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EX-32.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER, PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 - NXT Nutritionals Holdings, Inc.f10k2010ex32ii_nxt.htm
EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER, PURSUANT TO RULE 13A ? 14(A). - NXT Nutritionals Holdings, Inc.f10k2010ex31i_nxt.htm
EX-32.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER, PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 - NXT Nutritionals Holdings, Inc.f10k2010ex32i_nxt.htm
EX-10.24 - FORM OF STOCK OPTION AGREEMENT - NXT Nutritionals Holdings, Inc.f10k2010ex10xxiv_nxt.htm
EX-10.23 - 2010 STOCK OPTION PLAN - NXT Nutritionals Holdings, Inc.f10k2010ex10xxiii_nxt.htm
EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER, PURSUANT TO RULE 13A ? 14(A). - NXT Nutritionals Holdings, Inc.f10k2010ex31ii_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, 2010

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

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).  o 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: $9,883,129.
 
As of March 31, 2011, the registrant had 51,159,068 shares of its common stock issued and outstanding.
 
DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement for the Registrant’s Annual Meeting of Stockholders to be held on March 30, 2011 are incorporated by reference into Part III of this Annual Report on Form 10-K.
 
 
 
 

 
 
 
TABLE OF CONTENTS

     
PAGE
 
Forward Looking Statements
   
       
 
PART I
   
ITEM 1.
Business
    1
ITEM 1A.
Risk Factors
    10
ITEM 1B.
Unresolved Staff Comments
    16
ITEM 2.
Properties
    17
ITEM 3.
Legal Proceedings
    17
ITEM 4.
[Removed and reserved]
    17
       
 
PART II
   
ITEM 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    18
ITEM 6.
Selected Financial Data
    19
ITEM 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operation
    19
ITEM 7A.
Quantitative and Qualitative Disclosures About Market Risk
    25
ITEM 8.
Financial Statements and Supplementary Data
    26
ITEM 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    27
ITEM 9A.
Controls and Procedures
    27
ITEM 9B.
Other Information
   
       
       
 
PART III
    29
ITEM 10.
Directors, Executive Officers and Corporate Governance
    29
ITEM 11.
Executive Compensation
    29
ITEM 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    29
ITEM 13.
Certain Relationships and Related Transactions, and Director Independence
    29
ITEM 14.
Principal Accounting Fees and Services
    29
       
 
PART IV
   
ITEM 15.
Exhibits, Financial Statement Schedules
    30
       
SIGNATURES
    32


 
 

 
 
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.
 
 
 
-1-

 
 
Our current corporate structure is illustrated in the figure below:
 
 
 
PRODUCTS
 
SUSTA™ Natural Sweetener
 
SUSTA™ is an all 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.
 
 
 
-2-

 
 
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 sales for NXT Nutritionals for the 2010 and 2009 annual reporting periods. The sales amounts are broken down by product, Healthy Dairy ("HD") and SUSTA for each period when applicable.
 
HD 2009 Sales:
 
$
862,202.40
 
SUSTA 2009 Sales:
   
170,794.23
 
Total 2009 Sales:
 
$
1,032,996.63
 
         
HD 2010 Sales:
 
$
93,683
 
SUSTA 2010 Sales:
   
386,157
 
Total 2010 Sales:
 
$
477,840
 
 
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.
 
 
 
-3-

 
 
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 Noga 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 all-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 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.
 
 
 
-4-

 
 
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 begin 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.
 
 
 
-5-

 
 
The chart below indicates the stores currently carrying SUSTA™ :
 
 
 
 
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.
 
 
 
-6-

 
 
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.
 
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 “prebiotic,” 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 synethesis 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.
 
 
 
-7-

 
 
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.
 
 
 
-8-

 
 
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.
 
 
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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, 2010, we generated a net loss of $(17,402,736) during the year ended December 31, 2010, and as of that date, our current liabilities exceeded our current assets resulting in a working capital deficit of $(11,076,205). In addition, we also had a stockholder’s deficit of $(12,547,616) at December 31, 2010. As a result, our independent auditor expressed substantial doubt as to our ability to continue as a going concern.
 
WE MAY 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 $5,000,000 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.
 
 
 
-10-

 
 
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.
 
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.
 
 
 
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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.
 
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.
 
 
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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.
 
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.
 
 
-13-

 
 
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 7 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.
 
 
 
-14-

 
 
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.
 
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.
 
 
 
-15-

 
 
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.
 
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 2010 that remain unresolved.
 
 
 
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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.  The parties are currently engaged in discovery.  Trial before the Trademark Trial and Appeal Board is set to begin on September 29, 2011.
 
We are not currently aware of any other material pending legal proceedings against us.
 
ITEM 4.     [REMOVED AND RESERVED]
 
 
 
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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, 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  
Fourth Quarter ended December 31, 2009
    3.46       1.15  
Third Quarter ended September 30, 2009
    1.86       0.71  
Second Quarter ended June 30, 2009
    2.00       0.51  
March 11, 2009 to  March 31, 2009
    1.45       0.25  
 
Holders
 
As of March 31, 2011, 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, 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 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.
 
 
 
-19-

 
 
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.

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
 
The following table sets forth the summary income statement for the years ended December 31, 2010 and 2009:
 
   
Year ended
 
   
December 31,
2010
   
December 31,
2009
 
Sales - Net of slotting fees and discounts
 
$
187,516
   
$
905,728
 
Gross Profit (Loss)
 
$
(246,083
)
 
$
(63,624)
 
General and Administrative Expenses
 
$
(3,591,276
 
$
(6,906,598
Other Expenses - net
 
$
(13,565,377
)
 
$
(16,982,672
)
Net Loss
 
$
(17,402,736
)
 
$
(23,952,894
)
Loss per Share - Basic and Diluted
 
$
(0.38
)
 
$
(0.68
)
 
 
 
-20-

 
 
For the years ended December 31, 2010 and 2009, the Company reported a net loss of $(17,402,736), or $(0.38) per share and net loss of $(23,952,894) or $(0.68) per share, respectively. The change in net loss between the year ended December 31, 2010 and 2009 was primarily attributable to following significant events:  
 
  
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 had experienced limited sales on the SUSTA product during 2009, but approximately 80% of 2010 sales were derived from the natural sweetener product. Net sales decreased by approximately $718,212 for year ended December 31, 2010 as compared to December 31, 2009.  The corresponding cost of sales decreased in line with the decrease in sales.

  
Advertising expense decreased by $2,402,175.

  
Stock based compensation decreased by $3,660,106.

  
The Company incurred a loss on extinguishment of debt in the amount of $9,845,860 during the year ended December 31, 2010.  This loss was associated with the First and Second Modification and Amendment Agreement by and between the Company and the investors in the 2010 Original Issue Discount Senior Convertible Note issuance.

  
In addition to the loss on extinguishment, the Company also fully amortized the discounts associated with the 2010 Original Issue Discount Senior Convertible Note issuance.  This amortization resulted in expenses of $6,517,904 being fully amortized to interest expense during the year ended December 31, 2010.
 
  
The Company fully amortized to interest expense the debt issue cost in the amount of $726,988 during the year ended December 31, 2010.

  
The Company incurred a loss on extinguishment of debt in the amount of $15,603,551 during the year ended December 31, 2009.  This loss was recognized when the 2009 bridge investors converted into the new offering which was closed on August 27, 2009.

  
Other income and expenses – net and was also effected by the recording of the derivative expense of $(8,590,802) and the change in fair market value of the derivative liability in the amount of $13,763,391  in relation to the accounting associated with embedded derivatives in the 2010 secured convertible note offering.  The change in fair value was primarily attributable to the significant decrease in the Company’s per share value as quoted on the Over-the Counter Bulletin Board.

Sales: Despite our focus on expanding distribution of SUSTA and Healthy Dairy products nationwide, sales decreased by approximately 79.0% to $187,516 during the year ended December 31, 2010, from $905,728 during the corresponding December 31, 2009. The Company has shifted its Healthy Dairy sales focus from sales to grocery chains to the food service category. We are yet to record significant sales from this change in focus. The Company also launched the natural sweetener product (SUSTA) on April 30, 2009.  The Company had experienced limited sales on the SUSTA product during 2009, but approximately 80% of 2010 sales were derived from the natural sweetener product.  Net revenues decreased by $718,212 for the year ended December 31, 2010 as compared to the year ended December 31, 2009.  The corresponding cost of sales decreased in line with the decrease in revenue.  The Company is challenged with current pricing of our cost of sales and we are actively trying to lower both our manufacturing costs and our ultimate sales price to the consumer.
 
Gross Loss: Gross loss decreased by approximately of $182,000 during the year ended December 31, 2010 as compared to the year ended December 31, 2009.  This decrease is primarily attributable to offering significant discounts and favorable terms with our distributors and customers in an effort to maintain and increase brand awareness, as well as in increase in slotting fees.  The Company also realized an increase in the cost of raw materials during the year ended December 31, 2010 as compared to December 31, 2009.

General and Administrative Expense: General and administrative expenses decreased by 48% during the year ended December 31, 2010, as compared to the year ended December 31, 2009.  During the year ended December 31, 2009, the Company completed a reverse recapitalization with a public shell company.  The Company incurred significant fees to complete this transaction.  During the year ended December 31, 2010, an increase in professional fees related to investor relations and directors’ fees was offset by a significant decrease in accounting, consulting and legal fees which were significantly higher in the comparative year of 2009 based on the above noted reverse merger. The Company also issued approximately $4.5M in stock based compensation during the year ended December 31, 2009 as compared to $1.1M during the comparable year ended December 31, 2010. During 2010, Advertising expense decrease in approximately $2.4M.
 
 
-21-

 
 
Other Expenses - net: Other income and expenses – net decreased by approximately $3,417,295 to $(13,565,377) for the year ended December 31, 2010 as compared to $(16,982,672) during the corresponding year ended December 31, 2009.  

  
The Company incurred a loss on extinguishment of debt in the amount of $9,845,860 during the year ended December 31, 2010.  This loss was associated with the Modification and Amendment Agreement by and between the Company and the investors in the 2010 Original Issue Discount Senior Convertible Note issuance.
 
  
In addition to the loss on extinguishment, the Company also fully amortized the discounts associated with the 2010 Original Issue Discount Senior Convertible Note issuance.  This amortization resulted in expenses of $6,517,904 being fully amortized to interest expense during the year ended December 31, 2010.
 
  
During the year ended December 31, 2009 the Company recorded a loss on extinguishment of debt of $15,603,551 when bridge investors mandatorily converted into a new offering which was closed on August 27, 2009.  
 
  
The Company fully amortized to interest expense the debt issue cost in the amount of $726,988 during the year ended December 31, 2010.
 
  
Other income and expenses – net and was also effected by the recording of the derivative expense of $(8,590,802) and the change in fair market value of the derivative liability in the amount of $13,763,391  in relation to the accounting associated with embedded derivatives in the 2010 secured convertible note offering.  The change in fair value was primarily attributable to the significant decrease in the Company’s per share value as quoted on the Over-the Counter Bulletin Board.
 
Going Concern: As shown in the accompanying consolidated financial statements, the Company incurred a net loss of $(17,402,736) during the year ended December 31, 2010, and as of that date, the Company’s current liabilities exceeded its current assets by $11,076,205. Those factors raise substantial doubt about the Company’s ability to continue as a going concern.
 
Management of the Company plans to address this concern by doing the following:
 
▪           Raising additional capital through convertible note offerings
 
▪           Securing favorable raw material and manufacturing rates with our vendors
 
▪           Continuing to increase brand awareness for Healthy Dairy Yogurt Smoothies and the SUSTA Brand.
 
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. As illustrated above, the Company has already been successful in setting its plan in action and looks forward to further progress as the year progresses.
 
Liquidity and Capital Resources
 
The following table summarizes total current assets, liabilities and working capital at December 31, 2010 compared to December 31, 2009.
 
   
Year ended
       
   
December 31,
2010
   
December 31,
2009
   
Increase/(Decrease)
 
Current Assets
 
$
2,212,843
   
$
291,206
   
$
(1,921,637
)
Current Liabilities
 
$
13,289,048
   
$
1,826,899
   
$
(11,462,149
)
Working Capital (Deficit)
 
$
(11,076,205
)
 
$
(1,535,693
)
 
$
(9,540,512
)
 
 
 
-22-

 
 
As of December 31, 2010, we had a working capital deficit of $11,076,205 as compared to a working capital deficit of $1,535,693 as December 31, 2009, a decrease of $9,540,512. The decrease is primarily a result of the Company entering into the 2010 secured convertible note offering. And subsequently modifying and amending such offering.  The Company’s sales have decreased by approximately $718,212. The decrease is also attributable to a $2.9M derivative liability that was recorded in connection with the 2010 secured convertible note offering.
 
Net cash used for operating activities for the years ended December 31, 2010 and 2009 was $(3,035,079) and $(2,115,070), respectively. The Net Loss for the years ended December 31, 2010 and 2009 was $(17,402,736) and $(23,952,894), respectively.
 
Net cash obtained through all financing activities for year ended December 31, 2010 was $4,628,755 as compared to $1,909,326 for the year ended December 31, 2008.
 
We believe that our existing available cash will enable us to meet our working capital requirements for at least the next 7 months. Our estimated working capital requirement for the next 7 months is $1,100,000 with an estimated burn rate of $142,000 per month. The Company continues to explore potential expansion opportunities in the industry in order to boost sales, while leveraging distribution systems to consolidate lower costs.

Recent Accounting Pronouncements
 
In January 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2010-06, “Improving Disclosures about Fair Value Measurements (“ASU 2010-06”). ASU 2010-06 amends ASC 820, “Fair Value Measurements” ("ASC 820") to require a number of additional disclosures regarding fair value measurements. The amended guidance requires entities to disclose the amounts of significant transfers between Level 1 and Level 2 of the fair value hierarchy and the reasons for these transfers, the reasons for any transfers in or out of Level 3, and information in the reconciliation of recurring Level 3 measurements about purchases, sales, issuances and settlements on a gross basis. The ASU also clarifies the requirement for entities to disclose information about both the valuation techniques and inputs used in estimating Level 2 and Level 3 fair value measurements. The amended guidance was effective for financial periods beginning after December 15, 2009, except the requirement to disclose Level 3 transactions on a gross basis, which becomes effective for financial periods beginning after December 15, 2010. ASU 2010-06 did not have a significant effect on the Company’s consolidated financial position or results of operations.

In July 2010, the FASB issued ASU 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. ASU 2010-20 is to provide financial statement users with greater transparency about an entity’s allowance for credit losses and the credit quality of its financing receivables. The disclosures about activity that occurs during the reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010.  The Company does not expect the provisions of ASU 2010-20 to have a material effect on its financial position, results of operations or cash flows.

In August 2010, the FASB issued an exposure draft on lease accounting that would require entities to recognize assets and liabilities arising from lease contracts on the balance sheet. The proposed exposure draft states that lessees and lessors should apply a “right-of-use model” in accounting for all leases. Under the proposed model, lessees would recognize an asset for the right to use the leased asset, and a liability for the obligation to make rental payments over the lease term. The lease term is defined as the longest possible term that is “more likely than not” to occur. The accounting by a lessor would reflect its retained exposure to the risks or benefits of the underlying leased asset. A lessor would recognize an asset representing its right to receive lease payments based on the expected term of the lease. Comments on this exposure draft were due by December 15, 2010 and the final standard is expected to be issued in the second quarter of 2011. The Company believes that the proposed standard, as currently drafted, will have neither a material impact on its reported financial position and reported results of operations, nor a material impact on the liquidity of the Company.
 
 
 
-23-

 

 
In August 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-05, Measuring Liabilities at Fair Value, or ASU 2010-05, which amends ASC 820 to provide clarification of a circumstance in which a quoted price in an active market for an identical liability is not available. A reporting entity is required to measure fair value using one or more of the following methods: 1) a valuation technique that uses a) the quoted price of the identical liability when traded as an asset or b) quoted prices for similar liabilities (or similar liabilities when traded as assets) and/or 2) a valuation technique that is consistent with the principles of ASC 820. ASU 2010-05 also clarifies that when estimating the fair value of a liability, a reporting entity is not required to adjust to include inputs relating to the existence of transfer restrictions on that liability. The adoption did not have a material impact on our consolidated financial statements.

In December 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2010-29, Business Combinations (Topic 805) – Disclosure of Supplementary Pro Forma Information for Business Combinations. This ASU requires a public entity to disclose pro forma information for business combinations that occurred in the current reporting period. The disclosures include pro forma revenue and earnings of the combined entity for the current reporting period as though the acquisition date for all business combinations that occurred during the year had been as of the beginning of the annual reporting period. If comparative financial statements are presented, the pro forma revenue and earnings of the combined entity for the comparable prior reporting period should be reported as though the acquisition date for all business combinations that occurred during the current year had been as of the beginning of the comparable prior annual reporting period. ASU 2010-29 affects any public entity as defined by Topic 805 that enters into business combinations that are material on an individual or aggregate basis. ASU 2010-29 is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010.  Early adoption is permitted. The Company does not expect the provisions of ASU 2010-29 to have an effect on its financial position, results of operations or cash flows.

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 our 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.
 
 
 
-24-

 
 
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.
 
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 Black-Scholes option-pricing 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 2009, the convertible feature of the convertible notes (See Note 4 to our consolidated financial statements) 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 shipment of products to customers.
 
Sales are recognized upon shipment 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.
 
 
 
-25-

 
 
ITEM 8.      FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
 

 

 

NXT NUTRITIONALS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010 AND 2009



 
 
 

 
 
-26-

 

NXT Nutritionals Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
 
 
Page(s)
   
Report of Independent Registered Public Accounting Firm 
F-1
   
Consolidated Balance Sheets at December 31, 2010 and 2009 –   
F-2
   
Consolidated Statements of Operations For the Years Ended December 31, 2010 and 2009 –    
F-3
   
Consolidated Statements of Stockholders’ Deficit For the Years Ended December 31, 2010 and 2009 –   
F-4
   
Consolidated Statements of Cash Flows For the Years Ended December 31, 2010 and, 2009 –  
F-5
   
Notes to Financial Statements 
F-6 - F-26
 
 
 
 
 

 
 
 

 
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors of; NXT Nutritionals Holdings, Inc.
 
We have audited the accompanying consolidated balance sheet of NXT Nutritionals Holdings, Inc. and Subsidiaries, as of December 31, 2010 and 2009, and the related statements of operations, stockholders' deficit and cash flows for the years then ended. These financial statements arc 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, 2010 and 2009, 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 $17,402,736 and net cash used in operations of $3,035,079 for the year ended December 31, 2010; and a working capital deficit and stockholders' deficit of $11,076,205 and $12,547,616, respectively, at December 31, 2010, 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
 March 31, 2011
 
551 NW 77th Street Suite 201 • BOCa Raton, FL 33487
Phone: (561) 864-4444 Fax: (561) 892-3715
www.bettnancps.cominfo@bermancpas.com
Registered with the PCAOB • Member AICPA Center for Audit Quality
Member American Institute of Certified Public Accountants
Member Florida Institute of Certified Public Accountants
 


 
F-1

 
 
NXT Nutritionals Holdings, Inc. and Subsidiaries
 
Consolidated Balance Sheets
 
   
   
December 31, 2010
   
December 31, 2009
 
Assets
 
             
Assets:
           
Cash
  $ 1,662,130     $ 68,454  
Accounts receivable
    119,070       72,642  
Inventories
    431,643       150,110  
Total Current Assets
    2,212,843       291,206  
                 
Debt Issuance Costs - net
    25,548       46,590  
                 
Total Assets
  $ 2,238,391     $ 337,796  
                 
Liabilities and Stockholders' Deficit
 
                 
Liabilities:
               
Accounts payable and accrued expenses
  $ 654,963     $ 607,695  
Loans payable - related parties
    332,126       715,626  
Loan payable - other
    208,500       100,000  
Accrued interest payable
    59,035       41,125  
Registration rights payable
    608,840       362,453  
Convertible notes payable - net of debt discount
    8,438,684       -  
Derivative liabilities
    2,986,900       -  
Total Current Liabilities
    13,289,048       1,826,899  
                 
Convertible notes payable - net of debt discount
    1,496,959       1,830,605  
Total Long-Term Liabilities
    1,496,959       1,830,605  
                 
Total Liabilities
    14,786,007       3,657,504  
                 
Stockholders' Deficit
               
Preferred stock, $0.001 par value, 50,000,000 shares authorized,
               
   none issued and outstanding
    -       -  
Common stock, $0.001 par value, 200,000,000 shares authorized,
               
    49,408,068 and 39,971,745 shares issued and outstanding, respectively
    49,408       39,972  
Additional paid in capital
    32,822,477       24,657,084  
Accumulated deficit
    (45,419,501 )     (28,016,765 )
Total Stockholders' Deficit
    (12,547,616 )     (3,319,708 )
                 
Total Liabilities and Stockholders' Deficit
  $ 2,238,391     $ 337,796  
                 
See Accompanying Notes to Financial Statements
 
 
 
F-2

 
 
NXT Nutritionals Holdings, Inc. and Subsidiaries
 
Consolidated Statements of Operations
 
   
   
For the Years Ended December 31,
 
   
2010
   
2009
 
             
Sales - net of slotting fees and discounts
  $ 187,516     $ 905,728  
                 
Cost of sales
    433,599       969,352  
                 
Gross loss
    (246,083 )     (63,624 )
                 
General and administrative expenses
    3,591,276       6,906,598  
                 
Loss from operations
    (3,837,359 )     (6,970,222 )
                 
Other Income (Expenses)
               
     Interest expense
    (8,616,218 )     (1,016,718 )
     Interest income
    7,499       -  
     Loss on extinguishment of debt
    (9,845,860 )     (15,603,501 )
     Derivative expense
    (8,590,802 )     -  
     Change in fair market value of derivative liability
    13,763,391       -  
     Registration rights expense
    (283,387 )     (362,453 )
                 
          Total Other Income (Expenses) - Net
    (13,565,377 )     (16,982,672 )
                 
Net Loss
  $ (17,402,736 )   $ (23,952,894 )
                 
Net Loss per Common Share - Basic and Diluted
  $ (0.38 )   $ (0.68 )
                 
Weighted Average Number of Common Shares Outstanding
    45,787,226       35,032,563  
                 
See Accompanying Notes to Financial Statements
 
 
 
F-3

 
 
NXT Nutritionals Holdings, Inc. and Subsidiaries
 
Consolidated Statement of Stockholders' Deficit
 
For the Years Ended December 31, 2010 and 2009
 
                               
   
Common Stock
                   
   
Shares
   
Amount
   
Additional Paid-In Capital
   
Accumulated Deficit
   
Stockholders' Deficit
 
                               
                               
Balance, December 31, 2008
    34,619,195     $ 34,619     $ 1,915,484     $ (4,063,871 )   $ (2,113,768 )
                                         
Recapitalization
            -       25,000       -       25,000  
                                         
Stock based compensation
    3,881,305       3,881       4,453,509       -       4,457,390  
                                         
Conversion of accounts payable to common stock
    56,200       56       70,194       -       70,250  
                                         
Conversion of convertible notes
    1,415,045       1,416       564,602       -       566,018  
                                         
Stock purchase warrants issued for services
    -       -       280,000       -       280,000  
                                         
Beneficial conversion features
    -       -       2,127,700       -       2,127,700  
                                         
Extinguishment of convertible notes
    -       -       15,220,595       -       15,220,595  
                                         
Net loss for the year ended December 31, 2009
    -       -       -       (23,952,894 )     (23,952,894 )
                                         
Balance, December 31, 2009
    39,971,745     $ 39,972     $ 24,657,084     $ (28,016,765 )   $ (3,319,708 )
                                         
Conversion of convertible notes
    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
    -       -       467,224       -       467,224  
                                         
Reclassification of APIC when derivative ceases to exist
    -       -       4,834,934       -       4,834,934  
                                         
Net loss for the year ended December 31, 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 )
                                         
See Accompanying Notes to Financial Statements
 
 
 
F-4

 
 
NXT Nutritionals Holdings, Inc. and Subsidiaries
 
Consolidated Statements of Cash Flows
 
   
   
For the Years Ended December 31,
 
   
2010
   
2009
 
             
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net loss
  $ (17,402,736 )   $ (23,952,894 )
  Adjustments to reconcile net loss to net cash used in operating activities:
               
       Amortization of debt issue costs
    748,030       35,710  
       Amortization of debt discount
    7,848,508       883,367  
       Stock based compensation
    1,077,284       4,457,390  
       Warrants issued as consulting fee
    -       280,000  
       Loss on extinguishment of debt
    9,845,860       15,603,501  
       Derivative expense
    8,590,802       -  
       Change in fair market value of derivative liability
    (13,763,391 )     -  
       Registration rights expense
    283,387       362,453  
Changes in operating assets and liabilities:
               
  (Increase) Decrease in:
               
    Accounts receivable
    (46,428 )     135,527  
    Prepaid expenses
    -       33,000  
    Inventories
    (281,533 )     (82,552 )
  Increase (Decrease) in:
               
    Accounts payable and accrued expenses
    47,228       41,082  
    Accrued interest payable - related parties
    17,910       39,981  
    Accrued interest payable - convertible notes
    -       48,365  
         Net Cash Used in Operating Activities
    (3,035,079 )     (2,115,070 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Proceeds from loans payable - related parties
    -       25,000  
Proceeds from loan payable - other
    -       100,000  
Proceeds from issuance of convertible notes
    5,667,743       2,576,000  
Debt issuance costs paid in cash
    (726,988 )     (82,290 )
Payment on loans - related parties
    (45,000 )     (509,384 )
Repayment on loans payable- other
    (230,000 )     -  
Payments on convertible notes
    -       (200,000 )
Liquidated damage payment on registration rights
    (37,000 )     -  
        Net Cash Provided By Financing Activities
    4,628,755       1,909,326  
                 
Net Increase (Decrease) in Cash
    1,593,676       (205,744 )
                 
Cash - Beginning of Year
    68,454       274,198  
                 
Cash - End of Year
  $ 1,662,130     $ 68,454  
                 
SUPPLEMENTARY CASH FLOW INFORMATION:
               
Cash Paid During the Year for:
               
    Income Taxes
  $ -     $ -  
    Interest
  $ -     $ 8,263  
                 
SUPPLEMENTARY DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
         
                 
Debt discount recorded on convertible notes
  $ 5,667,743     $ -  
Beneficial conversion feature on convertible notes
  $ -     $ 2,127,700  
Original issue discount
  $ 850,201     $ 590,400  
Conversion of note payable in recapitalization
  $ -     $ 25,000  
Conversion of convertible note payable to common stock
  $ 2,262,610     $ 566,018  
Reclassification of derivative liability to paid in capital when derivative ceases to exist
  $ 4,834,934     $ -  
Exercise of cashless warrants
  $ 1,510     $ -  
Stock issued to settle account payable
  $ -     $ 70,250  
Accrued interest converted to convertible notes
  $ -     $ 81,940  
 
See Accompanying Notes to Financial Statements
 
 
F-5

 

NXT Nutritionals Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010 and 2009




Note 1 Nature of Operations

NXT Nutritionals Holdings, Inc. ("Holdings), (formerly known as Goldvale Resources, Inc.) is a Delaware corporation incorporated in 2006.  On February 12, 2009, Holdings acquired NXT Nutritionals, Inc. (the “Company”, “NXT Nutritionals”, or “NXT, Inc”) a Delaware corporation incorporated in 2008.

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®. SUSTA® will also be sold as a stand-alone sweetener.  The Company also sells non-fat 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: 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) the cyclical nature of the grocery industry, (ii) general economic conditions in the various local markets in which the Company competes, including the general downturn in the economy, (iii) the volatility of prices pertaining to food and beverages in connection with the Company’s distribution of product, and (iv) effective use of slotting fees paid as well as advertising. 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, 2010 and 2009, respectively.
 
The Company minimizes its credit risk associated with cash by periodically evaluating the credit quality of its primary financial institution. The balance at times may exceed federally insured limits.
 
 
F-6

 
 
NXT Nutritionals Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
 
 
As of December 31, 2010 the Company had cash in bank accounts which exceeded the federally insured limits by $1,235,498.

Accounts receivable and allowance for doubtful accounts
 
Accounts receivable represents trade obligations from customers that are subject to normal trade collection terms. The Company periodically evaluates the collectability of its accounts receivable and considers the need to establish an allowance for doubtful accounts based upon historical collection experience and specific customer information. Accordingly, the actual amounts could vary from the recorded allowances. The Company does not charge interest on past due receivables. Receivables are determined to be past due based on payment terms of original invoices.
 
At December 31, 2010 and 2009, respectively, the Company did not record an allowance for doubtful accounts.

Inventories

Inventories are stated at the lower of cost or market using the first-in, first-out (FIFO) valuation method.
   
 
December 31, 2010
 
   
December 31, 2009
 
 
Work in process
  $ 285,769     $ 90,594  
Finished goods
    145,874       59,516  
    $ 431,643     $ 150,110  

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 expensed.
 
Beneficial Conversion Feature
 
For convertible debt issued in 2009, the convertible feature (See Note 4) 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 would be recorded as a debt discount from the face amount of the respective debt instrument. The discount would be amortized to interest expense over the life of the debt. At each commitment date during 2009, the convertible debt instruments had an effective conversion rate per share in excess of the market price per share.

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.
 
 
F-7

 
 
NXT Nutritionals Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010 and 2009

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 Black-Scholes option-pricing 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, 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 binomial option-pricing model. At December 31, 2010 and December 31, 2009, respectively, the Company had derivative liabilities in the amounts of $2,986,900 and $0, respectively.
 
Revenue recognition

The Company records revenue for both the yogurt smoothie and for the natural sweetener 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 shipment of products to customers. The Company allows deductions in the form of credits for smoothie 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.  As of December 31, 2010 and December 31, 2009, the Company had no reserves.

Expenses such as slotting fees and sales discounts are accounted for as a direct reduction of revenues.  During the years December 31, 2010 and 2009, the Company recorded slotting fees and discounts of $290,324 and $127,269, respectively.

Cost of sales

Cost of sales represents costs directly related to the production and manufacturing of the 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, 2010
 
Year Ended
 December 31, 2009
$617,787
 
$3,019,962
 
 
F-8

 
 
NXT Nutritionals Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010 and 2009

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 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.
 
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, 2010 and 2009, respectively, the Company did not record any liabilities for uncertain tax positions.

Earnings per share

In accordance with accounting guidance now codified as FASB ASC Topic 260, “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, 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  

The Company had the following potential common stock equivalents at December 31, 2009:

Convertible debt – face amount of $3,665,338, conversion price of $0.40
    9,163,345  
Common stock warrants, conversion price of $0.40 (Series “A”) and $0.60 (Series “B”)
    21,906,781  
Total common stock equivalents
    31,070,126  

Since the Company reflected a net loss in 2010 and 2009, the effect of considering any common stock equivalents, if outstanding, would have been anti-dilutive. A separate computation of diluted earnings (loss) per share is not presented.
 
In connection with the reverse acquisition and recapitalization, all share and per share amounts have been retroactively restated.
 
 
F-9

 
 
NXT Nutritionals Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
 

Recent accounting pronouncements

In January 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2010-06, “Improving Disclosures about Fair Value Measurements (“ASU 2010-06”). ASU 2010-06 amends ASC 820, “Fair Value Measurements” ("ASC 820") to require a number of additional disclosures regarding fair value measurements. The amended guidance requires entities to disclose the amounts of significant transfers between Level 1 and Level 2 of the fair value hierarchy and the reasons for these transfers, the reasons for any transfers in or out of Level 3, and information in the reconciliation of recurring Level 3 measurements about purchases, sales, issuances and settlements on a gross basis. The ASU also clarifies the requirement for entities to disclose information about both the valuation techniques and inputs used in estimating Level 2 and Level 3 fair value measurements. The amended guidance was effective for financial periods beginning after December 15, 2009, except the requirement to disclose Level 3 transactions on a gross basis, which becomes effective for financial periods beginning after December 15, 2010. ASU 2010-06 did not have a significant effect on the Company’s consolidated financial position or results of operations.

In July 2010, the FASB issued ASU 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. ASU 2010-20 is to provide financial statement users with greater transparency about an entity’s allowance for credit losses and the credit quality of its financing receivables. The disclosures about activity that occurs during the reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010.  The Company does not expect the provisions of ASU 2010-20 to have a material effect on its financial position, results of operations or cash flows.

In August 2010, the FASB issued an exposure draft on lease accounting that would require entities to recognize assets and liabilities arising from lease contracts on the balance sheet. The proposed exposure draft states that lessees and lessors should apply a “right-of-use model” in accounting for all leases. Under the proposed model, lessees would recognize an asset for the right to use the leased asset, and a liability for the obligation to make rental payments over the lease term. The lease term is defined as the longest possible term that is “more likely than not” to occur. The accounting by a lessor would reflect its retained exposure to the risks or benefits of the underlying leased asset. A lessor would recognize an asset representing its right to receive lease payments based on the expected term of the lease. Comments on this exposure draft were due by December 15, 2010 and the final standard is expected to be issued in the second quarter of 2011. The Company believes that the proposed standard, as currently drafted, will have neither a material impact on its reported financial position and reported results of operations, nor a material impact on the liquidity of the Company.

In August 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-05, Measuring Liabilities at Fair Value, or ASU 2010-05, which amends ASC 820 to provide clarification of a circumstance in which a quoted price in an active market for an identical liability is not available. A reporting entity is required to measure fair value using one or more of the following methods: 1) a valuation technique that uses a) the quoted price of the identical liability when traded as an asset or b) quoted prices for similar liabilities (or similar liabilities when traded as assets) and/or 2) a valuation technique that is consistent with the principles of ASC 820. ASU 2010-05 also clarifies that when estimating the fair value of a liability, a reporting entity is not required to adjust to include inputs relating to the existence of transfer restrictions on that liability. The adoption did not have a material impact on our consolidated financial statements.

In December 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2010-29, Business Combinations (Topic 805) – Disclosure of Supplementary Pro Forma Information for Business Combinations. This ASU requires a public entity to disclose pro forma information for business combinations that occurred in the current reporting period. The disclosures include pro forma revenue and earnings of the combined entity for the current reporting period as though the acquisition date for all business combinations that occurred during the year had been as of the beginning of the annual reporting period. If comparative financial statements are presented, the pro forma revenue and earnings of the combined entity for the comparable prior reporting period should be reported as though the acquisition date for all business combinations that occurred during the current year had been as of the beginning of the comparable prior annual reporting period. ASU 2010-29 affects any public entity as defined by Topic 805 that enters into business combinations that are material on an individual or aggregate basis. ASU 2010-29 is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010.  Early adoption is permitted. The Company does not expect the provisions of ASU 2010-29 to have an effect on its financial position, results of operations or cash flows.
 
 
F-10

 
 
NXT Nutritionals Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
 

Note 3 Going Concern and Liquidity

As reflected in the accompanying consolidated financial statements, the Company has a net loss of $17,402,736 and net cash used in operations of $3,035,079 for the year ended December 31, 2010; and has a working capital deficit of $11,076,205 and a stockholders’ deficit of $12,547,616.

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.

The Company believes that the utilization of its unique ingredient “SUSTA” will allow new product development that will provide future positive cash flows, however, sales to date have been nominal.

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 Reverse Recapitalization and Debt

(A)  
Public Shell Merger – Reverse Merger and Recapitalization

On February 12, 2009, NXT Nutritionals Holdings, Inc. (“Holdings”) (formerly known as Goldvale Resources, Inc.), a then public shell corporation, merged with NXT Nutritionals, Inc. and NXT Nutritionals, Inc. became the surviving corporation, in a transaction treated as a reverse acquisition. Holdings did not have any operations and majority-voting control was transferred to NXT Nutritionals, Inc.  The transaction also requires a recapitalization of NXT Nutritionals, Inc. Since NXT Nutritionals, Inc. acquired a controlling voting interest, it was deemed the accounting acquirer, while Holdings was deemed the legal acquirer. The historical financial statements of the Company are those of NXT Nutritionals, Inc. and Subsidiaries, and of the consolidated entities from the date of merger and subsequent.

Since the transaction is considered a reverse acquisition and recapitalization, the presentation of pro-forma financial information was not required.

Pursuant to the merger, Holdings majority stockholder cancelled 20,000,000 shares of common stock and concurrently issued 22,480,000 shares of common stock to NXT Nutritionals, Inc.  Upon the closing of the reverse acquisition, NXT Nutritionals, Inc. stockholders held 63% of the issued and outstanding shares of common stock.
 
 
F-11

 
 
NXT Nutritionals Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
 

(B)  
 Private Company  – Reverse Merger and Recapitalization

On October 31, 2008, the Company entered into a Share purchase agreement with NXT, LLC and Healthy Dairy, LLC.  One individual serves as president of these two entities. The Company issued NXT, LLC Unitholders and Heath Dairy Unitholders 14,000,000 shares of common stock, for 100% membership interests in NXT, LLC and Healthy Dairy, LLC. NXT, LLC had nominal operations.

According to the agreement, the Company also 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 with a public shell, and an additional $600,000 within 180 days post closing.

During 2009, the Company repaid $220,000 to unit holders associated with the October 31, 2008 share exchange agreement between NXT, Inc. and Healthy Dairy, LLC and NXT, LLC. The Company still has a balance due on this portion of approximately $392,000.  There are no penalties or interest being accrued on the outstanding balance.  The Company has an oral waiver with the unit holders in that additional payments will be made once the Company begins to turn a profit.

(C)  
Loans Payable – Related Parties

On March 7, 2008, the Company entered into a loan agreement with a related party to borrow an up to $388,500, of which $120,274 was advanced, with no stated terms, during December 2007. An additional $268,226 was advanced during 2008. These loans bear interest at 6% with a default rate of interest of 12%.  The loans are secured by all assets of the Company.  The Company repaid $90,000 of these advances in May 2009,  The Company reclassified the loan to loans payable – other when the noteholder no longer was a benefical owner.
 
In December 2009, a Director loaned the Company $25,000.  The loan bore no interest, was not secured and was due on demand.  The Company repaid the $25,000 during February 2010.

The following is a summary of loans payable – related parties:
 
Balance – December 31, 2008
 
$
1,200,010
 
Advances
   
25,000
 
Repayments
   
(509,384
)
Balance – December 31, 2009
   
715,626
 
Repayments
   
(45,000
)
Transfer of related party loan to loan payable – other
   
(338,500)
 
Balance – December 31, 2010
 
$
332,1216
 

(D)  
Loans Payable – Other

On November 4, 2008, an investor paid $25,000 of expenses on behalf of the Company.  This advance was non-interest bearing, unsecured and due on demand. The $25,000 loan was converted to stock upon recapitalization with NXT Nutritionals Holdings, Inc. on February 12, 2009.

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.
 
The Company reclassified a loan from a former related party to loans payable – other in the amount of $338,500.  The loan was due on March 7, 2010. The Company repaid $130,000 during 2010.  On October 31, 2008, the default provisions were waived. At December 31, 2010 and 2009, the Company accrued $59,035 and $41,125, respectively.
 
 
F-12

 
 
NXT Nutritionals Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
 

(E)  
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, and modified and amended again on December 6, 2010.  The notes originally matured 15 months after the original issue date, but were ultimately modified and amended to a December 31, 2011 maturity.  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. The Notes contained the following features:

i.  
Conversion price at issuance:  $1.00
ii.  
Modified conversion price as of December 6, 2010: $0.40
iii.  
Registration rights – the Company is required to file a registration statement within 30 days of the close of the offering.  If the Company fails to file such registration statement, the Company will incur liquidated damages of 0.5% of the aggregate amount raised in the offering.  The maximum liquidated damages are capped at 6.0% of the aggregate amount raised in the offering.  The Company obtained an effective registration on February 14, 2011.
iv.  
Original issue discount- 15% over the 15 month maturity of the notes.  This amount was expensed in full as of September 1, 2010, the effective date of the Modification and Amendment Agreement
v.  
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.

The Company also issued the note holders one stock purchase warrant (Series C) with a maturity of 5 years and a $1.25 exercise price, which was modified and amended to $0.40.  The stock purchase warrants contain cashless exercise provisions.  The Company issued a total of 6,517,944 stock purchase warrants in this offering. The new face amount of the warrants after the second amendment is 7,495,635.

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 binomial lattice valuation model.
 
The fair value of the derivative liabilities are summarized as follow:
 
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 Modified and Amended Agreements
    7,326,680  
Derivative liability balance at December 31, 2010
  $ 2,986,900  
 
 
 
F-13

 
 
NXT Nutritionals Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
 

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%.

The terms of the second modification and amendment agreement are as follows:

i.  
Original issue discount is increased to 60% for outstanding notes from 15%,
ii.  
Warrants will increase by fifteen percent.
iii.  
Commencement of monthly redemptions are extended to December 31, 2011,
iv.  
Revenue target 1 – If the company does not recognize $5 million in sales for the three months ended March 31, 2011, the conversion rate will be adjusted to $0.30 unless the average closing trading price is $0.60 or better,
v.  
Revenue target 2 – If the company does not recognize $8 million in sales for the six months ended June 30, 2011, the conversion rate will be adjusted to 90% of the average closing bid price unless the average closing trading price is $0.60 or better.
 
Modification and Amendment Fair Value

At September 1, 2010 and December 6, 2010, the Company remeasured the modified and amended derivative liabilities, and recorded a derivative liability of $3,726,410 at September 1, 2010 and a derivative liability of $3,600,270 at December 6, 2010.  The following management assumptions were considered:

Exercise price
  $ 0.40  
Expected dividends
    0 %
Expected volatility
    200 %- 360 %
Risk fee interest rate
    0.22 – 1.53 %
Suboptimal exercise factor
    1.5  
Expected life of conversion features
 
.92 – 1.07 years
 
Expected life of Series C Warrants
 
4.13 – 4.49 years
 

 
F-14

 
 
NXT Nutritionals Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010 and 2009



Mark to Market

At December 31, 2010, the Company remeasured the derivative liabilities, and recorded a fair value adjustment of $418,420.  The following management assumptions were considered:

Exercise price
$0.40
Expected dividends
0%
Expected volatility
360%
Risk fee interest rate
0.30 – 1.50%
Suboptimal exercise factor
1.5
Expected life of conversion features
1 year
Expected life of Series C Warrants
4.13 – 4.16 years

Conversions

During the year ended December 31, 2010, 6 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
)
Accretion of debt discount
   
6,517,944
 
Increase in principal, as modified in the December 6, 2010 Modification and Amended Agreement
   
1,920,740
 
Note balance at December 31, 2010
 
$
8,438,684
 
 
(F)  
Convertible Debt and Warrants

1.  
 2008 Convertible Debt
a.  
$800,000 bridge notes (“2008 debt”) bearing interest at 10%.  These notes were due one year from issuance and were secured by all assets of the Company. The notes were convertible at $0.40/share, or 2,000,000 shares of common stock. The notes are subject to mandatory conversion if, at any time after closing, a reverse acquisition with a public shell company and prior to the maturity dates of these convertible notes, the Company completes a private placement (“new financing”) of convertible debt financing of between $2,000,000 - $5,000,000. On August 27, 2009, the Company closed the new financing, and exceeded the $2,000,000 minimum raise.
b.  
The $800,000 of convertible notes were issued with Series “A” warrants with the following provisions:
i.  
2,000,000 warrants
ii.  
Conversion price of $0.40/share
iii.  
Expiration of 5 years
c.  
Of the total, in March 2009, $200,000 of principal and $7,918 of accrued interest was repaid. The remaining principal and interest of $648,260 was converted into a new offering, see below regarding mandatory conversions.

2.  
2009 Convertible Debt was issued under the same terms as the 2008 convertible debt. (“2009 debt #1)
a.  
$595,000 in additional bridge notes.
b.  
The $595,000 of convertible notes were issued with Series “A” warrants with the following provisions:
i.  
1,487,500 warrants
ii.  
Conversion price of $0.40/share
iii.  
Expiration of 5 years
c.  
The remaining principal and interest of $628,629 was converted into a new offering, see below regarding mandatory conversions.

3.  
Debt discount associated with 2009 debt #1

In connection with convertible debt issued in 2009 debt #1, the Company has determined that fair value is applicable for these conventional convertible debt instruments.  The Company first determined the fair value of the warrants based upon the following management assumptions:

Expected dividends
0%
Expected volatility
125%
Expected term
5 years
Risk free interest rate
1.93% - 2.84%
 
 
F-15

 
 
NXT Nutritionals Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
 

After computing the fair value of the warrants, the Company determined the relative fair value of the convertible debt and the related effective conversion price. The Company’s effective conversion price for a portion of these issuances of convertible debt was below market price.

The Company recorded a beneficial conversion feature in connection with the issuance of these notes in the amount of $150,000.  Upon mandatory conversion on August 27, 2009, the Company amortized the remaining portion of the unamortized debt discount associated with the beneficial conversion features totaling $150,000.

4.  
New offering
a.  
Any debt, plus accrued interest would be converted at 130%.  The premium is 30%, which includes 3 years of simple interest at 10%, this is an original issue discount that is amortized over the life of the debt
b.  
Maturity date of debt is three years from issuance.
c.  
Secured by all assets of the Company.
d.  
Debt holder would receive Series “A” and Series “B” warrants
i.  
Warrants of both series are computed as the face amount of the debt converted.  Warrant coverage is 100% for both series. Originally issued warrants were cancelled and replaced in connection with this offering (see below regarding extinguishment).
ii.  
Conversion price is $0.40 for Series “A” and $0.60 for Series “B”.
iii.  
Expiration of 5 years
e.  
The new offering has no stated interest, and no debt discount was computed since no proceeds were raised.

5.  
Mandatory Conversions (see Note 4(F)(1)(A) above)
a.  
On August 27, 2009, the 2008 debt and 2009 debt #1 were converted into a new offering since the Company raised the minimum $2,000,000.
b.  
Principal of $1,195,000 and accrued interest of $81,890, totaling $1,276,890, and was converted into:
i.  
New debt instrument with a face amount, inclusive of the original issue discount totaling $1,659,956 ($1,276,890 x 130%), convertible at $0.40/share
ii.  
4,149,890 Series “A” warrants, conversion price of $0.40/share
iii.  
4,149,890 Series “B” warrants, conversion price of $0.60/share
iv.  
2,987,500 Series “A” warrants were cancelled

6.  
2009 Convertible Debt was issued under the same terms as the 2009 convertible debt #1. (“2009 debt #2)
a.  
$2,571,400 notes. These notes were due three years from issuance and were secured by all assets of the Company. The notes were convertible at $0.40/share, or 6,428,500 shares of common stock.
b.  
The $2,571,400 of convertible notes were issued with Series “A”  and “B” warrants with the following provisions:
i.  
6,428,500 Series “A” warrants, conversion price of $0.40/share.
ii.  
6,428,500 Series “B” warrants, conversion price of $0.60/share.
iii.  
Expiration of 5 years
c.  
On August 10, 2009, a convertible note holder converted principal in the amount of $204,100 into 510,250 shares of the Company’s common stock at a conversion rate of $0.40. On September 23, 2009, a convertible note holder converted principal in the amount of $30,000 into 75,000 shares of the Company’s common stock at a conversion rate of $0.40.  On August 10, 2009, a convertible note holder partially converted principal and interest in the amount of $331,918 into 829,795 shares of the Company’s common stock at a conversion rate of $0.40.
d.  
During the year ended December 31, 2010, 15 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.
 
 
F-16

 
 
NXT Nutritionals Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
 

7.  
Debt discount associated with 2009 debt #2

In connection with convertible debt issued in 2009 debt #2, the Company has determined that fair value is applicable for these conventional convertible debt instruments.  The Company first determined the fair value of the warrants based upon the following management assumptions:

Expected dividends
0%
Expected volatility
125%
Expected term
5 years
Risk free interest rate
1.93% - 2.84%
 
After computing the fair value of the warrants, the Company determined the relative fair value of the convertible debt and the related effective conversion price. The Company’s effective conversion price for a portion of these issuances of convertible debt was below market price.

The Company recorded a beneficial conversion feature in connection with the issuance of these notes in the amount of $2,131,000 and recorded an original issue discount of $590,400.

(G)  
Registration Rights Penalty

In connection with the issuance of the 2008 and 2009 convertible debt, all convertible note holders were entitled to liquidated damages, which provide for a payment in cash equal to a maximum of 9% of the total offering price for all debt proceeds raised.  The Company was required to file an S-1 registration statement 60 days after the offering closed.  The closing date of the offering was August 27, 2009; therefore the 60th day was October 26, 2009.  Furthermore, the Company was required to have this S-1 registration declared effective within 120 days (December 25, 2009) or within 150 days (January 24, 2010) if a full SEC review is done. The registration statement went effective on February 14, 2011.

The Company has evaluated the registration rights provision for the 2008 and 2009 convertible debt and has determined the probability of incurring liquidated damages. The Company recorded the full 9% penalty.

In connection with the issuance of the 2010 Convertible Debt, all convertible note holders were entitled to liquidated damages, which provide for a payment in cash equal to a maximum of 6% of the total offering price for all debt proceeds raised.  The Company was required to file an S-1 registration statement 30 days after the offering closed.  The closing date of the offering was February 26, 2010; therefore the 30th day was March 28, 2010.

The Company filed a registration on Form S-1 with the Securities Exchange Commission on April 21, 2010.  As of December 31, 2010, the registration had not been declared effective. The Company has accrued for the liquidated damages as follows:

Balance as of January 1, 2009
        $ -  
               
Gross 2009 and 2008 raised
  $ 4,027,256          
                 
Maximum penalty
    9 %   $ 362,453  
                 
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  

The registration statement was declared effective on February 14, 2011.
 
 
F-17

 
 
NXT Nutritionals Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
 

(H)  
Debt Issuance Costs

In connection with raising convertible debt during 2010, the Company paid debt issue costs of $726,988.  During the year ended December 31, 2010, the Company fully amortized ($726,988) the debt issuance costs in connection with the modification and extinguishment of the convertible debt, reference Note 4(E).

In connection with raising convertible debt, the Company paid debt issue costs to a family member of the Chairman of the Board totaling $82,300.  During December 31, 2010, the Company amortized $21,042. The Company amortized $35,710 during December 31, 2009.  The remaining $25,548 will be amortized over the remaining maturity of the debt.

Note 5 Fair Value

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.
 
 
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 following are the major categories of liabilities measured at fair value on a nonrecurring basis during the year ended December 31, 2010, using quoted prices in active markets for identical liabilities (Level 1); significant other observable inputs (Level 2); and significant unobservable inputs (Level 3):
 
 
F-18

 
 
NXT Nutritionals Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
 

   
Level 1:
Quoted Prices in Active Markets for Identical Liabilities
   
Level 2:
Significant Other Observable Inputs
   
Level 3:
Significant Unobservable Inputs
 
                         
Derivative Liabilities
  $ -     $ 2,986,900     $ -  
Total
  $ -     $ 2,986,900     $ -  

There were no financial instruments accounted for at fair value at December 31, 2009.
 
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.

Note 6 Stockholders Deficit

(A)  
Common Stock

On February 12, 2009, the Company issued 650,000 shares of common to members of the board of directors and outside consultants for services rendered, having a fair value of $6,500 ($0.01/share), based upon the value of the services rendered to the private company prior to the reverse acquisition.

On March 24, 2009, the Company issued 250,000 shares of common stock to consultants for services rendered, having a fair value of $312,500 ($1.25/share), based upon the quoted closing trading price. The Company also granted 250,000, 5 year stock purchase warrants, to purchase shares of the Company’s common stock at an exercise price of $0.60.

The Company determined the fair value of the warrants was $280,000, based upon the following management assumptions:

Expected dividends
   
0
%
Expected volatility
   
125
%
Expected term
 
5 years
Risk free interest rate
   
1.7
%

On March 24, 2009, the Company issued 175,000 shares of common stock to consultants to settle accounts payable from 2008 totaling $70,500 and an additional $148,250 for services rendered in 2009.  The stock issuance has a fair value of $218,750 ($1.25/share), based upon the quoted closing trading price.

On March 24, 2009, the Company issued 100,000 shares of common stock to consultants for services rendered, having a fair value of $125,000 ($1.25/share), based upon the quoted closing trading price.

On April 22, 2009, the Company entered into a 3 year agreement with a celebrity spokesperson.  In return for the ability to use the celebrity’s name and likeness, the Company agreed to issue the celebrity 400,000 shares of the Company’s common stock, having a fair value of $440,000 ($1.10/share), based upon the quoted closing trading price.  These shares were vested fully upon issuance.  The Company also agreed to pay the celebrity $50,000 which was paid in full on September 6, 2010.

On August 10, 2009, the Company issued 16,700 shares of the Company’s common stock to a consultant for services rendered, having a fair value of $16,700 ($1/share), based upon the quoted closing trading price.
 
 
F-19

 
 
NXT Nutritionals Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
 

On August 12, 2009, the Company issued a consultant 25,000 shares of the Company’s common stock for services rendered, having a fair value of $34,000 ($1.36/share), based upon the quoted closing trading price.

On August 15, 2009, the Company issued a consultant 90,000 shares of the Company’s common stock for services rendered, having a fair value of $123,300 ($1.37/share), based upon the quoted closing trading price.

On November 30, 2009, the Company entered into an agreement with a celebrity spokesperson in return for the ability to use the celebrity’s name and likeness.  The term of the agreement is effective from March 1, 2010 to February 28, 2011.  In consideration, the Company agreed to issue the celebrity 20,000 fully vested shares of the Company’s common stock on March 1, 2010.  Beginning April 2010, the Company  will issue the celebrity 20,000 shares of the Company’s common stock per month for five consecutive months. Based upon the quoted closing trading prices of the following dates, the shares had a fair value of: $0.38/share as of April 30, $0.24/share as of May 28, $0.22/share as of June 30, 2010, $0.22/share as of July 1, 2010, and $0.17/share as of August 1, 2010 respectively.

On December 2, 2009, the Company entered into an agreement with a celebrity spokesperson in return for the ability to use the celebrity’s name and likeness, the Company agreed to issue the celebrity 3,000,000 shares of the Company’s common stock.  The shares vest over a period as follows: 1,000,000 shares on December 2, 2009, 1,000,000 shares each on December 31, 2011 and 2012. On December 2, 2009, the Company issued the first 1,000,000 shares of common stock, having a fair value of $2,280,000 ($2.28/share) based upon the quoted closing trading price. During 2010, the Company and the celebrity agreed to terminate the contract.  The termination agreement is currently in negotiation.

During 2009, the Company appointed 3 new members to the Board of Directors.  The directors each received 250,000 shares of the Company’s common stock (750,000 in total for all three directors) fully vested upon the execution of the agreement.  The fair value of these issuances was $970,000, based upon quoted closing trading prices ranging from $0.90 to $1.60.

On March 30, 2010, the Company entered into a Settlement Agreement and Mutual General Release with a vendor.  In accordance with the terms of the settlement agreement, the vendor agreed to cancel the letter of engagement with the Company which provided for a 450,000 share issuances for past and future services, in return, the Company issued 300,000 shares of the Company’s common stock, having a fair value of $183,000 ($0.61/share), based upon the quoted closing trading price.

On June 14, 2010, the Company issued a consultant 50,000 shares of the Company’s common stock for services to be rendered, having a fair value of $11,650 ($0.23/share), based upon the quoted closing trading price. In addition, the Company will pay the consultant the greater of $5,000 per month or 5% of net sales of all products sold based on the agreement provisions.

On July 1, 2010, the Company issued a consultant 30,000 shares of the Company’s common stock for services to be rendered, having a fair value of $6,600 ($0.22/share), based upon the quoted closing trading price. In addition, the Company will pay the consultant the greater of $5,000 per month or 5% of net sales of all products sold based on the agreement provisions.

On September 21, 2010, the Company entered into an agreement with a celebrity spokesperson.  The term of the agreement expires on December 31, 2012.  In return for the ability to use the celebrity’s name and likeness, the Company agreed to issue the celebrity 250,000 shares of the Company’s common stock, having a fair value of $53,750 ($0.22/share), based upon the quoted closing trading price.  These shares were vested fully upon issuance.  The Company also agreed to issue the celebrity an additional 250,000 shares on December 31, 2011 and an additional 250,000 shares on December 31, 2012.  The Company also agreed to pay the celebrity $6,250/month from September 2010 through December 31, 2011 and $16,667/month during 2012.

During the year ended December 31, 2010, 4 warrant holders exercised 2,171,147 stock purchase warrants utilizing the cashless exercise provision for 1,509,799 shares of the Company’s common stock.

On October 8, 2010, the Company issued a consultant 200,000 shares for services rendered at a fair value of  $42,000 ($0.21/share) based upon the quoted closing price trading price.   The consultant is related to a member of the Company’s board of directors.
 
 
F-20

 
 
NXT Nutritionals Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
 

(B)  
Stock Options

On November 12, 2010, the Company adopted the 2010 Incentive Stock Plan (“the Plan”). The total number of shares of stock which may be purchased or granted directly by options, stock awards or restricted stock purchase offers, or purchased indirectly through exercise of options granted under the Plan shall not exceed 30,000,000 plus an increase of an the first day of each fiscal year, beginning in 2010. The Plan indicates that the exercise price of an award is equivalent to the market value of the Company’s common stock on the grant date.

On November 12, 2010, the Company's board of directors authorized the issuance of 8,495,000 and 7,265,000 stock options for fiscal year 2010 and fiscal year 2011, respectively, having a total fair value of $3,467,194, which vest over a 4 year term.  These options expire between November 12, 2020 and November 12, 2021.

The Company applied fair value accounting for all share based payment awards. The fair value of each plain-vanilla option granted is estimated on the date of grant using the Black-Scholes option-pricing model. The Black-Scholes assumptions used in the year ended December 31, 2010 is as follows:

Exercise price
 
$0.22
 
Expected dividends
 
0%
 
Expected volatility
 
360%
 
Risk fee interest rate
 
2.8%
 
Expected life of option
 
7 years
 
Expected forfeitures
 
0%
 
 
The following is a summary of the Company’s stock option activity:
   
 
 
 
Options
   
Weighted Average
Exercise Price
 
Weighted Average Remaining
Contractual Life
 
 
Aggregate
Intrinsic Value
 
Balance – January 1, 2010
    -                
Granted
    15,760,000     $ 0.22          
Exercised
    (- )   $ 0.22          
Forfeited
    (- )   $ -          
Balance – December 31, 2010 – outstanding
    15,760,000     $ 0.22  .32  
9.90 years
  $ -  
Balance – December 31, 2010 – exercisable
    2,123,750     $ 0.22  
9.90 years
  $ -  
                           
Grant date fair value of options granted – 2010
          $ 3,467,194            
Weighted average grant date fair value – 2010
          $ 0.22            
                           
Outstanding options held by related parties – 2010
    15,760,000                    
Exercisable options held by related parties – 2010
    2,123,750                    
Fair value of stock options granted to related parties - 2010
  $ 3,467,194                    
 
 
F-21

 
 
NXT Nutritionals Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
 

(C)  
Warrants

The following is a summary of the Company’s warrant activity:

   
Warrants
   
Weighted Average Exercise Price
 
             
Outstanding – December 31, 2009
    21,906,781     $ 0.40  
Exercisable – December 31, 2009
    21,906,781     $ 0.40  
Granted
    7,495,635     $ 0.40  
Exercised
    (2,171,147 )   $ 0.40  
Forfeited/Cancelled
    -     $ -  
Outstanding – December 31, 2010
    27,231,269     $ 0.40  
Exercisable – December 31, 2010
    27,231,269     $ 0.40  
 
 
Warrants Outstanding     Warrants Exercisable  
Range of exercise price     Number Outstanding     Weighted Average Remaining Contractual Life (in years)     Weighted Average Exercise Price     Number Exercisable     Weighted Average Exercise Price  
$ 0.40       27,231,269       3.52 years     $ 0.40       27,231,269     $ 0.40  
 
At December 31, 2010 and December 31, 2009, the total intrinsic value of warrants outstanding and exercisable was $0 and $20,080,402, respectively.

Note 7 Contingencies

Litigations, Claims and Assessments

From time to time, the Company may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm its business. The Company is currently not aware of any such legal proceedings or claims that they believe will have, individually or in the aggregate, a material adverse affect on its business, financial condition or operating results.

Note 8 Employment Agreements

On February 12, 2009, the Company entered into two employment agreements with its Chief Executive Officer and Chief Financial Officer. The terms of the agreements are as follows:

(1)  
CEO

●      3 year term
●      $240,000 annual salary of which $120,000 deferred during the year ended December 31, 2010

During 2011, the Company entered a new agreement with the CEO.  The new agreement includes a provision retrospectively granting the CEO deferred compensation for the year ended December 31, 2010 in the amount of $120,000.
 
 
F-22

 
 
NXT Nutritionals Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
 

(2)  
CFO
●      2 year term
 
200,000 shares of the Company’s common stock, having a fair value of $2,000 ($0.01/share), based upon the fair value of services rendered to third parties for services rendered.  These shares will vest 25,000 shares per quarter.  As of December 31, 2010, the CFO vested in the 200,000 shares of the stock award.
 
$3,500/month for financial service preparation and an hourly rate for engagements in addition to financial statement preparation.  The fees are paid to an accounting  firm where the CFO is an employee.
       
The agreement expired on February 12, 2011.  The CFO is currently working on a verbal agreement for $6,500 per month, fixed fee..

(3)  
COO

On January 26, 2010, the Company entered into an employment agreement with its Chief Operating Officer. The terms of the agreements are as follows:
 
● 
3 year term
● 
$20,000 monthly base salary of which 50% may be deferred until the termination of the contract or a change in control.  The Company deferred the $120,000 during the year ended December 31, 2010.

● 
Stock compensation which vests as follow:
 
i.  
400,000 shares of the Company’s common stock As of December 31, 2010, the COO has vested in the first 280,000 shares of the stock award.  The Company recorded an expense of $65,240 or ($0.23/share) during year ended December 31, 2010.

ii.  
500,000 shares of the Company’s common stock vesting 40,000 share shall vest on each of June 1, 2011, August 1, 2011, September 1, 2011, October 1, 2011, November 1, 2011, and the remaining shares shall fully vest on December 1, 2011.
iii.  
500,000 shares of the Company’s common stock shall be granted on or before January 1, 2011, vesting fully on December 31, 2011
iv.  
500,000 shares of the Company’s common stock shall be granted on or before January 1, 2012, vesting fully on December 31, 2012

(4)  
Executive Vice President and Director

On September 23, 2010, the Company entered into an employment agreement with its Executive Vice President.  The employment agreement had an effective date of January 1, 2010. The terms of the agreements are as follows:

·  
3 Year Term
·  
$9,500 monthly base salary
·  
Participation in bonus compensation program, maximum bonus of 100% annual salary
·  
Stock compensation as follows:
i.  
25,000 monthly from August 1, 2010 through October 31, 2010; of which the first two 25,000 share issuances were granted during the year ended December 31, 2010 at a value of $61,300 and $0.25/share.
ii.  
Additional 180,000 shares of the Company’s common stock shall be granted on December 31, 2010
iii.  
180,000 shares shall be granted during the year ended December 31, 2011
iv.  
180,000 shares shall be granted during the year ended December 31, 2012
 
 
F-23

 
 
NXT Nutritionals Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
 

(5)  
Consulting Contract – Research and Development

On July 30, 2010, the Company entered into an employment agreement with its Executive Vice President.  The employment agreement had an effective date of June 1, 2010. The terms of the agreements are as follows:

·  
2.5 Year Term
·  
$9,375 monthly compensation
·  
Quarterly bonus fee up to $1,875/month if certain deliverables are met
·  
Stock compensation as follows:
i.  
300,000 shares of the Company’s common stock on the date the agreement is exercised, valued at $51,000 or $0.17/share.
ii.  
Additional 20,000 shares of the Company’s common stock on the date the agreement is exercised, valued at $3,400 or $0.17/share.
iii.  
Additional 60,000 shares are to be granted quarterly though December 31, 2012.
 
Note 8 Income Taxes

At December 31, 2010, the Company has a net operating loss carry-forward of approximately $4,831,000 available to offset future taxable income expiring through 2030. Utilization of these net operating losses may be limited due to potential ownership changes under Section 382 of the Internal Revenue Code.

The valuation allowance at December 31, 2010 was $6,140,000. The net change in valuation allowance during the year ended December 31, 2010 was an increase of $4,689,000. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred income tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based on consideration of these items, Management has determined that enough uncertainty exists relative to the realization of the deferred income tax asset balances to warrant the application of a full valuation allowance as of December 31, 2010.

Significant deferred tax assets at December 31, 2010 and 2009 are as follows:

   
2010
   
2009
 
Gross deferred tax assets:
           
  Net operating loss carryforward
 
$
1,945,000
   
$
  929,000
 
  Amortization of debt discount and debt issue costs
   
   3,832,000
     
  370,000
 
  Accrued salary
   
   103,000
     
      6,000
 
  Registration rights
 
 
   260,000
     
  145,000