, or dietary-based, hormone related hyperactivity such as that often described in young children.
 
A formulation of SUSTA™ may be in liquid or dry form.  That is, it may be in the form of a powder that comprises or contains the formulation, or in the form of a liquid, either an aqueous liquid or a non-aqueous liquid.  In one preferred aspect, the invention provides a finished, water-based beverage, into which the formulation of the invention is incorporated.  Moreover, SUSTA™ provides a finished water-based beverage, which is acidified and which includes a formulation of the invention.
 
SUSTA™ also includes a method of slowing absorption of sugars, for instance, from the intestine of a subject (including but not limited to a human individual), that comprises administering to the subject, or making available for ingestion by the mammal, a formulation of the invention.  The formulation becomes effective when in an aqueous medium, which may be provided extrinsically, for instance by oral or intravenous administration or ingestion of an aqueous liquid containing the formulation, or intrinsically, for instance by ingestion of a solid formulation of the invention which is acted on by the body’s digestive secretions and conveyed to and through the body’s digestive system (an aqueous environment).
 
We believe that the additional objects and advantages of SUSTA™ include the following::
 
The SUSTA™ provides a formulation having desirable properties built upon synergistic ingredients; maintaining low simple sugar levels; and slowing down the normally rapid absorption of simple sugars from the gut.  This objective best optimizes energy levels by thwarting the potential destabilizing effects on blood sugar and inulin response, by preferably utilizing a polysaccharide matrix of complex carbohydrates and soluble gum fibers.
 
SUSTA™ provides numerous advantages not found in other agents including, but not limited to, limiting the effects of excessive use of ingredients, such as sugar, that may promote greater oxidative stress and actually reduce energy.  Ingredients are preferably chosen from among those that neutralize and inhibit free radical production and oxidative stress and, therefore, help to protect the cellular energy generating mechanisms.  Moreover, presently preferred ingredients are those that assist in the cellular utilization and burning of fuels for energy.  The composition of SUSTA™ also provides multiple tiered uses of various timed caloric energy fuels plus the sweetness system disclosed herein for longer, sustained energy.
 
Trademark
 
NXT Nutritionals also owns several registered trademarks, including Healthy Dairy®, which applies to its all-natural line of dairy products including our Healthy Dairy® non-fat yogurt smoothies, and SUSTA: Turns Calories into Healthy Energy®. The Healthy Dairy® trademark is held by Healthy Dairy, LLC, a wholly owned subsidiary of NXT Nutritionals. The SUSTA: Turns Calories into Healthy Energy® trademark is held by NXT, LLC, a wholly owned subsidiary of NXT Nutritionals.
 
 
11

 

ITEM 1A.  RISK FACTORS
 
In addition to the other information set forth in this report, you should carefully consider the following discussion of “risk factors” which identifies the most significant factors that may adversely affect our business, operations, financial position or future financial performance. The risks described below are not the only risks facing our Company. Additional risks not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or results of operations in future periods.
 
Risks Relating to Our Business
 
OUR LIMITED OPERATING HISTORY MAY NOT SERVE AS AN ADEQUATE BASIS TO JUDGE OUR FUTURE PROSPECTS AND RESULTS OF OPERATIONS.
 
We have a relatively limited operating history. Although we were incorporated on April 25, 2006, we did not begin operation in our current business until we entered into a Share Exchange Agreement with NXT Nutritionals and its shareholders on February 12, 2009. Such limited operating history and the unpredictability of the sweetener, and food and beverage industry makes it difficult for investors to evaluate our businesses and future operating results. An investor in our securities must consider the risks, uncertainties, and difficulties frequently encountered by companies in new and rapidly evolving markets. The risks and difficulties we face include challenges in accurate financial planning as a result of limited historical data and the uncertainties resulting from having had a relatively limited time period in which to implement and evaluate our business strategies as compared to older companies with longer operating histories.
 
OUR INDEPENDENT AUDITOR HAS RAISED DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN.
 
As reflected in our audited financial statement for the year ended December 31, 2011, we generated a net loss of $(1,335,706) during the year ended December 31, 2011, and as of that date, our current liabilities exceeded our current assets resulting in a working capital deficit of $(2,287,655). In addition, we also had a stockholder’s deficit of $(11,777,534) at December 31, 2011. As a result, our independent auditor expressed substantial doubt as to our ability to continue as a going concern.

WE NEED ADDITIONAL FINANCING TO EXECUTE OUR BUSINESS PLAN. IF WE DO NOT OBTAIN ADDITIONAL FINANCING IT COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.
 
Our cash from operations is not adequate to support our expansion and product development programs at this time. We will need substantial additional funds to:
 
·  
effectuate our business plan and expand our product line;
 
·  
file, prosecute, defend and enforce our intellectual property rights; and
 
·  
produce and market our products.
 
There are no assurances that future funding will be available on favorable terms or at all. If additional funding of up to $500,000 is not obtained, we will need to reduce, defer or cancel development programs, planned initiatives, or overhead expenditures to the extent necessary. The failure to fund our capital requirements could have a material adverse effect on our business, financial condition and results of operations. Moreover, the sale of additional equity securities to raise financing could result in additional dilution to our stockholders and the incurrence of indebtedness would result in increased debt service obligations that could result in operating and financing covenants that would restrict our operations.
 
 
12

 
 
NEWLY DEVELOPED PRODUCTS MAY NOT BE COMPATIBLE WITH MARKET NEEDS RESULTING IN AN ADVERSE EFFECT ON OUR SALES AND EARNINGS.
 
Our business is particularly subject to changing consumer trends and preferences.  Our continued success depends in part on our ability to anticipate and respond to these changes, and we may not respond in a timely or commercially appropriate manner to such changes.  If we fail to invest in extensive market research on consumer health needs in each market we target, we may face limited market acceptance of our products, which could have a material adverse effect on our sales and earnings.
 
WE HAVE SHIFTED OUR MARKETING AND SALES FOCUS OF HEALTHY DAIRY®, OUR SUSTAENHANCED NON-FAT REDUCED CALORIE YOGURT SMOOTHIES AND YOGURT CUPS, FROM SALE IN GROCERY CHAINS TO THE FOOD SERVICE CATEGORY.
 
We have shifted our focus from sales of Healthy Dairy® products from grocery chains to the food service category.  However, to date we have only begun to sell Healthy Dairy® to the U.S. Naval Academy and the U.S. Air Force Academy and sales are low as we develop this distribution channel.  We had previously generated all of our revenues of Healthy Dairy® from the sales to grocery chains. Although our management believes that this change in our business model will make us profitable in the future, there is no guarantee that we will be able to implement this change successfully. If we fail to succeed with this new business model it would have a material adverse effect on our sales and earnings
 
WE MAY ENCOUNTER SUBSTANTIAL COMPETITION IN OUR BUSINESS AND FAILURE TO COMPETE EFFECTIVELY MAY ADVERSELY AFFECT OUR ABILITY TO GENERATE REVENUE.
 
We believe that existing and new competitors will continue to improve their products and to introduce new products with competitive price and performance characteristics. We expect that we will be required to continue to invest in product development and productivity improvements to compete effectively in our markets. Our competitors could develop more efficient products or undertake more aggressive and costly marketing campaigns than ours, which may adversely affect our marketing strategies and could have a material adverse effect on our business, results of operations and financial condition.
 
Important factors affecting our ability to compete successfully include:
 
·  
the taste and flavor of products;
 
·  
trade and consumer promotions;
 
·  
rapid and effective development of new, unique cutting edge products;
 
·  
attractive and different packaging;
 
·  
branded product advertising; and
 
·  
pricing and promotion.
 
In periods of reduced demand for our products, we can either choose to maintain market share by reducing our selling prices to meet competition or maintain selling prices, which would likely sacrifice market share. Sales and overall profitability would be reduced in either case. In addition, we cannot assure that additional competitors will not enter our existing markets, or that we will be able to compete successfully against existing or new competition.
 
 
13

 
 
WE RELY ON THE SERVICES OF CERTAIN KEY PERSONNEL. IF WE FAIL TO KEEP THEM EMPLOYED IT MAY HAVE A MATERIAL ADVERSE EFFECT ON FULFILLING OUR BUSINESS PLAN.
 
Our business relies on the efforts and talents of our President and Chief Executive Officer, Francis McCarthy. The loss of Mr. McCarthy’s service could adversely affect the operations of our business. Although we have entered into a two year employment agreement with Mr. McCarthy and Mr. McCarthy has not indicated any intention of leaving us, the loss of his service for any reason could have a very negative impact on our ability to fulfill on our business plan.
  
WE MAY NOT BE ABLE TO HIRE AND RETAIN QUALIFIED PERSONNEL TO SUPPORT OUR GROWTH AND IF WE ARE UNABLE TO RETAIN OR HIRE SUCH PERSONNEL IN THE FUTURE, OUR ABILITY TO IMPROVE OUR PRODUCTS AND IMPLEMENT OUR BUSINESS OBJECTIVES COULD BE ADVERSELY AFFECTED.
 
If one or more of our senior executives or other key personnel are unable or unwilling to continue in their present positions, we may not be able to replace them easily or at all, and our business may be disrupted and our financial condition and results of operations may be materially and adversely affected. Competition for senior management and senior technology personnel is intense, the pool of qualified candidates is very limited, and we may not be able to retain the services of our senior executives or senior technology personnel, or attract and retain high-quality senior executives or senior technology personnel in the future. Such failure could materially and adversely affect our future growth and financial condition.
 
OUR MANAGEMENT CONCLUDES THAT OUR DISCLOSURE CONTROLS AND PROCEDURES WERE NOT EFFECTIVE, WHICH MAY PREVENT US FROM FILING REPORTS REQUIRED BY APPLICABLE LAWS AND REGULATIONS WITHIN THE TIME FRAME REQUIRED BY THE APPLICABLE RULES OF THE SECURITIES AND EXCHANGE COMMISSION.
 
Our management concludes that our disclosure controls and procedures are not effective to ensure that information required to be disclosed by us in the responses we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules due to that the fact that we have not completed the process of formally documenting internal controls. Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. If we cannot provide reliable financial reports timely or prevent fraud, our business reputation and operating results could be harmed. Failure to achieve and maintain an effective internal control environment could also cause investors to lose confidence in our reported financial information, which could have a material adverse effect on the price of our common stock,
 
PRODUCT LIABILITY CLAIMS AGAINST US COULD RESULT IN ADVERSE PUBLICITY AND POTENTIALLY SIGNIFICANT MONETARY DAMAGES.
 
As with other food producers, we are exposed to risks associated with product liability claims if the consumption of our products results in injury or illness. We cannot predict what impact such product liability claims or resulting negative publicity would have on our business or on our brand image. The successful assertion of product liability claims against us could result in potentially significant monetary damages, diversion of management resources and require us to make significant payments and incur substantial legal expenses, although we do carry product liability insurance for potential product liability claims.   Even if a product liability claim is not successfully pursued to judgment by a claimant, we may still incur substantial legal expenses defending against such a claim. Finally, serious product quality concerns could result in governmental action against us, which, among other things, could result in the suspension of production or distribution of our products, loss of certain licenses, or other governmental penalties.
 
 
14

 
 
MARKETING CLAIMS AGAINST US COULD RESULT IN ADVERSE PUBLICITY.
 
We are exposed to risks associated with marketing claims from our competitors. In this connection, we have received a letter from a competitor claiming that a sample of our SUSTA product contains a non-natural ingredient. This claim is more fully described in Item 1-Business- Claims from Competitor. We are currently investigating this claim and intend to take appropriate remedial action if this claim has any validity.  We cannot predict what impact such claim or resulting negative publicity would have on our business or on our brand image. If the claim were accurate, we may need to recall some or all of our product at some level of distribution. If the Company were required to undertake a recall, the recall could have a material adverse effect on the Company's financial condition and results of operations, including potential loss of reputation and future sales.
 
WE COMPETE IN AN INDUSTRY THAT IS BRAND-CONSCIOUS, AND UNLESS WE ARE ABLE TO ESTABLISH AND MAINTAIN BRAND NAME RECOGNITION OUR SALES MAY BE NEGATIVELY IMPACTED.
 
Our business is substantially dependent upon awareness and market acceptance of our products and brand by our targeted consumers. In addition, our business depends on acceptance by our independent distributors and consumers of our brand. Although we believe that we have made progress towards establishing market recognition for our brand in the industry, it is too early in the product life cycle of the brand to determine whether our products and brand will achieve and maintain satisfactory levels of acceptance by independent distributors, grocery stores, retailers and consumers.
 
WE RELY PRIMARILY ON THIRD-PARTY DISTRIBUTORS AND INDEPENDENT RETAILERS, AND THIS COULD NEGATIVELY AFFECT OUR ABILITY TO EFFICIENTLY AND PROFITABLY DISTRIBUTE AND MARKET OUR PRODUCTS, MAINTAIN OUR EXISTING MARKETS AND EXPAND OUR BUSINESS INTO OTHER GEOGRAPHIC MARKETS.
 
Except for the sales through the internet, we do not sell our products directly to our end customers. We primarily rely on third-party distributors and retailers for the sale and distribution of our products. To the extent that our distributors are distracted from selling our products or do not expend sufficient efforts in managing and selling our products, our sales will be adversely affected. Our ability to maintain our distribution network and attract additional distributors will depend on a number of factors, many of which are outside our control. Some of these factors include: (i) the level of demand for our brand and products in a particular distribution area; (ii) our ability to price our products at levels competitive with those offered by competing products and (iii) our ability to deliver products in the quantity and at the time ordered by distributors.
 
There can be no assurance that we will be able to meet all or any of these factors in any of our current or prospective geographic areas of distribution. Furthermore, shortage of adequate working capital may make it impossible for us to do so. Our inability to achieve any of these factors in a geographic distribution area will have a material adverse effect on our relationships with our distributors in that particular geographic area, thus limiting our ability to maintain and expand our market, which will likely adversely affect our revenues and financial results.
 
OUR FUTURE SUCCESS RELIES UPON SUSTA™, ALL-NATURAL, PATENT-PENDING, HEALTHY SWEETENER. THERE IS NO ASSURANCE THAT THESE PATENTS WILL BE GRANTED. EVEN IF THEY ARE GRANTED, THERE IS NO ASSURANCE THAT WE WILL HAVE THE RESOURCES TO ENFORCE THE PATENTS THROUGH LITIGATION OR OTHERWISE. THE LOSS OF EXCLUSIVE RIGHT TO SUSTA™ COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 
We believe that our business does not infringe upon the valid proprietary rights of others, but there can be no assurance that third parties will not assert infringement claims against us. If infringement claims are brought against us, there can be no assurance that we will have the financial resources to defend against such claims or prevent an adverse judgment against us. In the event of an unfavorable ruling on any such claim, there can be no assurance that a license or similar agreement to utilize the intellectual property rights in question relied upon by us in the conduct of our business will be available to us on reasonable terms, if at all. In the event of an unfavorable ruling on any such claim, there can be no assurance that a license or similar agreement to utilize the intellectual property rights in question relied upon by us in the conduct of our business will be available to us on reasonable terms, if at all.
 
 
15

 
 
SUSTA™ is patent-pending in the United States and Canada. There can be no assurance any of these pending patents will be granted or, even if they are, that we will have the resources to enforce these patents through litigation or otherwise. In addition, patents granted by the United States Patent Office do not guarantee that competitors in overseas locations will not imitate our products, or patent similar products in other nations. The failure to obtain the patent to SUSTA™ may have a material adverse effect on our business operations.
  
WE MAY NEED ADDITIONAL CAPITAL TO FUND OUR FUTURE OPERATIONS AND, IF IT IS NOT AVAILABLE WHEN WE NEED IT, WE MAY NEED TO REDUCE OUR PLANNED DEVELOPMENT AND MARKETING EFFORTS, WHICH MAY REDUCE OUR SALES REVENUES.
 
We believe that our existing working capital and cash available from operations will enable us to meet our working capital requirements for at least the next 3 months. The development and marketing of new products and the expansion of distribution channels and associated support personnel requires a significant commitment of resources. In addition, if the markets for our products develop more slowly than anticipated, or if we fail to establish significant market share and achieve sufficient net revenues, we may continue to consume significant amounts of capital. As a result, we could be required to raise additional capital of up to $5,000,000. We cannot assure that additional capital, if required, will be available on acceptable terms, or at all. If we are unable to obtain sufficient amounts of additional capital, we may be required to reduce the scope of our planned product development and marketing efforts, which could harm our business, financial condition and operating results
 
WE MAY NEVER PAY ANY DIVIDENDS TO SHAREHOLDERS.
 
We have never declared or paid any cash dividends or distributions on our capital stock. We currently intend to retain our future earnings, if any, to support operations and to finance expansion and therefore we do not anticipate paying any cash dividends on our Common Stock in the foreseeable future.
 
The declaration, payment and amount of any future dividends will be made at the discretion of the board of directors, and will depend upon, among other things, the results of our operations, cash flows and financial condition, operating and capital requirements, and other factors as the board of directors considers relevant. There is no assurance that future dividends will be paid, and, if dividends are paid, there is no assurance with respect to the amount of any such dividend.
 
Risks Related to Our Common Stock
 
OUR COMMON STOCK IS QUOTED ON THE OTC BULLETIN BOARD WHICH MAY HAVE AN UNFAVORABLE IMPACT ON OUR STOCK PRICE AND LIQUIDITY.
 
Our Common Stock is quoted on the OTC Bulletin Board.  The OTC Bulletin Board is a significantly more limited market than the New York Stock Exchange or Nasdaq system.  The quotation of our shares on the OTC Bulletin Board may result in a less liquid market available for existing and potential stockholders to trade shares of our Common Stock, could depress the trading price of our Common Stock and could have a long-term adverse impact on our ability to raise capital in the future.
 
THERE IS LIMITED LIQUIDITY ON THE OTCBB.
 
When fewer shares of a security are being traded on the OTCBB, volatility of prices may increase and price movement may outpace the ability to deliver accurate quote information. Due to lower trading volumes in shares of our Common Stock, there may be a lower likelihood of one's orders for shares of our Common Stock being executed, and current prices may differ significantly from the price one was quoted at the time of one's order entry. 
 
 
16

 
 
OUR COMMON STOCK IS THINLY TRADED, SO CURRENT SHAREHOLDERS MAY BE UNABLE TO SELL THEIR SHARES AT OR NEAR ASKING PRICES OR AT ALL.
 
Currently our Common Stock is quoted in the OTC Bulletin Board market and the trading volume we will develop may be limited by the fact that many major institutional investment funds, including mutual funds, as well as individual investors follow a policy of not investing in Bulletin Board stocks and certain major brokerage firms restrict their brokers from recommending Bulletin Board stocks because they are considered speculative, volatile and thinly traded. The OTC Bulletin Board market is an inter-dealer market much less regulated than the major exchanges and our Common Stock is subject to abuses, volatility and shorting. Thus there is currently no broadly followed and established trading market for our Common Stock. An established trading market may never develop or be maintained. Active trading markets generally result in lower price volatility and more efficient execution of buy and sell orders. Absence of an active trading market reduces the liquidity of the shares traded there.
 
The trading volume of our Common Stock has been and may continue to be limited and sporadic. As a result of such trading activity, the quoted price for our Common Stock on the OTC Bulletin Board may not necessarily be a reliable indicator of its fair market value. Further, if we cease to be quoted, holders would find it more difficult to dispose of, or to obtain accurate quotations as to the market value of our Common Stock and as a result, the market value of our Common Stock likely would decline.
 
OUR COMMON STOCK IS SUBJECT TO PRICE VOLATILITY UNRELATED TO OUR OPERATIONS.
 
The market price of our common stock could fluctuate substantially due to a variety of factors, including market perception of our ability to achieve our planned growth, quarterly operating results of other companies in the same industry, trading volume in our common stock, changes in general conditions in the economy and the financial markets or other developments affecting our competitors or us. In addition, the stock market is subject to extreme price and volume fluctuations. This volatility has had a significant effect on the market price of securities issued by many companies for reasons unrelated to their operating performance and could have the same effect on our Common Stock.
 
IF WE FAIL TO REMAIN CURRENT ON OUR REPORTING REQUIREMENTS, WE COULD BE REMOVED FROM THE OTC BULLETIN BOARD, WHICH WOULD LIMIT THE ABILITY OF BROKER-DEALERS TO SELL OUR SECURITIES AND THE ABILITY OF SHAREHOLDERS TO SELL THEIR SECURITIES IN THE SECONDARY MARKET.
 
Companies trading on the OTC Bulletin Board, such as NXT Nutritionals, must be reporting issuers under Section 12 of the Exchange Act, and must be current in their reports under Section 13 of the Exchange Act, in order to maintain price quotation privileges on the OTC Bulletin Board.  If we fail to remain current on our reporting requirements, we could be removed from the OTC Bulletin Board.  As a result, the market liquidity for our securities could be adversely affected by limiting the ability of broker-dealers to sell our securities and the ability of shareholders to sell their securities in the secondary market.
 
CURRENT SHAREHOLDERS MAY BE SUBJECT TO DILUTION CAUSED BY CONVERSION OF OUR OUTSTANDING CONVERTIBLE DEBENTURE AND/OR EXERCISE OF OUR OUTSTANDING SERIES A, SERIES B AND SERIES C WARRANTS.
 
In connection with a private offering closed on August 27, 2009, we issued a number of 3-year convertible debentures, representing an aggregate principal amount of $3,173,000, which are convertible into shares of our Common Stock at $0.40 per share at any time during the term of the convertible debentures, a number of Series A Warrants to purchase 100% of the underlying shares of Common Stock of the convertible debenture at an exercise price of $0.40 per share and a number of Series B Warrants to purchase 100% of the underlying shares of Common Stock of the convertible debenture at an exercise price of $0.60 per share. Upon conversion or exercise of the convertible debenture or the Series A and Series B Warrants, in whole or in part, current shareholders will be subject to significant dilution.
 
 
17

 
 
In connection with a private offering closed on February 26,  2010, we issued a number of 15 month convertible debentures, representing an aggregate principal amount of $5,667,743 with a face amount of $6,517,943, and subsequently modified to $8,438,684, which are convertible into shares of our Common Stock at a modified rate of  $0.40 per share at any time during the term of the convertible debentures, a number of Series C Warrants to purchase 100% of the underlying shares of Common Stock of the convertible debenture at a modified exercise price of $0.40 per share.   Upon conversion or exercise of the convertible debenture or the Series C Warrants, in whole or in part, current shareholders will be subject to significant dilution.

On November 21, 2011, NXT Nutritionals Holdings, Inc. (the “Company” or the “Registrant”) and NXT Investment Partners, LLC, a Delaware limited liability company (“NIP”) executed a Securities Purchase Agreement (the “SPA”) pursuant to which NIP agreed to make investments (the “Investment”) in the Company in the form of a senior secured loan to the Company in the aggregate principal amount of at least $1,000,000 and up to $1,500,000 (the amount loaned shall be referred to as the “Principal Amount of the 2011 Note”), bearing interest at 13% per annum, in exchange for a four-year 13% Senior Secured promissory note (“2011 Note”). On November 21, 2011, pursuant to the SPA, the Company received an initial investment of $1,000,000 and issued the 2011 Note in the original principal amount of $1,000,000 along with 13,075,468 shares of Series A Convertible Preferred Stock (“Preferred Stock”) of the Company to NXT. The sum of the $1,000,000 initial investment was attributed 20% for the purchase of the 2011 Note and 80% for the purchase of the Preferred Stock. Pursuant to the terms of the SPA, the Company and NXT may agree to an additional investment of up to $500,000. A Preferred Stock Certificate of Designation as attached to the SPA. The Preferred Stock issued under the SPA carries an annual dividend equal to the greater of: (a) 10% of the then outstanding Principal Amount of the 2011 Note as of December 31st of the applicable fiscal year for which the annual dividend is being paid; or (b) 10% of the Net Income (as defined in the 2011 Note) of the Company in excess of $500,000 for the applicable fiscal year of the Company and is convertible at the option of NIP into an equal number of shares of common stock of the Company representing 20% of the Company’s fully diluted capital stock at the time of conversion.

In connection with the closing of the Investment, the Company granted to NIP a security interest in the Company’s assets as collateral as set forth in the Security Agreement dated November 21, 2011, as attached to the SPA. Furthermore, on November 21, 2011 the Company’s subsidiaries also entered into a Subsidiary Guarantee Agreement, as attached to the SPA, to guarantee the Company’s prompt and complete payment and performance when the obligations set forth in the Subsidiary Guarantee are due.

OUR COMMON STOCK IS CLASSIFIED AS A “PENNY STOCK” AS THAT TERM IS GENERALLY DEFINED IN THE SECURITIES EXCHANGE ACT OF 1934 TO MEAN EQUITY SECURITIES WITH A PRICE OF LESS THAN $5.00. OUR COMMON STOCK WILL BE SUBJECT TO RULES THAT IMPOSE SALES PRACTICE AND DISCLOSURE REQUIREMENTS ON BROKER-DEALERS WHO ENGAGE IN CERTAIN TRANSACTIONS INVOLVING A PENNY STOCK.
 
The SEC has adopted regulations which generally define so-called "penny stocks" to be an equity security that has a market price less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exemptions. As a "penny stock," our Common Stock may become subject to Rule 15g-9 under the Exchange Act of 1934, or the "Penny Stock Rule." This rule imposes additional sales practice requirements on broker-dealers that sell such securities to persons other than established customers and "accredited investors" (generally, individuals with a net worth in excess of $1,000,000 or annual incomes exceeding $200,000, or $300,000 together with their spouses).
 
For any transaction involving a penny stock, unless exempt, the penny stock rules require that a broker or dealer approve a person's account for transactions in penny stocks and the broker or dealer receive from the investor a written agreement to the transaction setting forth the identity and quantity of the penny stock to be purchased.  In order to approve a person's account for transactions in penny stocks, the broker or dealer must obtain financial information and investment experience and objectives of the person and make a reasonable determination that the transactions in penny stocks are suitable for that person and that that person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.
 
 
18

 
 
The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prepared by the SEC relating to the penny stock market, which, in highlight form, sets forth:
 
The basis on which the broker or dealer made the suitability determination, and that the broker or dealer received a signed, written agreement from the investor prior to the transaction.
 
Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.
 
Because of these regulations, broker-dealers may not wish to engage in the above-referenced necessary paperwork and disclosures and/or may encounter difficulties in their attempt to sell shares of our Common Stock, which may affect the ability of selling shareholders or other holders to sell their shares in any secondary market and have the effect of reducing the level of trading activity in any secondary market. These additional sales practice and disclosure requirements could impede the sale of our Common Stock. In addition, the liquidity for our Common Stock may decrease, with a corresponding decrease in the price of our Common Stock. Our Common Stock, in all probability, will be subject to such penny stock rules for the foreseeable future and our shareholders will, in all likelihood, find it difficult to sell their common stock.
 
There can be no assurance that our Common Stock will qualify for exemption from the Penny Stock Rule. In any event, even if our Common Stock were exempt from the Penny Stock Rule, we would remain subject to Section 15(b)(6) of the Exchange Act, which gives the SEC the authority to restrict any person from participating in a distribution of a penny stock if the SEC determines that such a restriction would be in the public interest.
 
ITEM 1B.    UNRESOLVED STAFF COMMENTS
 
We have received no written comments regarding our periodic or current reports from the staff of the SEC that were issued 180 days or more preceding the end of our fiscal year 2011 that remain unresolved.

ITEM 2.      PROPERTIES
 
Our principal executive offices are located at 933 E. Columbus Avenue, Suite C, Springfield, MA 01105.  Currently we do not own any real property. Our office rental expense on a monthly basis is $450. Healthy Dairy, LLC, and NXT, LLC operate from our principal executive office.
 
ITEM 3.      LEGAL PROCEEDINGS
 
On November 5, 2004, our subsidiary NXT Nutritionals, filed an application to register the SUSTA trademark on the United States Patent and Trademark Office (“USPTO”) Principal Register, which the USPTO approved and published for opposition.
 
On November 23, 2009, ConAgra Foods Food Ingredients Company, Inc. filed an opposition proceeding before the USPTO’s Trademark Trial and Appeal Board seeking to prevent such registration.  In the opposition proceeding, ConAgra claims that the SUSTA mark is almost identical in sight, sound, and commercial impression to ConAgra’s SUSTAGRAIN trademark, such that a likelihood of confusion exists between these two marks.  On October 28, 2010, we responded to ConAgra’s Notice of Opposition.  As of April 1, 2012, the companies have reached an agreement in principle pursuant to which NXT will have trademark rights in SUSTA Natural Sweetener and SustaBowl natural sweetener. The proceeding pending before the USPTO has been extended by the parties.
 
We are not currently aware of any other material pending legal proceedings against us.
 
 
19

 
 
 
ITEM 4.     MINE SAFETY DISCLOSURES

Not applicable

 
20

 
 
PART II
 
ITEM 5.      MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
 
Our shares of common stock are trading on the Over the Counter Bulletin Board (“OTC Bulletin Board”) under the trading symbol “NXTH.OB.” The OTC Bulletin Board is a significantly more limited market than the New York Stock Exchange or Nasdaq system.  The quotation of our shares on the OTC Bulletin Board may result in a less liquid market available for existing and potential stockholders to trade shares of our common stock, could depress the trading price of our common stock and could have a long-term adverse impact on our ability to raise capital in the future.
 
The following table sets forth, for the periods indicated, the high and low bid prices for our common stock on the OTC Bulletin Board as reported by various OTCBB market makers. The quotations do not reflect adjustments for retail mark-ups, mark-downs, or commissions and may not necessarily reflect actual transactions.
 
Quarter Ended
 
High Bid ($)
   
Low Bid ($)
 
Fourth Quarter ended December 31, 2011
   
0.06
     
0.01
 
Third Quarter ended September 30, 2011
   
0.07
     
0.02
 
Second Quarter ended June 30, 2011
   
0.18
     
0.05
 
First Quarter ended  March 31, 2011
   
0.27
     
0.14
 
Fourth Quarter ended December 31, 2010
   
0.32
     
0.17
 
Third Quarter ended September 30, 2010
   
0.30
     
0.17
 
Second Quarter ended June 30, 2010
   
0.62
     
0.16
 
First Quarter ended March 31, 2010
   
3.22
     
0.52
 
 
Holders
 
As of April, 2012, there were approximately 68 holders of record of our common stock. This does not reflect the number of persons or entities who held stock in nominee or "street" name through various brokerage firms.
 
Dividends
 
To date, we have never declared or paid any cash dividends on our capital stock.  We currently intend to retain any future earnings for funding growth and therefore, do not expect to pay any dividends in the foreseeable future. Payment of future dividends, if any, will be at the discretion of our Board of Directors after taking into account various factors, including our financial condition, operating results, current and anticipated cash needs and plans for expansion.
 
Transfer Agent and Registrar
 
Our independent stock transfer agent is Corporate Stock Transfer, Inc. at 3200 Cherry Creek South Drive, Suite 430, Denver, Colorado 80209.
 
 
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ITEM 6.       SELECTED FINANCIAL DATA
 
Not applicable.
 
ITEM 7.       MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS.
 
The following discussion is provided as a supplement to – and should be read in conjunction with - the Consolidated Financial Statements and Notes thereto appearing elsewhere in this Form 10-K. The following discussion contains “forward-looking statements” as described in the introduction to this Form 10-K.
 
BUSINESS
 
Operating through NXT Nutritionals, we are engaged in developing and marketing of a proprietary, patent-pending, natural, healthy sweetener sold under the brand name SUSTA™ and other food and beverage products. SUSTA™ is being sold as a stand-alone product and it is the common ingredient for all of our products.  We also market and sell Healthy Dairy® which is enhanced by the revolutionary taste and nutritious ingredients contained in SUSTA™. Our mission is to provide consumers with unique, healthy, delicious products that promote a healthier lifestyle and combat obesity and diabetes.

We have previously been focused on expanding the distribution of SUSTA™ to the retail marketplace nationwide and, expanding the Healthy Diary® product line from the east coast to nationwide reach, and eventually expanding the Healthy Dairy® to include product lines such as cup yogurt and ice cream.  Currently we have changed our business focus of Healthy Dairy away from selling to the grocery chains and to focus on the food service category.
 
We have undertaken an aggressive marketing campaign and trial program.  Additionally, more traditional levers in the retail sales channel like advertising, trade incentives, price promotions, couponing, and demonstrations are being employed.  We are targeting consumer food and beverage companies to incorporate SUSTA™ into their products to provide a healthy alternative to sugar, artificial sweeteners and other natural sweeteners that do not provide the nutritional and health benefits of SUSTA™.  We also plan to continue to utilize our three high profile celebrity spokespersons, including Eddie George, Blair Underwood and Dara Torres, to help drive awareness of SUSTA™ by appearing in commercials, making public appearances, heading our cause marketing campaign and appearing on popular television shows.
 
We have funded our operations to date on private placement offerings of our securities.  On August 27, 2009, we completed a private offering of an aggregate subscription amount of $3,173,000 through the issuance of investment units to certain accredited investors.  Each investment unit had a purchase price of $50,000 and consisted of (i) a three year Debentures in the amount of $65,000 convertible into shares of our common stock at a conversion price of $0.40 per share, (ii) five year Series A Warrants to purchase 100% of the common stock underlying the Debenture at an exercise price of $0.40 per share, and (iii) five year Series B Warrants to purchase 100% of the common stock underlying the Debenture at an exercise price of $0.60 per share.
 
On February 26, 2010, we closed on a private placement offering by raising total gross proceeds of $5,667,743, through the sale of (i) 0% Original Issue Discount Senior Secured Convertible Notes convertible into shares of our common stock at a conversion price of $1.00 per share, and (ii) a number of five-year Warrants exercisable into a number of shares of common stock equal to 100% of the number of common shares underlying the Notes at an exercise price of $1.25 per share to certain accredited investors. The principal amount of each Note is 115% of the subscription proceeds received.  
 
On September 1, 2010, we entered into a modification and amendment agreement (the “Modification Agreement”) with purchasers holding approximately 87% of the aggregate number of (1) the Notes, (2) the Warrants, and (3) the shares of common stock underlying the Notes and the Warrants, pursuant to which the commencement of monthly redemption date of the Notes is extended to December 1, 2010 and the holders of the Notes and the Warrants, we may now pay the monthly redemption of the Notes in common stock even if the monthly redemption price described in the Notes is less than $0.40. In addition, pursuant to the Modification Agreement, the conversion price of the Notes and the exercise price of the Warrants are both reduced to $0.40 per share. 
 
 
22

 
 
On December 6, 2010 we entered into a second modification and amendment agreement (the “Second Modification Agreement”) with the Purchasers (the “Purchasers”) holding approximately 91% of the aggregate number of (1) the  Notes, (2) Series C warrants and (3) the shares of common stock underlying the Notes and the Series C Warrants. Pursuant to the Amendment, the commencement of monthly redemption date of the Notes is extended to September 1, 2011, the maturity date of the Notes is extended to December 31, 2011 and the original issue discount is amended such that the principal amount equals each investor’s subscription amount multiplied by 1.60.  In addition the conversion price can be adjusted on the following events:
 
(i)
First Quarter 2011 Form 10-Q.  If the Company’s filing of its March 31, 2011 Form 10-Q with the Securities and Exchange Commission does not disclose revenue of at least $5 million for the first three months of 2011, then the Conversion Price of the Notes will decrease by $.03 on the fifth (5th) trading day after the Company files its March 31, 2011 Form 10-Q.  Notwithstanding the foregoing, if, during the five (5) trading days following the filing of the March 31, 2011 Form 10-Q, the average closing bid price is $.60 or better, the aggregate trading volume of Company common stock is at least 1.5 million shares and all of the shares underlying the Notes may be sold pursuant to an effective registration statement or Rule 144 (and the Company is then in compliance with the current public information required under Rule 144), then no adjustment to the Conversion Price will be made hereunder.
 
(ii)
Second Quarter 2011 Form 10-Q.  If the Company’s filing of its June 30, 2011 Form 10-Q with the Securities and Exchange Commission does not disclose revenue of at least $8 million for the first six months of 2011, then the Conversion Price of the Notes will be adjusted to equal the lesser of (i) the then effective Conversion Price and (ii) ninety (90%) percent of the average closing bid price during the five (5) trading Days following the filing of the June 30, 2011 Form 10-Q, such adjustment, if any, to occur on the fifth (5th) trading day following the Company’s filing of its June 30, 2011 Form 10-Q.  Notwithstanding the foregoing, if, during the five (5) trading Days following the filing of the June 30, 2011 Form 10-Q, the average closing bid price is $.60 or better, the aggregate trading volume of Company common stock is at least 1.5 million shares and all of the shares underlying the Notes may be sold pursuant to an effective registration statement or Rule 144 (and the Company is then in compliance with the current public information required under Rule 144), then no adjustment to the Conversion Price will be made hereunder.
 
On November 21, 2011, NXT Nutritionals Holdings, Inc. (the “Company” or the “Registrant”) and NXT Investment Partners, LLC, a Delaware limited liability company (“NIP”) executed a Securities Purchase Agreement (the “SPA”) pursuant to which NIP agreed to make investments (the “Investment”) in the Company in the form of a senior secured loan to the Company in the aggregate principal amount of at least $1,000,000 and up to $1,500,000 (the amount loaned shall be referred to as the “Principal Amount of the 2011 Note”), bearing interest at 13% per annum, in exchange for a four-year 13% Senior Secured promissory note (“2011 Note”). On November 21, 2011, pursuant to the SPA, the Company received an initial investment of $1,000,000 and issued the 2011 Note in the original principal amount of $1,000,000 along with 13,075,468 shares of Series A Convertible Redeemable Preferred Stock (“Preferred Stock”) of the Company to NXT. The sum of the $1,000,000 initial investment was attributed 20% for the purchase of the 2011 Note and 80% for the purchase of the Preferred Stock. Pursuant to the terms of the SPA, the Company and NXT may agree to an additional investment of up to $500,000. The rights and preferences of the Preferred Stock are set forth in the Series A Preferred Stock Certificate of Designation as attached to the SPA. The Preferred Stock issued under the SPA carries an annual dividend equal to the greater of: (a) 10% of the then outstanding Principal Amount of the 2011 Note as of December 31st of the applicable fiscal year for which the annual dividend is being paid; or (b) 10% of the Net Income (as defined in the 2011 Note) of the Company in excess of $500,000 for the applicable fiscal year of the Company and is convertible at the option of NIP into an equal number of shares of common stock of the Company representing 20% of the Company’s fully diluted capital stock at the time of conversion.
 
 
23

 

In connection with the closing of the Investment, the Company granted to NIP a security interest in the Company’s assets as collateral as set forth in the Security Agreement dated November 21, 2011, as attached to the SPA. Furthermore, on November 21, 2011 the Company’s subsidiaries also entered into a Subsidiary Guarantee Agreement, as attached to the SPA, to guarantee the Company’s prompt and complete payment and performance when the obligations set forth in the Subsidiary Guarantee are due.
 
Additionally, pursuant to a Registration Rights Agreement dated November 21, 2011 delivered pursuant to the SPA, the Company agreed to register 100% of the common shares issuable upon conversion of the Preferred Stock (the “Registrable Securities”) on a Form S-1 (the “Registration Statement”) to be filed with the Securities and Exchange Commission (the “SEC”) on or prior to the 60th calendar day following the date the Company is required to file its Form 10-K for the fiscal year ending December 31, 2011 (the “Filing Date”) and use its best efforts to have it declared effective within 180 calendar days after November 21, 2011 (the “Effectiveness Date”).  In the event that the total number of the Registrable Securities exceeds the limitation imposed by the SEC staff under Rule 415, the number of Registrable Securities to be registered will be subject to cut back as provided in the Registration Rights Agreement. Subject to the terms of the Registration Rights Agreement, upon the occurrence of any event that shall incur liquidated damages (each an “Event” and the date of the occurrence of any such Event, the “Event Date”), including, but not limited to, that the initial Registration Statement is not filed prior to the Filing Date or the initial Registration Statement including the Registrable Securities permitted by Rule 415 is not declared effective by the Effectiveness Date, (A) the Company shall pay to NIP an amount in cash, as partial liquidated damages, equal to 0.5% of the aggregate subscription amount paid by NIP pursuant to the SPA for any unregisterable securities then held by NIP, and (B) on each monthly anniversary of the Event Date until the Event is cured, the shall pay to NIP an amount in cash, equal to 1.0% of the aggregate subscription amount paid by NIP pursuant to the SPA for any unregisterable securities then held by NIP, subject to a maximum amount of 6.0% of the aggregate subscription amount paid by NXT pursuant to the SPA.

The term of the SPA additionally requires the holders of at least 65% of the outstanding principal amount of the Company’s 2009 convertible debentures (the “2009 Debentures”) and five year Series A and Series B warrants (collectively, the “2009 Warrants” and together with the 2009 Debentures are referred to as the “2009 Securities”) to agree to and execute the First Amendment (as described below) and the holders of at least 67% of the outstanding principal amount of the Company’s 0% Original Issue Discount Senior Secured Convertible Notes (the “2010 Notes”) to agree to and execute the Fourth Modification Agreement (as described below).
 
On November 4, 2011, the Company entered into a Fourth Modification and Amendment Agreement (the “Fourth Modification Agreement”) with the holders holding approximately 93.5% percent of the outstanding principal amount of (1) the 2010 Notes, (2) the related Series C warrants (the “Series C Warrants”) and (3) the shares of common stock underlying the Notes and the Series C Warrants. Pursuant to the Fourth Modification Agreement, the holders, upon closing of the Investment, among other things, have agreed to waived their right to monthly redemptions of the Notes and extend the maturity date of the Notes to the date that is 48-months from the Closing Date (as defined in the SPA) of the Investment. In addition, the holders have agreed (i) that the conversion price will be lowered to $0.25, (ii) to a waiver of the anti-dilution provisions and future participation rights set forth in the Notes and Series C Warrants and (iii) to subordinate their security interests securing the 2010 Notes to the senior security interests to be granted by the Company to secure the Investment and to third parties that provide financing for accounts receivables, inventory and raw materials of the Company.

Also on November 4, 2011, approximately 70% of the holders of the outstanding principal amount of the Company’s 2009 Securities entered into a First Modification and Amendment Agreement (the “First Amendment”) pursuant to which, upon closing of the Investment, the 2009 Debentures and the 2009 Warrants of the approving holders were amended and modified, among other things, (i) to reduce the Conversion Price (as defined in the 2009 Debentures) and the Exercise Price (as defined in the 2009 Warrants) to $0.25 per share of common stock, (ii) to waive the anti-dilution provisions of the 2009 Debentures and the 2009 Warrants and (iii) and extend the Maturity Date under the 2009 Debentures to the date that is 48-months from the Closing Date (as defined in the SPA) of the Investment. As a result of the closing of Investment, those holders of the 2009 Securities who did not execute the First Amendment will incur a reduction of the Conversion Price (as defined in the 2009 Debentures) and the Exercise Price (as defined in the 2009 Warrants) of their 2009 Debentures and 2009 Warrants to $0.09 per share of common stock. The Maturity Date under the 2009 Debentures remains unmodified for those holders of the 2009 Securities who did not execute the First Amendment.
 
 
24

 
 
The Company continues to explore potential expansion opportunities in the industry in order to boost sales, while leveraging distribution systems to consolidate lower costs.
 
RESULTS OF OPERATIONS
 
Results of Operations
 
Summary of Statement of Operations for the Year Ended December 31, 2011 and 2010:
 
   
Year ended
 
   
December 31, 2011
   
December 31, 2010
 
Sales – net of slotting fees and discounts
 
$
237,989
   
$
187,516
 
Gross Loss
 
$
(912,716
 
$
(246,083
)
General and Administrative Expenses
 
$
(3,535,854
)
 
$
(3,591,276
)
Other Income (Expense) - Net
 
$
3,112,864
   
$
(13,565,377
)
Net Loss
 
$
(1,335,706
)
 
$
(17,402,736
)
Net Loss per Common Share – Basic
 
$
(0.04
)
 
$
(0.38
 
For the year ended December 31, 2011 and 2010, the Company reported a net loss of $(1,335,706) or $(0.04) per share and a net loss of $(17,402,736) or $(0.38) per share, respectively. The change in loss between the year ended December 31, 2011 and 2010 was primarily attributable to the following:

·  
The Company has shifted its Healthy Dairy sales focus from sales to grocery chains to the food service category.  We have only recorded a limited number of Healthy Dairy sales since this shift in focus. The Company also launched the natural sweetener product (SUSTA) on April 30, 2009.  The Company has experienced limited sales on the SUSTA product.  The mix in sales between the yogurt smoothie and the natural sweetener  was approximately 50% each during the year ended December 31, 2011 as compared to 80% of sales during the year ended December 31, 2010 was for the natural sweetener.  This increase in sales composition toward the yogurt smoothies is due to selling into the military channel during the year ended December 31, 2011. 
 
·  
Sales for the year ended December 31, 2011 as compared to the year ended December 31, 2010 increased by 26%.  The increase is primarily attributable to selling into the military channel during the year ended December 31, 2011. 
 
·  
General and administrative expenses decreased by approximately 1% during the year ended December 31, 2011 as compared to the corresponding year ended December 31, 2010. 
 
Other income (expense) - net increased significantly during the year ended December 31, 2011 as compared to the corresponding year ended December 31, 2010.  The increase is primarily attributable to an approximately $8.0 million decrease in interest expense.  The Company fully accreted the debt discount recorded on the 2010 convertible note offering during 2010.  The Company also recorded a loss on debt extinguishment of $9.8 million during the year ended December 31, 2010.  The decreases were offset by a major decrease in the change in fair market value of the derivative liability during the year ended December 31, 2011 as compared to the corresponding year ended December 31, 2010.
  
 
25

 
 
Liquidity and Capital Resources
 
Going Concern:  As reflected in our audited financial statement for the year ended December 31, 2011, we generated a net loss of $(1,335,706) during the year ended December 31, 2011, and as of that date, our current liabilities exceeded our current assets resulting in a working capital deficit of $(2,287,655). In addition, we also had a stockholder’s deficit of $(11,777,534) at December 31, 2011. As a result, our independent auditor expressed substantial doubt as to our ability to continue as a going concern.

The ability of the Company to continue its operations is dependent on management's plans, which include the raising of capital through debt and/or equity markets with some additional funding from other traditional financing sources, including term notes, until such time that funds provided by operations are sufficient to fund working capital requirements. 
 
 
The Company will require additional funding to meet its working capital obligations and to finance the growth of its current and expected future operations. The Company believes its current available cash along with anticipated revenues are insufficient to meet its working capital needs unless the Company’s obtains additional funding in the near future. There can be no assurance that financing will be available in amounts or terms acceptable to the Company, if at all.

The ability of the Company to continue as a going concern is dependent on its ability to do all or most of the above listed steps. In the event that the Company were unable to obtain additional financing, it is likely that the Company would be required to discontinue operations.
 
The following table summarizes total current assets, liabilities and working capital at December 31, 2011 compared to December 31, 2010.
 
   
December 31,
2011
   
December 31,
2010
   
Increase/
Decrease
 
                   
Current Assets
 
$
467,227
   
$
2,212,843
   
$
(1,745,616
)
Current Liabilities
 
$
2,754,882
   
$
5,377,489
   
$
(2,622,607
Working Capital (Deficit)
 
$
(2,287,655
)
 
$
(3,164,646
)
 
$
(876,991
 )

As of December 31, 2011, we had a working capital deficit of $(2,287,655) as compared to a working capital deficit of $(3,164,646) as of December 31, 2010, a decrease of $(876,991).
 
The decrease is primarily a result of a decrease in current liabilities, specifically a decrease in derivative liabilities and a decrease in convertible notes, primarily due to the restructure of the 2010 Notes and 2009 Debentures, which extended the maturity dates to 4 years on a significant portion of those instruments, as well as convertible holders of those instruments converting to common stock during the year ended December 31, 2011. These decreases in current liabilities were partially offset by a decrease in current assets, specifically a decrease in cash by approximately $1,217,808.
 
Net cash used for operating activities for the year ended December 31, 2011 and 2010 was $(2,151,557) and $(3,035,079), respectively.  During the year ended December 31, 2011, the Company used cash to build inventories and to further develop the 4 ounce yogurt cup and to market and build brand awareness of the product line.  The Company fully reserved for the inventory balance as of December 31, 2011 due to the difficulties with moving the inventory.
 
Net cash obtained through all financing activities for the year ended December 31, 2011 was $933,749 as compared to $4,628,755 for the year ended December 31, 2010, specifically attributable to the 2010 Convertible Note Offering.  During 2011, the Company raised $1,000,000 through the sale and issuance of the 2011 convertible redeemable preferred stock and note.  The proceeds were offset by $78,750 in issuance costs.
 
 
26

 
 
The Company continues to explore potential expansion opportunities in the industry in order to boost sales, while leveraging distribution systems to effect lower costs.
 
Recent Accounting Pronouncements
 
In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The guidance in ASU 2011-04 changes the wording used to describe the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements, including clarification of the FASB's intent about the application of existing fair value and disclosure requirements and changing a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The amendments in this ASU should be applied prospectively and are effective for interim and annual periods beginning after December 15, 2011. Early adoption by public entities is not permitted. The adoption of this guidance is not expected to have a material impact on the Company’s financial position or results of operations. 
 
Critical Accounting Policies
 
Our financial statements and related public financial information are based on the application of accounting principles generally accepted in the United States (“GAAP”). GAAP requires the use of estimates; assumptions, judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenues and expense amounts reported. These estimates can also affect supplemental information contained in our external disclosures including information regarding contingencies, risk and financial condition. We believe our use of estimates and underlying accounting assumptions adhere to GAAP and are consistently and conservatively applied. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions. We continue to monitor significant estimates made during the preparation of our financial statements.   

Our significant accounting policies are summarized in Note 2 of the consolidated financial statements. While all these significant accounting policies impact our financial condition and results of operations, we view certain of these policies as critical. Policies determined to be critical are those policies that have the most significant impact on our financial statements and require management to use a greater degree of judgment and estimates. Actual results may differ from those estimates. Our management believes that given current facts and circumstances, it is unlikely that applying any other reasonable judgments or estimate methodologies would cause effect on our consolidated results of operations, financial position or liquidity for the periods presented in this report. 
 
We believe the following critical accounting policies and procedures, among others, affect our more significant judgments and estimates used in the preparation of our consolidated financial statements: 
 
Use of Estimates, Going Concern Consideration – The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make 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 revenue and expenses during the reporting period. Actual results could differ from those estimates.  Among the estimates we have made in the preparation of the financial statements is an estimate of our projected revenues, expenses and cash flows in making the disclosures about our liquidity in this report.  As an early stage company, many variables may affect our estimates of cash flows that could materially alter our view of our liquidity and capital requirements as our business develops.  Our consolidated financial statements have been prepared assuming we are a “going concern”.  No adjustment has been made in the consolidated financial statements which could result should we be unable to continue as a going concern.  
 
Share-Based Compensation - US GAAP requires public companies to expense employee share-based payments (including options, warrants, restricted stock units and performance stock units) based on fair value.  We must use our judgment to determine key factors in determining the fair value of the share-based payment, such as volatility, forfeiture rates and the expected term in which the award will be outstanding. 
 
 
27

 
 
Derivative Financial Instruments - Fair value accounting requires bifurcation of embedded derivative instruments such as conversion features in convertible debt or equity instruments, and measurement of their fair value for accounting purposes. In determining the appropriate fair value, the Company uses the Binomial Lattice Model. In assessing the convertible debt instruments, management determines if the convertible debt host instrument is conventional convertible debt and further if there is a beneficial conversion feature requiring measurement. If the instrument is not considered conventional convertible debt, the Company will continue its evaluation process of these instruments as derivative financial instruments. 
 
Once determined, derivative liabilities are adjusted to reflect fair value at each reporting period end, with any increase or decrease in the fair value being recorded in results of operations as an adjustment to fair value of derivatives. In addition, the fair value of freestanding derivative instruments such as warrants, are also valued using the binomial option-pricing model. 
 
Debt Issue Costs and Debt Discount -These items are amortized over the life of the debt to interest expense.  If a conversion, extinguishment or repayment of the underlying debt occurs, a proportionate share of these amounts is immediately expensed.
 
Beneficial Conversion Feature - For convertible debt issued in 2008/2009, the convertible feature of the convertible notes indicated a rate of conversion that was below market value. As a result, the Company recorded a "beneficial conversion feature" ("BCF") and related debt discount. 
 
When the Company records a BCF, the relative fair value of the BCF is recorded as a debt discount from the face amount of the respective debt instrument. The discount is amortized to interest expense over the life of the debt. Upon issuance, the convertible debt instruments had an effective conversion rate per share in excess of the market price per share. 
 
Revenue recognition - The Company follows the guidance of the Securities and Exchange Commission’s Staff Accounting Bulletin No. 104 for revenue recognition and records revenue when all of the following have occurred: (1) persuasive evidence of an arrangement exists, (2) the product is delivered, (3) the sales price to the customer is fixed or determinable, and (4) collectability of the related customer receivable is reasonably assured. There is no stated right of return for products.
 
Sales are recognized upon delivery of products to customers. The Company allows deductions in the form of credits for products unsold during its shelf life which is on average 3 to 4 months. The Company’s reserve for accounts receivable takes these potential future credits into consideration.  Expenses such as slotting fees, sales discounts, and reclamation are accounted for as a direct reduction to revenues.
 
OFF-BALANCE SHEET ARRANGEMENTS:
 
We do not have any off-balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons, also known as “special purpose entities” (SPEs).
 
ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
 
Not applicable.

 
28

 
 
ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
 
NXT NUTRITIONALS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010
 
 
Page(s)
   
Report of Independent Registered Public Accounting Firm 
F-1
   
Consolidated Balance Sheets December 31, 2011 and 2010    
F-2
   
Consolidated Statements of Operations Years Ended December 31, 2011 and 2010    
F-3
   
Consolidated Statement of Stockholders’ Deficit Years Ended December 31, 2011 and 2010   
F-4
   
Consolidated Statements of Cash Flows Years Ended December 31, 2011 and, 2010  
F-5
   
Notes to Consolidated Financial Statements 
F-6 - F-26
 
 
29

 
 
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors of:
NXT Nutritionals Holdings, Inc.
 
We have audited the accompanying consolidated balance sheets of NXT Nutritionals Holdings, Inc. and Subsidiaries, as of December 31, 2011 and 2010, and the related consolidated statements of operations, stockholders' deficit and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
 
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 audits included considerations 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 includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes 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 NXT Nutritionals Holdings, Inc. and Subsidiaries as of December 31, 2011 and 2010, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
 
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the financial statements, the Company had a net loss of $1,335,706 and net cash used in operations of $2,151,557 for the year ended December 31, 2011; and a working capital deficit and stockholders' deficit of $2,287,655 and $11,777,534, respectively, at December 31, 2011. These factors raise substantial doubt about the Company's ability to continue as a going concern. Management's plan in regards to these matters is also described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
 
Berman & Company, P.A.
 
Boca Raton, Florida
April 16, 2012
 
 
551 NW 77th Street Suite 201 • Boca Raton, FL 33487
Phone: (561) 864-4444 • Fax: (561) 892-3715
www.berrnancpas.cominfo@bermancpas.com
Registered with the PCAOB • Member AICPA Center for Audit Quality
Member American Institute of Certifiedd Public Accountants
Member Florida Institute of Certified Public Accountants
 
 
F-1

 
 
NXT Nutritionals Holdings, Inc. and Subsidiaries
 
Consolidated Balance Sheets
 
   
   
December 31, 2011
   
December 31, 2010
 
Assets
 
             
Current Assets
           
Cash
  $ 444,322     $ 1,662,130  
Accounts receivable - net
    11,021       119,070  
Inventories - net
    -       431,643  
Other
    11,884       -  
Total Current Assets
    467,227       2,212,843  
                 
Debt issuance costs - net
    48,076       25,548  
                 
Total Assets
  $ 515,303     $ 2,238,391  
                 
Liabilities and Stockholders' Deficit
 
                 
Current Liabilities
               
Accounts payable and accrued expenses
  $ 944,472     $ 654,962  
Loans payable - related parties
    344,624       332,126  
Loans payable - other
    208,500       208,500  
Accrued interest payable - related parties
    71,545       59,035  
Accrued interest payable - convertible notes
    14,247       -  
Registration rights payable
    362,453       608,840  
Convertible notes payable - net of debt discount
    419,375       527,126  
Derivative liabilities
    389,666       2,986,900  
Total Current Liabilities
    2,754,882       5,377,489  
                 
Long-Term Liabilities
               
Note payable - net
    538,702       -  
Convertible notes payable - net of debt discount
    8,524,961       9,408,517  
Total Long-Term Liabilities
    9,063,663       9,408,517  
                 
Total Liabilities
    11,818,545       14,786,006  
                 
                 
Series A, convertible redeemable preferred stock, $0.001 par value, 50,000,000 shares
               
   authorized, 13,075,468 and 0 shares issued and outstanding, respectively (no stated value)
    474,292       -  
                 
Stockholders' Deficit
               
Common stock, $0.001 par value, 200,000,000 shares authorized,
               
    72,838,322 and 49,408,068 shares issued and outstanding, respectively
    72,839       49,408  
Additional paid in capital
    35,783,011       32,822,477  
Accumulated deficit
    (47,633,384 )     (45,419,501 )
Total Stockholders' Deficit
    (11,777,534 )     (12,547,616 )
                 
Total Liabilities, Redeemable Preferred Stock, and Stockholders' Deficit
  $ 515,303     $ 2,238,391  
 
See accompanying notes to financial statements
 
 
F-2

 
 
NXT Nutritionals Holdings, Inc. and Subsidiaries
 
Consolidated Statements of Operations
 
   
   
   
Years Ended December 31,
 
   
2011
   
2010
 
             
Sales - net of slotting fees and discounts
  $ 237,989     $ 187,516  
                 
Cost of sales
    1,150,705       433,599  
                 
Gross loss
    (912,716 )     (246,083 )
                 
General and administrative expenses
    3,535,854       3,591,276  
                 
Loss from operations
    (4,448,570 )     (3,837,359 )
                 
Other income (expense)
               
     Interest expense
    (420,043 )     (8,616,218 )
     Interest income
    181       7,499  
     Loss on extinguishment of debt
    -       (9,845,860 )
     Forgiveness of registration rights payable
    246,387       -  
     Derivative expense
    -       (8,590,802 )
     Change in fair market value of derivative liability
    3,286,339       13,763,391  
     Registration rights expense
    -       (283,387 )
                 
          Total other income (expense) - net
    3,112,864       (13,565,377 )
                 
Net loss
  $ (1,335,706 )   $ (17,402,736 )
                 
Series A, convertible redeemable preferred stock dividend
    (878,177 )     -  
                 
Net loss applicable to common stockholders
  $ (2,213,883 )   $ (17,402,736 )
                 
Net loss per common share - basic and diluted
  $ (0.04 )   $ (0.38 )
                 
Weighted average number of common shares outstanding - basic and diluted
    53,728,392       45,787,226  
 
See accompanying notes to financial statements
 
 
F-3

 
 
NXT Nutritionals Holdings, Inc. and Subsidiaries
 
Consolidated Statement of Stockholders' Deficit
 
Years Ended December 31, 2011 and 2010
 
                               
                               
   
Common Stock
                   
   
Shares
   
Amount
   
Additional Paid-In Capital
   
Accumulated Deficit
   
Stockholders' Deficit
 
                               
                               
Balance, December 31, 2009
    39,971,745     $ 39,972     $ 24,657,084     $ (28,016,765 )   $ (3,319,708 )
                                         
Conversion of convertible notes to common stock
    5,656,524       5,656       2,256,954       -       2,262,610  
                                         
Exercise of warrants
    1,509,799       1,510       (1,510 )     -       -  
                                         
Stock issued for services
    2,270,000       2,270       607,790       -       610,060  
                                         
Stock options issued for services
    -       -       467,225       -       467,225  
                                         
Reclassification to additional paid in capital when derivative ceases to exist
    -       -       4,834,934       -       4,834,934  
                                         
Net loss - 2010
    -       -       -       (17,402,736 )     (17,402,736 )
                                         
Balance - December 31, 2010
    49,408,068       49,408       32,822,477       (45,419,501 )     (12,547,616 )
                                         
Stock issuance costs
    -       -       (37,012 )     -       (37,012 )
                                         
Conversion of convertible notes to common stock
    3,554,806       3,555       1,348,834       -       1,352,389  
                                         
Stock issued for services
    19,875,448       19,876       592,849       -       612,725  
                                         
Stock options issued for services
    -       -       866,790       -       866,790  
                                         
Reclassification to additional paid in capital when derivative ceases to exist
    -       -       189,073       -       189,073  
                                         
Series A, convertible redeemable preferred stock dividend
    -       -       -       (878,177 )     (878,177 )
                                         
Net loss - 2011
    -       -       -       (1,335,706 )     (1,335,706 )
                                         
Balance - December 31, 2011
    72,838,322     $ 72,839     $ 35,783,011     $ (47,633,384 )   $ (11,777,534 )
 
See accompanying notes to financial statements
 
 
F-4

 
 
NXT Nutritionals Holdings, Inc. and Subsidiaries
 
Consolidated Statements of Cash Flows
 
   
   
Years Ended December 31,
 
   
2011
   
2010
 
             
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net loss
  $ (1,335,706 )   $ (17,402,736 )
  Adjustments to reconcile net loss to net cash used in operating activities:
               
       Amortization of debt issue costs
    19,210       748,030  
       Amortization of debt discount
    374,076       7,848,508  
       Bad debt expense
    4,102       -  
       Inventory reserve
    897,213       -  
       Stock based compensation
    1,479,516       1,077,284  
       Loss on extinguishment of debt
    -       9,845,860  
       Derivative expense
    -       8,590,802  
       Change in fair market value of derivative liabilities
    (3,286,339 )     (13,763,391 )
       Registration rights expense
    -       283,387  
       Forgiveness of registration rights payable
    (246,387 )     -  
Changes in operating assets and liabilities:
               
    (Increase) Decrease in:
               
    Accounts receivable
    103,947       (46,428 )
    Prepaid expenses
    (11,884 )     -  
    Inventories
    (465,570 )     (281,533 )
  Increase (Decrease) in:
               
    Accounts payable and accrued expenses
    289,508       47,228  
    Accrued interest payable - related parties
    12,510       17,910  
    Accrued interest payable - convertible notes
    14,247       -  
         Net Cash Used in Operating Activities
    (2,151,557 )     (3,035,079 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Proceeds from loans payable - related parties
    12,498       -  
Proceeds from issuance of convertible notes
    -       5,667,743  
Debt issuance costs paid in cash
    (41,737 )     (726,988 )
Proceeds from issuance of preferred stock and promissory note
    1,000,000       -  
Stock issuance costs paid in cash
    (37,012 )     -  
Repayment on loans - related parties
    -       (45,000 )
Repayment on loans - other
    -       (230,000 )
Liquidated damage payment on registration rights
    -       (37,000 )
        Net Cash Provided By Financing Activities
    933,749       4,628,755  
                 
Net Increase (Decrease) in Cash
    (1,217,808 )     1,593,676  
                 
Cash - Beginning of Year
    1,662,130       68,454  
                 
Cash - End of Year
  $ 444,322     $ 1,662,130  
                 
SUPPLEMENTARY CASH FLOW INFORMATION:
               
Cash Paid During the Year for:
               
    Income taxes
  $ -     $ -  
    Interest
  $ -     $ -  
                 
SUPPLEMENTARY DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
               
                 
Debt discount recorded on convertible notes
  $ 474,292     $ 5,667,743  
Series A, convertible redeemable preferred stock dividend
  $ 878,178     $ -  
Original issue discount
  $ -     $ 850,201  
Conversion of convertible note payable to common stock
  $ 1,352,389     $ 2,262,610  
Reclassification to additional paid in capital when derivative ceases to exist
  $ 189,073     $ 4,834,934  
Exercise of cashless warrants
  $ -     $ 1,510  
 
See accompanying notes to financial statements
 
 
F-5

 
 
NXT Nutritionals Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
 
Note 1 Nature of Operations and Basis of Presentation

Nature of Operations
 
NXT Nutritionals Holdings, Inc. ("Holdings) is a Delaware corporation incorporated in 2006.  
 
The Company is a developer of proprietary, patent pending, healthy alternative sweeteners. The foundation and common ingredient for all of the Company’s products is the all-natural sweetener SUSTA®. The Company also sells non-fat yogurt and yogurt smoothie products.

Note 2 Summary of Significant Accounting Policies

Principles of consolidation

All significant intercompany accounts and transactions have been eliminated in consolidation.

Use of estimates

The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Such estimates and assumptions impact, among others, the following: allowance for bad debt, inventory obsolescence,  the fair value of share-based payments, fair value of derivative liabilities, estimates of the probability and potential magnitude of contingent liabilities and the valuation allowance for deferred tax assets due to continuing operating losses.

Making estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the consolidated financial statements, which management considered in formulating its estimate could change in the near term due to one or more future confirming events. Accordingly, the actual results could differ significantly from our estimates.

Risks and uncertainties

The Company operates in an industry that is subject to intense competition and change in consumer demand. The Company's operations are subject to significant risk and uncertainties including financial and operational risks including the potential risk of business failure.
 
The Company has experienced, and in the future expects to continue to experience, variability in sales and earnings. The factors expected to contribute to this variability include, among others, (i) general economic conditions in the various local markets in which the Company competes, including the general downturn in the economy, (ii) the volatility of prices pertaining to food and beverages in connection with the Company’s distribution of product, and (iii) the Company allocating resources effectively and efficienctly  for expenses such as slotting fees and advertising due to the Company’s limited resources. These factors, among others, make it difficult to project the Company’s operating results on a consistent basis.
 
Cash and cash equivalents

The Company considers all highly liquid instruments purchased with a maturity of three months or less to be cash equivalents.  There were no cash equivalents at December 31, 2011 and 2010, respectively.
 
The Company minimizes its credit risk associated with cash by periodically evaluating the credit quality of its primary financial institution.
 
 
F-6

 
 
NXT Nutritionals Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
 
Accounts receivable and allowance for doubtful accounts 
 
Accounts receivable are stated at the amount management expects to collect from outstanding balances. The Company generally does not require collateral to support customer receivables.  The Company provides an allowance for doubtful accounts based upon a review of the outstanding accounts receivable, historical collection information and existing economic conditions. The Company determines if receivables are past due based on days outstanding, and amounts are written off when determined to be uncollectible by management.  The maximum accounting loss from the credit risk associated with accounts receivable is the amount of the receivable recorded, which is the face amount of the receivable net of the allowance for doubtful accounts.
 
As of December 31, 2011 and 2010, the allowance for doubtful accounts was $4,102 and $0, respectively.

Inventories

Inventories are stated at the lower of cost or market using the first-in, first-out (FIFO) valuation method.

   
December 31, 2011
   
December 31, 2010
 
Raw materials
  $ 713,502     $ 285,769  
Finished goods
    183,712       145,874  
Reserve for obsolete inventory
    (897,213 )     -  
    $ -     $ 431,643  

Raw materials consist of ingredients used to make and package the Company’s all natural sweetener and the Company’s yogurt smoothie products.  Finished goods consists of cases of both the sweetener and the yogurt smoothies.
 
At December 31, 2011, the Company fully reserved  inventory due to the decline in sales and the delay in implementing the business plan.  In addition, the Company has a gross loss from its product sales, which also is an indication of the product’s value.

Debt Issue Costs and Debt Discount

Amortized over the life of the debt to interest expense.  If a conversion, extinguishment or repayment of the underlying debt occurs, a proportionate share is expensed.
 
Original Issue Discount

For certain convertible debt issued in 2010 and 2009, the Company provided the debt holder with an original issue discount.  The original issue discount was equal to three years of simple interest at 10% of the proceeds raised.  The original issue discount was recorded to debt discount reducing the face amount of the note and is being amortized to interest expense over the maturity period of the debt.

Derivative Financial Instruments

Fair value accounting requires bifurcation of embedded derivative instruments such as ratchet provisions or conversion features in convertible debt or equity instruments, and measurement of their fair value for accounting purposes. In determining the appropriate fair value, the Company uses the Binomial Lattice Valuation Model (“BLVM”). In assessing the Company’s convertible debt instruments, management determines if the convertible debt host instrument is conventional convertible debt and further if there is a beneficial conversion feature requiring measurement. If the instrument is not considered conventional convertible debt, the Company will continue its evaluation process of these instruments as derivative financial instruments.
 
Once determined, the derivative liabilities are adjusted to reflect fair value at each reporting period end, with any increase or decrease in the fair value being recorded in results of operations as an adjustment to fair value of derivatives. In addition, the fair value of freestanding derivative instruments such as warrants, are also valued using the BLVM.
 
 
F-7

 

NXT Nutritionals Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
 
Revenue recognition

The Company records revenue for yogurt, yogurt smoothies and for the natural sweetener when all of the following have occurred: (1) persuasive evidence of an arrangement exists, (2) the product is shipped or delivered, depending on the specific nature of the contract, (3) the sales price to the customer is fixed or determinable, and (4) collectability of the related customer receivable is reasonably assured.  There is no stated right of return for products.
 
The Company allows deductions in the form of credits for products unsold during its shelf life which is on average 3 to 4 months.  The Company’s reserve for accounts receivable takes these potential future credits into consideration.  
 
Expenses such as slotting fees and sales discounts are accounted for as a direct reduction of revenues as follows:

   
Year Ended
December 31, 2011
   
Year Ended
December 31, 2010
 
Gross sales
  $ 302,795     $ 477,840  
Less: slotting fees, discounts, allowances
    64,806       290.324  
Net sales
  $ 237,989     $ 187,516  

Cost of sales
 
Cost of sales represents costs directly related to the production and manufacturing of the Company’s products.  Costs include product development, freight, packaging, and print production costs.
 
Advertising

Costs incurred for producing and communicating advertising for the Company are charged to operations as incurred as follows:

 
Year  Ended
 December 31, 2011
     
Year  Ended
 December 31, 2010
   
 $
708,041
    $
617,787
   
 
Share-based payments

Generally, all forms of share-based payments, including stock option grants, warrants, restricted stock grants and stock appreciation rights are measured at their fair value utilizing an option pricing model on the awards’ grant date, based on the estimated number of awards that are ultimately expected to vest. Share-based compensation awards issued to non-employees for services rendered are recorded at either the fair value of the services rendered or the fair value of the share-based payment, whichever is more readily determinable. The expense resulting from share-based payments are recorded in cost of goods sold or general and administrative expense in the consolidated statement of operations, depending on the nature of the services provided.

Income Taxes

The Company accounts for income taxes in accordance with accounting guidance now codified as FASB ASC Topic 740, “Income Taxes,” which requires that the Company recognize deferred tax liabilities and assets based on the differences between the financial statement carrying amounts and the tax bases of assets and liabilities, using enacted tax rates in effect in the years the differences are expected to reverse. Deferred income tax benefit (expense) results from the change in net deferred tax assets or deferred tax liabilities. A valuation allowance is recorded when it is more likely than not that some or all deferred tax assets will not be realized.
 
 
F-8

 
 
NXT Nutritionals Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
 
Accounting guidance now codified as FASB ASC Topic 740-20, “Income Taxes – Intraperiod Tax Allocation,” clarifies the accounting for uncertainties in income taxes recognized in accordance with FASB ASC Topic 740-20 by prescribing guidance for the recognition, de-recognition and measurement in financial statements of income tax positions taken in previously filed tax returns or tax positions expected to be taken in tax returns, including a decision whether to file or not to file in a particular jurisdiction. FASB ASC Topic 740-20 requires that any liability created for unrecognized tax benefits is disclosed. The application of FASB ASC Topic 740-20 may also affect the tax bases of assets and liabilities and therefore may change or create deferred tax liabilities or assets. The Company would recognize interest and penalties related to unrecognized tax benefits in income tax expense. At December 31, 2011 and 2010, respectively, the Company did not record any liabilities for uncertain tax positions.

Earnings per share

Basic earnings (loss) per share is computed by dividing net income (loss) by weighted average number of shares of common stock outstanding during each period.  Diluted earnings (loss) per share is computed by dividing net income (loss), adjusted for changes in income or loss that resulted from the assumed conversion of convertible shares, by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during the period.

The Company had the following potential common stock equivalents at December 31, 2011:

       
Series A, convertible redeemable preferred stock (see note 8)
    36,396,684  
Convertible debt – face amount of $8,650,965, conversion price of $0.25
    34,603,860  
Convertible debt – face amount of $436,458, conversion price of $0.09
    4,849,534  
Common stock warrants, exercise price of $0.25 (Series “A”, “B” and “C”)
    27,231,269  
Stock options, exercise price $0.22
     6,063,750  
Total common stock equivalents
    109,145,097  
 
The Company had the following potential common stock equivalents at December 31, 2010:

Convertible debt – face amount of $2,001,128, conversion price of $0.40
    5,002,820  
Convertible debt – face amount of $8,438,684, conversion price of $0.40
    21,096,710  
Common stock warrants, conversion price of $0.40 (Series “A”) and $0.60 (Series “B”)
    19,735,634  
Common stock warrants, conversion price of $0.40 (Series “C”)
    7,495,635  
Stock options, exercise price $0.22
    2,123,750  
Total common stock equivalents
    55,454,549  

Since the Company reflected a net loss in 2011 and 2010, the effect of considering any common stock equivalents, would have been anti-dilutive. A separate computation of diluted earnings (loss) per share is not presented.
 
Reclassification

Certain items in the 2010 financial statement presentation have been reclassified to conform to the 2011 presentation.  Such reclassifications have no effect on previously reported financial condition, operations or cash flows.
 
Recent accounting pronouncements

In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The guidance in ASU 2011-04 changes the wording used to describe the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements, including clarification of the FASB's intent about the application of existing fair value and disclosure requirements and changing a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The amendments in this ASU should be applied prospectively and are effective for interim and annual periods beginning after December 15, 2011. Early adoption by public entities is not permitted. The adoption of this guidance is not expected to have a material impact on the Company’s financial position or results of operations
 
 
F-9

 

Note 3 Going Concern

As reflected in the accompanying consolidated financial statements, the Company has a net loss of $1,335,706 and net cash used in operations of $2,151,557 for the year ended December 31, 2011; and has a working capital deficit of $2,287,655 and a stockholders’ deficit of $11,777,534.

The ability of the Company to continue its operations is dependent on Management's plans, which include the raising of capital through debt and/or equity markets with some additional funding from other traditional financing sources, including term notes, until such time that funds provided by operations are sufficient to fund working capital requirements.  The Company may need to incur additional liabilities with certain related parties to sustain the Company’s existence.

The Company will require additional funding to finance the growth of its current and expected future operations as well as to achieve its strategic objectives.  The Company believes its current available cash along with anticipated revenues may be insufficient to meet its cash needs for the near future.  There can be no assurance that financing will be available in amounts or terms acceptable to the Company, if at all (See Note 5 financing).

The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.  These financial statements do not include any adjustments relating to the recovery of the recorded assets or the classification of the liabilities that might be necessary should the Company be unable to continue as a going concern.

Note 4 Loans Payable

(A)  
Loans Payable – Related Parties
 
As part of the 2008 Unit Purchase Agreement, the Company agreed to pay $600,000 to the unitholders of Healthy Dairy, LLC and NXT, LLC within 90 days from the close of the reverse acquisition, which occurred in February 2009, with a public shell, and an additional $600,000 within 180 days post closing.  There are no penalties or interest.  Payments will be made once the Company begins to become profitable.  As of December 31, 2009, the Company had a balance due of $352,126.  The Company paid $20,000 during 2010.
 
In December 2009, a Director loaned the Company $25,000.  The loan is unsecured, bore no interest and was due on demand.  The Company repaid the $25,000 during February 2010.

During 2011, 3 Directors loaned the Company $12,498.   The loans are unsecured, bear no interest and are due on demand.

The following is a summary of loans payable – related parties:
 
Balance – December 31, 2009
   
377,126
 
Repayments
   
(45,000
)
Balance – December 31, 2010
 
$
332,126
 
Loans from Directors
   
    12,498
 
Balance  - December 31, 2011
  $
344,624
 
    
 
F-10

 
 
NXT Nutritionals Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
 
(B)  
Loans Payable – Other
 
On December 30, 2009, the Company issued a $100,000 unsecured promissory note to a third party.  The note bore 10% interest and was repaid in February 2010.
 
In 2008, the Company had outstanding loans for $388,500. These loans bear interest at 6%.  The loans are secured by all assets of the Company.  These loans are due on demand.  The Company repaid $90,000 of these advances in May 2009, and an additional $130,000 was repaid in 2010.

At December 31, 2011 and 2010, the Company has accrued interest on this loan of $71,545 and $59,035, respectively.
 
Balance – December 31, 2009
 
$
438,500
 
Repayments
   
(230,000
)
Balance – December 31, 2010
   
208,500
 
Repayments
   
          (-)
 
Balance – December 31, 2011
 
$
208,500
 

Note 5 Note Payable

On November 21, 2011, the Company issued a 13% senior secured note with a face amount of $1,000,000, due on the earlier of November 21, 2015 or closing of a change in control transaction.  (See Note 8).

In connection with the issuance of the note and Series A, convertible redeemable preferred stock, the Company determined that an allocation of fair value was needed to derive amounts that would be recorded as debt, temporary equity and debt issue costs.

Utilizing the relative fair value method, the Company allocated 53% of the $1,000,000 proceeds to the note.  In addition, the Company allocated 53% of the $78,750 ($41,737) in transaction issuance costs as debt issuance costs on the balance sheet and is amortizing these costs over the life of the note.  The note is secured by all assets of the Company.  The Company allocated 47% of the $1,000,000 proceeds to the series A, convertible redeemable preferred stock.  In addition, the Company allocated 47% of the $78,750 ($37,012) in issuance costs as stock issuance costs on the balance sheet.
 
The Company recorded a debt discount, in the amount of $474,292, which represents the allocation of the gross proceeds of $1,000,000 (47%) that was allocated to the Series A, convertible redeemable preferred stock. During the year ended December 31, 2011, the company amortized $12,994 of the debt discount to interest expense.
 
At December 31, 2011, the Company has accrued interest on this note in the amounts of $14,247.
 
The notes carry an additional payment provision in which the Company upon the earlier of (i) the date of prepayment of the principal amount of note, or (ii) the payment of the principal amount of the note on the maturity date, whichever occurs first, shall pay to the holder an additional $200,000; provided that (i) in the event of one or more payments of a portion but not the entire principal amount of this note either as a prepayment or on the maturity date, such payment shall be prorated based upon the portion of the principal amount of this Note then being paid to the Holder divided by the aggregate Principal Amount of this Note on the date hereof; and (ii) no additional payment shall be due and owing to the Holder if the average closing price per share of the Common Stock equals $0.20 or higher per share for the 90 consecutive Trading Days on the OTCBB (or such other then applicable principal Trading Market of the Company’s shares of Common Stock) immediately preceding any payment with respect to the principal amount of the note.
 
 
F-11

 
 
NXT Nutritionals Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
 
Note 6 Convertible Notes Payable
 
At December 31, 2011 and December 31, 2010, convertible debt consists of the following:
 
   
December 31,
2011
   
  December 31,
2010
             
Convertible debt – secured – derivative liabilities (A)
 
$
7,575,095
     $     
8,438,684
 
Conventional convertible debt – secured (B)
   
1,512,328
     
       2,001,128
 
Less: debt discount
   
(143,087
)
   
       (504,169)
 
Convertible debt – net
   
8,944,336
     
      9,935,643
 
                 
                 
Less: current portion
   
(419,375
)
   
                        (527,126)
 
                 
Long term debt
 
$
8,524,961
     $     
9,408,517
 
 
(A)  
2010 Original Issue Discount Senior Secured Convertible Note Offering

On February 26, 2010, the Company completed a secured convertible notes and warrants offerings, which was modified and amended on September 1, 2010,  December 6, 2010 and November 4, 2011.

The original principal of the notes was $6,517,944 with an original issue discount of $850,201. The gross proceeds raised were $5,667,743, of which the Company received approximately $4,940,755 in net proceeds. The Company paid $726,988 in debt issuance costs. The new face amount of the secured convertible notes after the second amendment is $8,438,684.

i.  
In accordance with the December 6, 2010 Modification and Amendment Agreement, the Conversion price was modified from $0.40 to $0.37.
ii.  
Registration rights – The notes contained a registration rights provision
iii.  
Original issue discount- 60% of the cash proceeds received.  The discount was fully amortized to interest expense as of December 31, 2010.
iv.  
Full ratchet provision – The notes contain a provision in which the conversion price can be reduced in any event the Company issues any security or debt instrument with a lower consideration per share in any future offering.
v.  
Secured by all assets of the Company
 
 
F-12

 
 
NXT Nutritionals Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
 
The Company also issued the note holders (“2010 holders”) one stock purchase warrant with a maturity of 5 years. The stock purchase warrants contain cashless exercise provisions.  There are currently 7,495,635 warrants associated with this offering outstanding.
 
The Company recorded the fair value of the derivative liabilities to debt discount to the extent of the face amount of the notes and expensed immediately the remaining value of the derivative as it exceeded the face amount of the note.  The Company recorded a derivative expense at issuance in the amount of $8,590,802.

The fair value of the derivative liabilities at issuance was based upon the following management assumptions:

Exercise price
$1 - $1.25
Expected dividends
0%
Expected volatility
200%
Expected term: conversion feature
1.25 years
Expected term: warrants
5 years
Risk free interest rate
0.35% - 2.3%

Modification and Amendment of 2010 Original Issue Discount Senior Secured Convertible Note (Extinguishment Accounting)

The Company determined that the First and Second Modification and Amendment of the debt instruments on September 1, 2010 and December 6, 2010, resulted in debt instruments being exchanged with substantially different terms and applied extinguishment accounting resulting in a loss on extinguishment of debt as follows:

Description
 
Date of Modification
     
First Modification
 
September 1, 2010
  $ 3,726,410  
Second Modification
 
December 6, 2010
    6,119,450  
Loss on extinguishment of debt
  $ 9,845,860  
 
The Company compared the present value of both old and new debt as well as the fair value of the warrants granted in the new offering. The Company determined that the present value of the cash flows associated with the new debt instruments exceeded the present value of the old debt instruments by more than 10% and accounted for the modification as an extinguishment.
 
On September 6, 2011, the Company entered into a third modification and amendment agreement. This agreement acted as a stand-still agreement. All rights and privleges under the second modification and amendment agreement were extended for 30 days.
 
On November 4, 2011, the Company entered into a fourth modification agreement with the 2010 Secured Convertible Note and Warrant holders.  Accordingly, the Company reclassified the debt to long-term liabilities.

Under the modification, the 2010 Holders:

·  
Waived their right to monthly redemptions on the notes,
·  
Extended the maturity date to November 21, 2015, ratcheted the exercise price to $0.25 per share for both the notes and warrants,
 
 
F-13

 
 
NXT Nutritionals Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
 
·  
Waived anti-dilution provisions for the note and warrants (The derivative liability ceased to exist),
·  
Waived registration right penalties of $246,387, the company recorded as a gain on forgiveness of debt,
·  
Agreed to subordinate their security interests securing the Notes to the senior security interests to be granted by the Company to secure the investors in the November 21, 2011 financing and to third parties that provide financing for accounts receivables, inventory and raw materials of the Company.
 
The Company analyzed the fourth modification and amendment agreement.  The Company then assessed if the modification and amendments qualified for modification or extinguishment accounting.  Because the fair value of the instrument prior to modification and amendment was less than ten percent of the instrument post modification, the Company concluded that extinguishment accounting was not applicable, and the Company applied modification accounting.

In connection with the ASC 815, “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock,” the Company determined that the embedded conversion feature and the warrant issuances (ratchet down of exercise price based upon lower exercise price in future offerings) are not indexed to the Company’s own stock and, therefore, is an embedded derivative financial liability (the “Embedded Derivative”), which requires bifurcation and to be separately accounted for.

The Company measured the fair value of the derivative liabilities using a BLVM.

The fair value of the derivative liabilities are summarized as follows:
 
Fair value at the issuance dates for conversion feature and warrants issued on the 2010 Original Issue Discount Senior Secured Convertible Note Offering
  $ 14,258,545  
Mark to market adjustments for the year ended December 31, 2010:
    (13,763,391 )
Reclassification to paid in capital when derivative liability ceases to exist
    (4,834,934 )
Fair value of the derivative as modified
    7,326,680  

Derivative liability balance at December 31, 2010
  $ 2,986,900  
Reclassification to paid in capital when derivative liability ceases to exist
    ( 189,073 )
Fair value mark to market adjustment
    (2,797,827 )
Derivative liability balance at December 31, 2011
  $ -  

Mark to Market
 
At the time of each debt conversion, modification and at year end, the Company re-measured the derivative liabilities at fair value. As a term of the fourth modification, the investors waived the ratchet provision, and the derivative ceased to exist (see Note 8 for the Company's only outstanding derivative liability).  The following management assumptions were considered in connection with the computation of fair value of debt and warrants and related reclassification of derivative liabilities to additional paid in capital as well as the period end fair value re-measurement:
 
 
F-14

 
 
NXT Nutritionals Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
 
Exercise price
$0.25 - $0.40
Expected dividends
0%
Expected volatility
137% - 360%
Risk fee interest rate
0.20% – 2.24%
Suboptimal exercise factor
1.5
Expected life of conversion features
0.50 years
Expected life of warrants
3.4 years
 
Conversions
 
During the year ended December 31, 2011, note holders converted principal of $863,589 into 2,332,806 shares of common stock, at a conversion rate of $0.37 - $0.40 per share.

During the year ended December 31, 2010, note holders converted principal in the amount of $598,400 into 1,496,000 shares of the Company’s common stock at a conversion rate of $0.40.
 
The 2010 Original Issue Discount Senior Secured Convertible Notes are summarized as follow:
 
Fair value at the issuance dates for conversion feature and warrants issued on the 2010 Original Principal amount at issuance
 
$
6,517,944
 
Less debt discount at issuance
   
(6,517,944
)
Amortization of debt discount
   
6,517,944
 
Increase in principal, as modified in the December 6, 2010 Modification and Amended Agreement
   
2,519,140
 
Conversion of note payable to common stock
   
 (598,400)
 

Convertible Notes Payable at December 31, 2010
  $ 8,438,684  
Conversion of notes into common stock
    (863,589 )
Convertible Notes Payable December 31, 2011
  $ 7,575,095  

(B)  
Convertible Debt and Warrants

During 2008 and 2009, the Company entered into a convertible note and warrant offering.  The terms are as follows:

i.  
Exercise price - ranging from $0.09 - $0.25
ii.  
Three year maturity
iii.  
Original issue discount of 30%
iv.  
Secured by all assets of the Company
v.  
Registration rights – the Company was required to have a registration statement filed within 60 days after the offering closed.  To date, the company has not filed a registration statement and has accrued the maximum liquidated damages penalty of 9% of the offering totaling $362,453.
vi.  
Full ratchet provision – The notes contain a provision in which the conversion price can be reduced in any event the Company issues any security or debt instrument with a lower consideration per share in any future offering.
 
 
F-15

 
 
NXT Nutritionals Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
 
vii.  
1 Series “A”, 5 Year, $0.40 stock purchase warrant, and 1 Series “B”, 5 Year, $0.60 stock purchase warrant, for each dollar invested into convertible debt
 
On November 4, 2011, approximately 70% of the 2009 Convertible Debenture Holders (“2009 Holders”) entered into a modification agreement.

The 2009 Holders:

·  
Ratcheted the exercise price to $0.25 per share for both the note and warrants,
·  
Waived anti-dilution provisions for both the note and warrants (ceases to be a derivative liability); and
·  
Extended the maturity date to November 21, 2015
 
A summary of the Convertible Debt Principal is as follows:

Convertible Debt, net of debt discount as of December 31, 2009
  $ 1,830,605  
Conversion of debt into common stock
    (1,664,210 )
Amortization of debt discount for the year ended December 31, 2009
    1,330,564  
 
Convertible Debt, net of debt discount as of December 31, 2010
  $ 1,496,959  
Conversion of debt into common stock
    (488,800 )
Amortization  of debt discount for the year ended December 31, 2011
    361,081  
Convertible Debt, net of debt discount as of December 31, 2011
  $ 1,369,240  

Conversions

During the year ended December 31, 2011, note holders converted principal of $488,800 into 1,222,000 shares of common stock, at a conversion rate of $0.40 per share

During the year ended December 31, 2010, note holders converted principal in the amount of $1,664,210 into 4,160,524 shares of the Company’s common stock at a conversion rate of $0.40.

(C)
Debt Issuance Costs

Debt issuance costs, net are as follows:

Balance - December 31, 2009
  $ 46,590  
Debt issue costs paid in 2010
    726,988  
Amortization of debt issue costs
    (748,030 )
Balance - December 31, 2010
    25,548  
Debt issue costs paid in 2011
    41,737  
Amortization of debt issue costs
    (19,209 )
Balance – December 31, 2011
  $ 48,076  
 
 
F-16

 
 
NXT Nutritionals Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
 
(D)  
Registration Rights Penalty

The Company incurred liquidated damages for failing to file timely registration statements in 2009 and 2010.  The Company recorded liquidated damages as outlined below.  In accordance with the November 4, 2011 modification agreement, the 2010 noteholders waived their respective liquidated damages in the amount of $246,387.  The 2008/2009 noteholders did not forgive their liquidated damages.

Balance as of December 31, 2009
        $ 362,453  
               
Gross 2010 proceeds raised
  $ 5,667,743          
                 
Penalty for late filing of registration statement
    0.50 %     28,339  
                 
Penalty for not being declared effective
    0.045 %     255,048  
                 
Less: payments made
            (37,000 )
Balance as of December 31, 2010
          $ 608,840  
                 
Forgiveness of registration rights payable
            (246,387 )
                 
Balance as of December 31, 2011
          $ 362,453  
 
Note 7 Fair Value

Disclosures of information about the fair value of certain financial instruments for which it is practicable to estimate the value.  For purpose of this disclosure, the fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation.

The Company has categorized its assets and liabilities recorded at fair value based upon the fair value hierarchy specified by GAAP.

The levels of fair value hierarchy are as follows:

 
·
Level 1 inputs utilize unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access;
 
 
·
Level 2 inputs utilize other-than-quoted prices that are observable, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs such as interest rates and yield curves that are observable at commonly quoted intervals; and
 
 
·
Level 3 inputs are unobservable and are typically based on our own assumptions, including situations where there is little, if any, market activity.
 
 
F-17

 
 
NXT Nutritionals Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
 
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the Company categorizes such financial asset or liability based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
 
Both observable and unobservable inputs may be used to determine the fair value of positions that are classified within the Level 3 category. As a result, the unrealized gains and losses for assets within the Level 3 category presented in the tables below may include changes in fair value that were attributable to both observable and unobservable inputs.
 
The Company recorded derivative liabilities of $389,666 and $2,986,900 December 31, 2011 and December 31, 2010.   These derivative liabilities are level 2.
 
Derivative activity is summarized as follows:
 
Fair value at the issuance dates for conversion feature and warrants issued on the 2010 Original Issue Discount Senior Secured Convertible Note Offering (Note 6A)
  $ 14,258,545  
Mark to market adjustments for the year ended December 31, 2010 (Note 6A)
    (13,763,391 )
Reclassification to paid in capital when derivative liability ceases to exist (Note 6A)
    (4,834,934 )
Fair value of the Modified and Amended Agreements (Note 6A)
    7,326,680  
Derivative liability balance at December 31, 2010 (Note 6A)
    2,986,900  
Reclassification to paid in capital when derivative liability ceases to exist (Note 6A)
    (189,072 )
Fair value mark to market adjustment (debt) (Note 6A)
    (2,797,828 )
Recognition of derivative at commitment date (Note 8)
    878,177  
Fair value mark to market adjustment (Series A, convertible redeemable preferred stock  (Note 8)
    (488,511 )
Derivative liability balance at December 31, 2011
  $ 389,666  

Note 8 Series A, Convertible Redeemable Preferred Stock
 
On November 21, 2011, the Company sold 13,075,468 shares of Series A, Convertible Redeemable Preferred Stock with full voting rights equivalent to a fixed 20% voting right.  The preferred stock carries the following features:
 
1. 
Preferred stock is convertible at the option of the holder into an equal number of shares of common stock of the Company representing 20% of the Company’s fully diluted capital stock at the time of conversion. The redemption is triggered upon a change in control or November 21, 2015.  The Company concluded the variable conversion feature in the form of a guaranteed 20% ownership right would be classified and accounted for as a derivative liability, The preferred stock is convertible into 20% of the fully diluted capital structure of the Company.  It is unknown if the Company will have enough authorized shares to settle this conversion in common stock.  Due to this uncertainty, the conversion feature is accounted as a derivative liability.  The Company measured the fair value of the derivative liabilities using a BLVM.
 
  2.
Annual dividend equal to the greater of (a) 10% of the then outstanding principal ($1,000,000 at December 31, 2011) amount of the 2011 note payable or (b) 10% of net income in excess of $500,000;  Dividends accrue commencing on January 1, 2012 and are payable annually in arrears.
 
 
F-18

 
 
NXT Nutritionals Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2011 and 2010

 
  3. 
A first priority lien in the assets of the Company was granted to the holders of the 2011 Note.  The holders of the 2010 Notes subordinated their interests to the security in the assets of the Company.  See discussion of Fourth Modification.
 
4.  
 
The investors may invest an additional $500,000.
  
 
 5.
Registration Rights- the Company agreed to register 100% of the common shares issuable upon conversion of the preferred stock, which equates to 20% of the fully dilutive capital structure of the Company, which represents 36,396,684 shares on December 31, 2011.   The registration statement must be filed within 60 days following the filing of the Company’s 2011 10K and must be declared effective within 180 calendar days from November 21, 2011, which is on or about May 31, 2012.
 
 6.
If the Company fails the registration rights provisions, liquidated damages will be assessed up to a maximum of 6% of the amount financed.