f10q0911_nxt.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2011

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 333-147631

NXT Nutritionals Holdings, Inc.

(Exact name of registrant as specified in its charter)

Delaware		59-2921318
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

933 E. Columbus Avenue

Springfield, MA 01105

(Address of principal executive offices) (Zip Code)

(413) 533-9300

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 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 305 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or smaller reporting company.

Large accelerated filer	o	Accelerated filer	o

Non-accelerated filer	o	Smaller reporting company	x

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

As of December 8, 2011, there were 52,301,874 shares of the registrant’s common stock outstanding.

NXT NUTRITIONALS HOLDINGS, INC.

FORM 10-Q

September 30, 2011

INDEX

PART I-- FINANCIAL INFORMATION

Item 1.	Financial Statements
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures About Market Risk
Item 4.	Control and Procedures

PART II-- OTHER INFORMATION

Item 1	Legal Proceedings
Item 1A.	Risk Factors
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.	Defaults Upon Senior Securities
Item 4.	(Removed and Reserved)
Item 5.	Other Information
Item 6.	Exhibits

SIGNATURE

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

NXT NUTRITIONALS HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(UNAUDITED)

NXT Nutritionals Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2011

(unaudited)

	Page(s)


Consolidated Balance Sheets as of September 30, 2011 (unaudited)
and December 31, 2010	5

Consolidated Statements of Operations
Three and Nine Months Ended September 30, 2011 and 2010 (unaudited)	6

Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2011 and 2010 (unaudited)	7

Notes to Consolidated Financial Statements (unaudited)	8 - 19

NXT Nutritionals Holdings, Inc. and Subsidiaries
Consolidated Balance Sheets

	September 30, 2011
	(Unaudited)			December 31, 2010
Assets

Assets:
Cash	$	-		$	1,662,130
Accounts receivable		59,875			119,070
Inventories		751,626			431,643
Total Current Assets		811,501			2,212,843

Debt issuance costs - net		12,014			25,548

Total Assets	$	823,515		$	2,238,391

Liabilities and Stockholders' Deficit

Liabilities:
Accounts payable and accrued expenses	$	1,093,386		$	654,963
Loans payable - related parties		332,126			332,126
Loans payable - other		208,500			208,500
Accrued interest payable - other		69,431			59,035
Registration rights payable		362,453			608,840
Convertible notes payable - net of debt discount		412,261			8,438,684
Derivative liabilities		-			2,986,900
Total Current Liabilities		2,478,157			13,289,048

Convertible notes payable - net of debt discount		8,590,942			1,496,959
Total Long-Term Liabilities		8,590,942			1,496,959

Total Liabilities		11,069,099			14,786,007

Stockholders' Deficit
Series A, Redeemable Convertible 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,
53,587,874 and 49,408,068 shares issued and outstanding, respectively		53,588			49,408
Additional paid in capital		34,759,446			32,822,477
Accumulated deficit		(45,058,618	)		(45,419,501	)
Total Stockholders' Deficit		(10,245,584	)		(12,547,616	)

Total Liabilities and Stockholders' Deficit	$	823,515		$	2,238,391

See accompanying notes to financial statements

NXT Nutritionals Holdings, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010

Sales - net of slotting fees and discounts	$	66,230		$	3,220		$	151,174		$	161,011

Cost of sales		175,979			62,831			337,627			219,512

Gross loss		(109,749	)		(59,611	)		(186,453	)		(58,501	)

General and administrative expenses		566,143			685,725			2,133,187			2,117,566

Loss from operations		(675,892	)		(745,336	)		(2,319,640	)		(2,176,067	)

Other Income (Expenses)
Interest expense		(67,266	)		(5,301,479	)		(363,692	)		(8,520,059	)
Interest income		-			3,011			-			5,770
Loss on extinguishment of debt		-			(3,726,410	)		-			(3,726,410	)
Derivative expense		-			-			-			(8,590,802	)
Change in fair value of derivative liability		32,403			782,924			2,797,828			13,146,856
Gain on extinguishment of registration rights payable		246,387			-			246,387			-
Registration rights expense		-			(85,016	)		-			(113,355	)

Total Other Income (Expense) - Net		211,524			(8,326,970	)		2,680,523			(7,798,000	)

Net Income (Loss)	$	(464,368	)	$	(9,072,306	)	$	360,883		$	(9,974,067	)

Net Income (Loss) per Common Share - Basic	$	(0.01	)	$	(0.19	)	$	0.01		$	(0.22	)

Net Income (Loss) per Common Share - Diluted	$	(0.01	)	$	(0.19	)	$	(0.02	)	$	(0.22	)

Weighted Average Number of Common Shares Outstanding		53,417,004			46,589,785			52,269,314			45,103,155

See accompanying notes to financial statements

NXT Nutritionals Holdings, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
	Nine Months Ended September 30,
	2011			2010

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	360,883		$	(9,974,067	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Amortization of debt issue costs		13,534			743,467
Amortization of debt discount		339,950			7,761,635
Stock based compensation		479,687			419,680
Derivative expense		-			8,590,802
Change in fair value of derivative liability		(2,797,828	)		(13,146,856	)
Registration rights expense		-			113,355
Loss on extinguishment of debt		-			3,726,410
Gain on extinguishment of registration rights payable		(246,387	)		-
Changes in operating assets and liabilities:
(Increase) Decrease in:
Accounts receivable		59,195			23,082
Inventories		(319,983	)		(350,680	)
Increase (Decrease) in:
Accounts payable and accrued expenses		438,423			(155,394	)
Accrued interest payable - other		10,396			13,395
Net Cash Used in Operating Activities		(1,662,130	)		(2,235,171	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of convertible notes		-			5,667,743
Debt issuance costs paid in cash		-			(726,988	)
Repayment on loans - other		-			(215,000	)
Liquidated damages payment on registration rights		-			(3,000	)
Net Cash Provided By Financing Activities		-			4,722,755

Net Increase (Decrease) in Cash		(1,662,130	)		2,487,584

Cash - Beginning of Period		1,662,130			68,454

Cash - End of Period	$	-		$	2,556,038

SUPPLEMENTARY CASH FLOW INFORMATION:
Cash Paid During the Period for:
Income Taxes	$	-		$	-
Interest	$	-		$	-

SUPPLEMENTARY DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

Debt discount recorded on convertiable notes	$	-		$	5,667,743
Original issue discount	$	-		$	850,201
Conversion of convertible notes into common stock	$	1,272,389		$	1,664,210
Reclassification of derivative liability to additional paid in capital	$	189,073		$	1,942,254
Exercise of cashless warrants	$	-		$	1,510

See accompanying notes to financial statements

NXT Nutritionals Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2011

(Unaudited)

Note 1 Nature of Operations and Basis of Presentation

Nature of Operations

NXT Nutritionals Holdings, Inc. ("Holdings") 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®. The Company also sells non-fat yogurt and yogurt smoothie products.

Basis of Presentation

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules and regulations of the United States Securities and Exchange Commission for interim financial information.

The financial information as of December 31, 2010 is derived from the audited financial statements presented in the Company’s Annual Report on Form 10-K for the years ended December 31, 2010 and 2009. The unaudited interim consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K, which contains the audited financial statements and notes thereto, together with the Management’s Discussion and Analysis, for the years ended December 31, 2010 and 2009.

Certain information or footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted, pursuant to the rules and regulations of the Securities and Exchange Commission for interim financial reporting. Accordingly, they do not include all the information and footnotes necessary for a comprehensive presentation of financial position, results of operations, or cash flows. It is management's opinion, however, that all material adjustments (consisting of normal recurring adjustments) have been made which are necessary for a fair financial statement presentation. The interim results for the nine months ended September 30, 2011 are not necessarily indicative of results for the full fiscal year.

Note 2 Summary of Significant Accounting Policies

Principles of consolidation

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

Use of estimates

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

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

NXT Nutritionals Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2011

(Unaudited)

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) the Company allocating resources effectively and efficienctly for expenses such as slotting fees and advertising due to the Company’s limited resources. These factors, among others, make it difficult to project the Company’s operating results on a consistent basis.

Accounts receivable and allowance for doubtful accounts

Accounts receivable are stated at the amount management expects to collect from outstanding balances. The Company generally does not require collateral to support customer receivables. The Company provides an allowance for doubtful accounts based upon a review of the outstanding accounts receivable, historical collection information and existing economic conditions. The Company determines if receivables are past due based on days outstanding, and amounts are written off when determined to be uncollectible by management. The maximum accounting loss from the credit risk associated with accounts receivable is the amount of the receivable recorded, which is the face amount of the receivable net of the allowance for doubtful accounts.

Inventories

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

	September 30, 2011		December 31, 2010
Raw Materials	$	584,608	$	285,769
Finished goods		167,018		145,874
	$	751,626	$	431,643

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.

Original Issue Discount

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

Derivative Financial Instruments

Fair value accounting requires bifurcation of embedded derivative instruments such as ratchet provisions or conversion features in convertible debt or equity instruments, and measurement of their fair value for accounting purposes. In determining the appropriate fair value, the Company uses the Binomial Lattice Valuation Model (“BLVM”). In assessing the Company’s convertible debt instruments, management determines if the convertible debt host instrument is conventional convertible debt and further if there is a beneficial conversion feature requiring measurement. If the instrument is not considered conventional convertible debt, the Company will continue its evaluation process of these instruments as derivative financial instruments.

NXT Nutritionals Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2011

(Unaudited)

Once determined, the derivative liabilities are adjusted to reflect fair value at each reporting period end, with any increase or decrease in the fair value being recorded in results of operations as an adjustment to fair value of derivatives. In addition, the fair value of freestanding derivative instruments such as warrants, are also valued using the BLVM.

Revenue recognition

The Company records revenue for yogurt, yogurt smoothies and for the natural sweetener when all of the following have occurred: (1) persuasive evidence of an arrangement exists, (2) the product is 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 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 September 30, 2011 and December 31, 2010, the Company had no reserves.

Expenses such as slotting fees and sales discounts are accounted for as a direct reduction of revenues as follows:

	Three Months Ended September 30, 2011		Three Months Ended September 30, 2010		Nine Months Ended September 30, 2011		Nine Months Ended September 30, 2010
Gross Sales	$	66,304	$	21,238	$	215,137	$	189,979
Less: Slotting, Discounts, Allowances		74		18,018		63,963		28,968
Net Sales	$	66,230	$	3,220	$	151,174	$	161,011

Cost of sales

Cost of sales represents costs directly related to the production and manufacturing of the Company’s yogurt smoothie products and the all-natural sweetener SUSTA®. 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:

Three Months Ended September 30, 2011				Three Months Ended September 30, 2010				Nine Months Ended September 30, 2011				Nine Months Ended September 30, 2010
$	43,480			$	132,864			$	168,378			$	457,509

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.

NXT Nutritionals Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2011

(Unaudited)

Income Taxes

For the nine months ended September 30, 2011, the Company reflected net income. However, the Company expects that certain gains recorded in the financial statements would not be taxable. As a result, the Company has no taxable income to report.

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 September 30, 2011:


Convertible debt – face amount of $9,167,423, conversion price of $0.25			36,669,692
Common stock warrants, exercise price of $0.25 (Series “A”, “B” and “C”)			27,231,269
Stock options, exercise price $0.22			2,123,750
Total common stock equivalents			66,024,711

	Nine Months Ended September 30, 2011
Net income from operations	$	360,883
Weighted average shares - basic				52,269,314

Effect of dilutive securities (above)				66,024,711
Change in fair value of derivative liability		(2,797,828	)
Interest expense		363,692
Diluted loss		(2,073,253	)

Weighted average shares - diluted				118,294,025


Earnings (loss) per share:
Basic	$	0.01
Diluted		(0.02	)

The Company had the following potential common stock equivalents at September 30, 2010:

Convertible debt – face amount of $2,001,128, conversion price of $0.40			5,002,820
Convertible debt – face amount of $6,517,904, conversion price of $0.40			16,294,860
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”)			6,517,944
Total common stock equivalents			47,551,258

NXT Nutritionals Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2011

(Unaudited)

Since the Company incurred a net loss in for the three months ended September 30, 2011 and for the three and nine months ended September 30, 2010, the effect of considering any common stock equivalents would have been anti-dilutive. A separate computation of diluted earnings (loss) per share is not presented for these periods

Recent accounting pronouncements

There are no recent accounting pronouncements that are expected to have an effect on the Company’s financial statements.

Note 3 Going Concern

As reflected in the accompanying unaudited interim consolidated financial statements, the Company has net cash used in operations of $1,662,130 for the nine months ended September 30, 2011; and has a working capital deficit of $1,666,656 and a stockholders’ deficit of $10,245,584.

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

The Company will require additional funding to finance the growth of its current and expected future operations as well as to achieve its strategic objectives. The Company believes its current available cash along with anticipated revenues may be insufficient to meet its cash needs for the near future. There can be no assurance that financing will be available in amounts or terms acceptable to the Company, if at all (See Note 8 financing).

The accompanying unaudited interim 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 Convertible Notes Payable

At September 30, 2011 and December 31, 2010, debt consists of the following:

	September 30, 2011			December 31, 2010

Convertible debt – secured – derivative liabilities (A)	$	7,655,095		$	8,438,684
Conventional convertible debt – secured (B)		1,512,328			2,001,128
		-
Less: debt discount		(164,220	)		(504,169	)
Convertible debt – net		9,003,203			9,935,643


Less: current portion		(412,261	)		(8,438,684	)

Long term debt – Net	$	8,590,942		$	1,496,959

NXT Nutritionals Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2011

(Unaudited)

(A)	2010 Original Issue Discount Senior Secured Convertible Note Offering

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

i.	In accordance with the December 6, 2010 Modification and Amendment Agreement, the Conversion price was modified from $0.40 to $0.37.

ii.

Registration rights – the Company was required to file a registration statement within 30 days of the close of the offering. If the Company failed to file such registration statement, the Company would incur liquidated damages of 0.5% of the aggregate amount raised in the offering. The maximum liquidated damages were capped at 6.0% of the aggregate amount raised in the offering. The Company obtained an effective registration on February 14, 2011.

iii.	Original issue discount- 60% of the cash proceeds received. The discount was fully amortized to interest expense as of December 31, 2010.

iv.	Full ratchet provision – The notes contain a provision in which the conversion price can be reduced in any event the Company issues any security or debt instrument with a lower consideration per share in any future offering.

v.	Secured by all assets of the Company

The Company also issued the note holders (“2010 holders”) one stock purchase warrant with a maturity of 5 years. The stock purchase warrants contain cashless exercise provisions. There are currently 7,495,636 warrants associated with this offering outstanding.

On November 4, 2011, the Company entered into a fourth modification agreement with the 2010 Secured Convertible Note and Warrant holders. The Company concluded that the modification be recognized as of September 30, 2011. Accordingly the Company reclassified a portion of the debt to long-term liabilities.

Under the modification, the 2010 Holders:

·	Waived their right to monthly redemptions on the notes,

·	Extended the maturity date to November 21, 2015, ratcheted the exercise price to $0.25 per share for both the notes and warrants,

·	Waived anti-dilution provisions for the note and warrants (resulting in these instruments ceasing to be treated as derivative liabilities),

·	Waived registration right penalties of $246,387,

Agreed to subordinate their security interests securing the Notes to the senior security interests to be granted by the Company to secure the investors in the November 21, 2011 financing and to third parties that provide financing for accounts receivables, inventory and raw materials of the Company.

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

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

NXT Nutritionals Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2011

(Unaudited)

The fair value of the derivative liabilities are summarized as follow:

Derivative liability balance at December 31, 2010	$	2,986,900
Reclassification to paid in capital when derivative liability ceases to exist		( 189,072	)
Fair value mark to market adjustment		(2,797,828	)
Derivative liability balance at September 30, 2011	$	-

Mark to Market

At September 30, 2011 and at the time of each debt conversion, the Company remeasured the derivative liabilities at fair value. The following management assumptions were considered in connection with the computation of fair value upon conversion of debt and related reclassification of derivative liabilities to additional paid in capital as well as the period end fair value remeasurement:

Exercise price	$0.25 - $0.40
Expected dividends	0%
Expected volatility	360%
Risk fee interest rate	0.20 – 2.24%
Suboptimal exercise factor	1.5
Expected life of conversion features	0.50 years
Expected life of warrants	3.39 – 3.41 years

Conversions

During the nine months ended September 30, 2011, 3 note holders converted principal of $783,589 into 2,012,806 shares of common stock, at a conversion rate of $0.37 - $0.40 per share.

The 2010 Original Issue Discount Senior Secured Convertible Notes are summarized as follow:

Convertible Notes Payable at December 31, 2010	$	8,438,684
Conversion of notes into common stock		(783,589	)
Convertible Notes Payable at September 30, 2011	$	7,655,095

(B)	Convertible Debt and Warrants

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

i.	Conversion price: $0.40

ii.	Three year maturity

iii.	Original issue discount of 30%

iv.	Secured by all assets of the Company

v.	Registration rights – the Company was required to have a registration statement filed within 60 days after the offering closed. To date, the company has not filed a registration statement and has accrued the maximum liquidated damages penalty of 9% of the offering.

vi.	Full ratchet provision – The notes contain a provision in which the conversion price can be reduced in any event the Company issues any security or debt instrument with a lower consideration per share in any future offering.

vii.	1 Series “A” 5 Year $0.40 stock purchase warrant and 1 Series “B” 5 Year $0.60 stock purchase warrant for each convertible share

NXT Nutritionals Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2011

(Unaudited)

On November 4, 2011, approximately 70% of the outstanding principal amount of the 2009 Convertible Debenture Holders (“2009 Holders”) entered into a modification agreement.

The 2009 Holders:

·	Ratcheted the exercise price to $0.25 per share for both the note and warrants,

·	Waived anti-dilution provisions for both the note and warrants,

·	Extended the maturity date to November 21, 2015

A summary of the Convertible Debt Principal is as follows:

Convertible Debt, net of debt discount as of December 31, 2010	$	1,496,959
Conversion of debt into common stock		(488,800	)
Accretion of debt discount for the nine months ended September 30, 2011		339,950
Convertible Debt, net of debt discount as of September 30, 2011	$	1,348,109

Conversions

During the nine months ended September 30, 2011, note holders converted principal of $488,800 into 1,222,000 shares of common stock, at a conversion rate of $0.40 per share

Debt Discount

At issuance, the Company recorded debt discounts associated with the original issue discount and beneficial conversion features. During the nine months ended September 30, 2011 and 2010, the Company recorded interest expense of $339,950 and $1,251,784, respectively.

(C)	Debt Issuance Costs

Debt issuance costs, net are as follows:

Balance - December 31, 2010	$	25,548
Amortization of debt issue costs during nine months ended September 30, 2011		(13,534	)
Balance - September 30, 2011	$	12,014

Note 5 Fair Value

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

NXT Nutritionals Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2011

(Unaudited)

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 Company recorded derivative liabilities of $0 and $2,986,900 at September 30, 2011 and December 31, 2010. These derivative liabilities are level 2.

Note 6 Stockholders Deficit

(A)	Common Stock

2011

The Company issued 765,000 shares of common stock to officers, for services rendered, in accordance with their employment agreements, at a fair value of $108,575 ($0.045 - $0.24/share), based upon the quoted closing trading price.

The Company issued 180,000 shares of common stock to a consultant, for services rendered, at a fair value of $20,700 ($0.045 - 0.21/share), based upon the quoted closing trading price.

(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.

NXT Nutritionals Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2011

(Unaudited)

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 2011 options were granted on November 12, 2010 but the requisite service period does not begin until November 2011, at which time the vesting begins. The Company will begin expensing the 2011 options as of November 12, 2011.

During 2011, the Company expensed $350,412 as share based payments.

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 – December 31, 2010 – outstanding		15,760,000	$	0.22		$	-
Balance – December 31, 2010 – exercisable		15,760,000	$	0.22		$	-
Granted		-	$	-
Exercised		-	$	-
Forfeited		-	$	-
Balance – September 30, 2011 – outstanding		15,760,000	$	0.22	9.15years	$	-
Balance - September 30, 2011 – exercisable		2,123,750	$	0.22	9.15 years	$	-




Outstanding options held by related parties – 2011		15,760,000
Exercisable options held by related parties – 2011		2,123,750

On the date of grant in 2010 (for the 2010 and 2011 options), the Company valued these issuances at fair value, utilizing a Black Scholes Option Pricing Model. The Company utilized the following management assumptions:

Exercise price	$0.22
Expected dividends	0%
Expected volatility	360%
Risk fee interest rate	2.8%
Suboptimal exercise factor	1.5
Expected life of stock options	7.0 years

NXT Nutritionals Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2011

(Unaudited)

(C)Warrants

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

	Warrants		Weighted Average Exercise Price

Outstanding – December 31, 2010		27,231,269	$	0.25
Exercisable – December 31, 2010		27,231,269	$	0.25
Granted		-	$	-
Exercised		-	$	-
Forfeited/Cancelled		-	$	-
Outstanding – September 30, 2011		27,231,269	$	0.25
Exercisable – September 30, 2011		27,231,269	$	0.25

Warrants Outstanding							Warrants Exercisable

Range of		Number Outstanding		Weighted Average Remaining Contractual Life (in years)	Weighted Average Exercise Price		Number Exercisable		Weighted Average Exercise Price
exercise price
$	0.25		27,231,269	2.88 years	$	0.25		27,231,269	$	0.25

As part of the modifications of debt on November 4, 2011, all exercise prices of the warrants were ratcheted to $0.25. The above table retrospectively reflects the ratchet. At September 30, 2011 and December 31, 2010, the total intrinsic value of warrants outstanding and exercisable was $0 and $0, respectively.

Note 7 Commitments and 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.

NXT Nutritionals Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2011

(Unaudited)

Note 8 Subsequent Event

On November 21, 2011, the Company executed a debt financing, containing the following features:

1.	Issuance of $1,000,000 four-year senior secured note (“2011 Note”) bearing interest at 13%; Default interest at 18%,
2.	Secured by all assets of the Company,
3.	Issuance of 13,075,468 shares of Series A Redeemable Convertible preferred stock, full voting rights up to 20% of the vote,
4.	Preferred stock is convertible at the option of the holder into an equal number of shares of common stock of the Company representing 20% of the Company’s fully diluted capital stock at the time of conversion. The redemption is triggered upon a change in control. The Company concluded the variable conversion feature would be classified and accounted for as a derivative liability,
5.	Annual dividend equal to the greater of (a) 10% of the then outstanding principal amount of the 2011 note payable or (b) 10% of net income in excess of $500,000; Dividends accrued commencing on January 1, 2012 and are payable annually in arrears.
6.	A first priority lien in the assets of the Company was granted to the holders of the 2011 Note. The holders of the 2010 Notes subordinated their interests to the security in the assets of the Company. See discussion of Fourth Modification.
7.	The investors may invest an additional $500,000 on or prior to January 20, 2012
8.	The sum of the $1,000,000 initial investment was attributed 20% for the purchase of the 2011 Note and 80% for the purchase of the Preferred Stock.

Registration Rights- the Company agreed to register 100% of the common shares issuable upon conversion of the preferred stock, which equates to 20% of the fully dilutive capital structure of the Company. The registration statement must be filed within 60 days following the filing of the Company’s 2011 10K and must be declared effective within 180 calendar days from November 21, 2011, which is on or about May 31, 2012.

10.

If the Company fails the registration rights provisions, liquidated damages will be assessed up to a maximum of 6% of the amount financed.

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

We make forward-looking statements in Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this report based on the beliefs and assumptions of our management and on information currently available to us. Forward-looking statements include information about our possible or assumed future results of operations which follow under the headings “Business and Overview,” “Liquidity and Capital Resources,” and other statements throughout this report preceded by, followed by or that include the words “believes,” “expects,” “anticipates,” “intends,” “plans,” “estimates” or similar expressions. We generally use words such as “believe,” “may,” “could,” “will,” “intend,” “expect,” “anticipate,” “plan,” and similar expressions to identify forward-looking statements, including statements regarding our ability to continue to create innovative technology products, our ability to continue to generate new business based on our sales and marketing efforts, referrals and existing relationships, our financing strategy and ability to access the capital markets and other risks discussed in our Risk Factor section included in our Form 10-K for the year ended December 31, 2010, as filed with the Securities and Exchange Commission.

Forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed in these forward-looking statements, including the risks and uncertainties described below and other factors we describe from time to time in our periodic filings with the U.S. Securities and Exchange Commission (the “SEC”). We therefore caution you not to rely unduly on any forward-looking statements. The forward-looking statements in this report speak only as of the date of this report, and we undertake no obligation to update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise.

OVERVIEW

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 a line of yogurt smoothies sold under the brand name 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,. Eventually, the Company plans on expanding the Healthy Dairy® brand 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.

With regard to Susta, we have undertaken traditional levers in the retail sales channel. The Company has employed advertising, internet communications, trade incentives, price promotions, and couponing. 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™.

With regard to the sale of Healthy Dairy, the Company has received approval from the United States Navy to be on the Navy’s standard daily core menu. The Company has also been approved to sell its Healthy Dairy smoothies to the United States Naval Academy at Annapolis, Maryland and the United States Air Force Academy. The Company plans on expanding its sale of Healthy Dairy to all branches of the United States Military and the other United States Military Academies. To date, sales of Healthy Dairy are at an early stage and will need to increase dramatically to meet the Company’s expectations and business plans. The Company has retained the services of business owned and operated by retired U.S. Military veterans to support the Company’s growth objectives in the United States Military. In order to satisfy future expected orders from the various Military branches and academies, the Company will need additional financing, including a working capital line of credit. Any such financing is subject to the consent from third parties, such as holders of the 2010 Notes (see below).

In the future we also plan to utilize celebrity spokespersons, including Dara Torres, to help drive awareness of SUSTA™ and Healthy Dairy 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 through 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 “2010 Notes”). The principal amount of each of the 2010 Notes 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 2010 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 2010 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.

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 2010 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. As of March 31, 2011, the Conversion Price of the note was modified from $0.40 to $0.37.

(ii) Second Quarter 2011 Form 10-Q. If the Company’s filing of its June 30, 2011 Form 10-Q with the Securities and Exchange Commission does not disclose revenue of at least $8 million for the first six months of 2011, then the Conversion Price of the Notes will be adjusted to equal the lesser of (i) the then effective Conversion Price and (ii) ninety (90%) percent of the average closing bid price during the five (5) trading Days following the filing of the June 30, 2011 Form 10-Q, such adjustment, if any, to occur on the fifth (5th) trading day following the Company’s filing of its June 30, 2011 Form 10-Q. Notwithstanding the foregoing, if, during the five (5) trading Days following the filing of the June 30, 2011 Form 10-Q, the average closing bid price is $.60 or better, the aggregate trading volume of Company common stock is at least 1.5 million shares and all of the shares underlying the Notes may be sold pursuant to an effective registration statement or Rule 144 (and the Company is then in compliance with the current public information required under Rule 144), then no adjustment to the Conversion Price will be made hereunder.

On September 6, 2011, the Company entered into a Third Modification and Amendment Agreement (the “Third Modification Agreement”) with the Purchasers holding more than sixty-seven (67%) percent of the aggregate number of (1) the 2010 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 2010 Notes is extended to October 1, 2011, In addition, the Third Modification Agreement provides that the holders of the 2010 Notes will forebear and take no action to enforce the terms of the 2010 Notes for a period of sixty (60) days following the effectiveness of the Third Modification Agreement, including any reduction of the Conversion Price of the 2010 Notes or reduction in the exercise price of the Warrants as provided in the Second Modification Agreement. The sixty (60) day time period is intended to allow the Company to acquire additional financing on terms and conditions acceptable to the Company and subject to the consent of the Purchasers

On November 21, 2011, the Company and NXT Investment Partners, LLC, a Delaware limited liability company (“NIP”) executed a Securities Purchase Agreement (the “SPA”) pursuant to which NIP agreed to make investments (the “Investment”) in the Company in the form of a senior secured loan to the Company in the aggregate principal amount of at least $1,000,000 and up to $1,500,000 (the amount loaned shall be referred to as the “Principal Amount of the 2011 Note”), bearing interest at 13% per annum, in exchange for a four-year 13% Senior Secured promissory note (“2011 Note”). Additionally, on November 21, 2011, pursuant to the SPA, the Company received an initial investment of $1,000,000 and issued the 2011 Note in the original principal amount of $1,000,000 along with 13,075,468 shares of Series A Convertible Preferred Stock (“Preferred Stock”) of the Company to NXT. Pursuant to the terms of the SPA, the Company and NXT may agree to an additional investment of up to $500,000 on or prior to January 20, 2012. The Preferred Stock was issued by the Company pursuant to an exemption under Section 4(2) of the Securities Act of 1933 (the “Securities Act”) due to the fact that it did not involve a public offering of securities and Rule 506 of Regulation D promulgated thereunder. The shares of Preferred Stock are “restricted securities” as such term is defined in the Securities Act. The Preferred Stock issued under the SPA carries an annual dividend equal to the greater of: (a) 10% of the then outstanding Principal Amount of the 2011 Note as of December 31st of the applicable fiscal year for which the annual dividend is being paid; or (b) 10% of the Net Income (as defined in the 2011 Note) of the Company in excess of $500,000 for the applicable fiscal year of the Company and is convertible at the option of NIP into an equal number of shares of common stock of the Company representing 20% of the Company’s fully diluted capital stock at the time of conversion. The term of the SPA additionally required the holders of at least 65% of the outstanding principal amount of the 2009 Debentures to agree to and execute the First Amendment (as described below) and the holders of at least 67% of the outstanding principal amount of the 2010 Notes to agree to and executed the Fourth Modification Agreement (as described below).

On November 4, 2011, the Company entered into a Fourth Modification and Amendment Agreement (the “Fourth Modification Agreement”) with the holders holding approximately 93.5% percent of the outstanding principal amount of (1) the 2010 Notes, (2) Series C warrants and (3) the shares of common stock underlying the Notes and the Series C Warrants. Pursuant to the Fourth Modification Agreement, the holders, upon closing of the Investment, among other things, have agreed to waived their right to monthly redemptions of the Notes and extend the maturity date of the Notes to the date that is 48-months from the Closing Date (as defined in the SPA) of the Investment. In addition, the holders have agreed (i) that the conversion price will be lowered to $0.25, (ii) to a waiver of the anti-dilution provisions and future participation rights set forth in the Notes and Series C Warrants waived registration rights penalties of $246,387 and (iii) to subordinate their security interests securing the 2010 Notes to the senior security interests to be granted by the Company to secure the Investment and to third parties that provide financing for accounts receivables, inventory and raw materials of the Company.

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

RESULTS OF OPERATIONS

Results of Operations

Summary of Statement of Operations for the Three Months Ended September 30, 2011 and 2010 (unaudited):

	Three months ended
	September 30, 2011			September 30, 2010
Sales – net of slotting fees and discounts	$	66,230		$	3,220
Gross Loss	$	(109,749	)	$	(59,611	)
General and Administrative Expenses	$	(566,143	)	$	(685,725	)
Other Income (Expense) - Net	$	211,524		$	(8,326,970	)
Net Loss	$	(464,368	)	$	(9,072,306	)
Net Income per Common Share – Basic	$	(0.01	)	$	(0.19	)

For the three months ended September 30, 2011 and 2010, the Company reported a net loss of $464,368 or $(0.01) per share and a net loss of $9,072,306 or $(0.19) per share, respectively. The change in net loss between the three months ended September 30, 2011 and 2010 was primarily attributable to the following:

The Company has shifted its Healthy Dairy sales focus from sales to grocery chains to the food service category. We have only recorded a limited number of Healthy Dairy sales since this shift in focus. The Company also launched the natural sweetener product (SUSTA) on April 30, 2009. The Company has experienced limited sales on the SUSTA product.

Gross sales for the three months ended September 30, 2011 and the three months ended September 30, 2010 reflected a slight increase, primarily due to an increase in yogurt smoothie sales. The Company is yet to significantly execute upon the shift in focus from grocery chains to the food service category.

·	General and administrative expenses decreased by approximately 17% during the three months ended September 30, 2011 as compared to the corresponding three months ended September 30, 2010. The decrease is primarily attributable to a decline in both stock base compensation and professional fees.

Other income (expense) - net increased significantly during the three months ended September 30, 2011 as compared to the corresponding three months ended September 30, 2010. The increase is primarily attributable to a decrease in interest expense. The Company fully accreted the debt discount recorded on the 2010 convertible note offering during 2010. The Company also recorded significant debt extinguishment expenses during the three months ended September 30, 2010. The increases were offset by a major decrease in the change in fair market value of the derivative liability during the three months ended September 30, 2011 as compared to the corresponding three months ended September 30, 2010.

Summary of Statement of Operations for the Nine Months Ended September 30, 2011 and 2010 (unaudited):

	Nine months ended
	September 30, 2011			September 30, 2010
Sales – net of slotting fees and discounts	$	151,174		$	161,011
Gross Loss	$	(186,453	)	$	(58,501	)
General and Administrative Expenses	$	(2,133,187	)	$	(2,117,566	)
Other Income (Expense) - Net	$	2,680,523		$	(7,798,000	)
Net Income (Loss)	$	360,883		$	(9,974,067	)
Net Income (Loss) per Common Share – Basic	$	0.01		$	(0.22	)

For the nine months ended September 30, 2011 and 2010, the Company reported a net income of $360,883 or $0.01 per share and a net loss of $(9,974,067) or $(0.22) per share, respectively. The change in net income (loss) between the nine months ended September 30, 2011 and 2010 was primarily attributable to the following:

·	Sales for the nine months ended September 30, 2011 as compared to the nine months ended September 30, 2010 decreased by 6%. The Company is yet to significantly execute upon the shift in focus from grocery chains to the food service category.

General and administrative expenses increased by approximately 1% during the nine months ended September 30, 2011 as compared to the corresponding nine months ended September 30, 2010. The increase is primarily attributable to the Company’s development and roll out the 4 ounce yogurt cup, and increased marketing efforts to build brand and product awareness. The increase is offset by a decrease in both stock base compensation and professional fees. ·

Other income (expense) - net decreased significantly during the nine months ended September 30, 2011 as compared to the corresponding nine months ended September 30, 2010. The decrease is primarily attributable to a decrease in interest expense. The Company fully accreted the debt discount recorded on the 2010 convertible note offering during 2010. The Company also recorded significant debt extinguishment expenses during the nine months ended September 30, 2010. The decreases were offset by a major decrease in the change in fair market value of the derivative liability during the nine months ended September 30, 2011 as compared to the corresponding nine months ended September 30, 2010.

Liquidity and Capital Resources

Going Concern: As reflected in the accompanying unaudited interim consolidated financial statements, the Company has a loss from operations of $2,319,640 and net cash used in operations of $1,662,130 for the nine months ended September 30, 2011; and has a working capital deficit of $1,666,656 and a stockholders’ deficit of $10,245,584.

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 also believes that it will be required to restructure the terms of its existing indebtedness in order to attract additional capital and to avoid a default under the terms of this indebtedness. The Company is currently engaged in discussions with various third parties concerning a possible investment in the Company and with the current holders of the Company’s indebtedness regarding the modification of the terms of the indebtedness. These discussions are all preliminary in nature and there can be no assurance that any of them will result in an additional funding or the successful restructuring of the Company’s debt.

The Company will require additional funding to meet its working capital obligations and to finance the growth of its current and expected future operations. The Company believes its current available cash along with anticipated revenues are insufficient to meet its working capital needs unless the Company’s obtains additional funding in the near future. There can be no assurance that financing will be available in amounts or terms acceptable to the Company, if at all.

The ability of the Company to continue as a going concern is dependent on its ability to do all or most of the above listed steps. In the event that the Company were unable to obtain additional financing, it is likely that the Company would be required to discontinue operations.

The following table summarizes total current assets, liabilities and working capital at September 30, 2011 compared to December 31, 2010.

	September 30, 2011			December 31, 2010			Increase/ Decrease
	(unaudited)
Current Assets	$	811,501		$	2,212,843		$	(1,401,342	)
Current Liabilities	$	2,478,157		$	13,289,048		$	(10,810,891	)
Working Capital (Deficit)	$	(1,666,656	)	$	(11,076,205	)	$	(9,409,549	)

As of September 30, 2011, we had a working capital deficit of $1,666,656 as compared to a working capital deficit of 11,076,205 as of December 31, 2010, a decrease of $9,409,549.

The decrease is primarily a result of a decrease in current liabilities, specifically a decrease in derivative liabilities and a decrease in convertible notes, primarily due to the restructure of the 2010 Notes and 2009 Debentures, which extended the maturity dates to 4 years on a significant portion of those instruments, as well as convertible holders of those instruments converting to common stock during the nine months ended September 30, 2011. These decreases in current liabilities were partially offset by a decrease in current assets, specifically a decrease in cash by approximately $1,662,000.

Net cash used for operating activities for the nine months ended September 30, 2011 and 2010 was $(1,662,130) and $(2,235,171), respectively. During the nine months ended September 30, 2011, the Company used cash to build inventories and to further develop the 4 ounce yogurt cup and to market and build brand awareness of the product line.

Net cash obtained through all financing activities for the nine months ended September 30, 2011 was $0 as compared to $4,722,755 for the nine months ended September 30, 2010, specifically attributable to the 2010 Convertible Note Offering.

The Company continues to explore potential expansion opportunities in the industry in order to boost sales, while leveraging distribution systems to effect lower costs.

Recent Accounting Pronouncements

There are no recent accounting pronouncements that are expected to have an effect on the Company’s financial statements.

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 unaudited interim consolidated financial statements. While all these significant accounting policies impact our financial condition and results of operations, we view certain of these policies as critical. Policies determined to be critical are those policies that have the most significant impact on our financial statements and require management to use a greater degree of judgment and estimates. Actual results may differ from those estimates. Our management believes that given current facts and circumstances, it is unlikely that applying any other reasonable judgments or estimate methodologies would cause effect on our consolidated results of operations, financial position or liquidity for the periods presented in this report.

We believe the following critical accounting policies and procedures, among others, affect our more significant judgments and estimates used in the preparation of our consolidated financial statements:

Use of Estimates, Going Concern Consideration – The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Among the estimates we have made in the preparation of the financial statements is an estimate of our projected revenues, expenses and cash flows in making the disclosures about our liquidity in this report. As an early stage company, many variables may affect our estimates of cash flows that could materially alter our view of our liquidity and capital requirements as our business develops. Our consolidated financial statements have been prepared assuming we are a “going concern”. No adjustment has been made in the consolidated financial statements which could result should we be unable to continue as a going concern.

Share-Based Compensation - US GAAP requires public companies to expense employee share-based payments (including options, warrants, restricted stock units and performance stock units) based on fair value. We must use our judgment to determine key factors in determining the fair value of the share-based payment, such as volatility, forfeiture rates and the expected term in which the award will be outstanding.

Derivative Financial Instruments - Fair value accounting requires bifurcation of embedded derivative instruments such as conversion features in convertible debt or equity instruments, and measurement of their fair value for accounting purposes. In determining the appropriate fair value, the Company uses the Binomial Lattice Model. In assessing the convertible debt instruments, management determines if the convertible debt host instrument is conventional convertible debt and further if there is a beneficial conversion feature requiring measurement. If the instrument is not considered conventional convertible debt, the Company will continue its evaluation process of these instruments as derivative financial instruments.

Once determined, derivative liabilities are adjusted to reflect fair value at each reporting period end, with any increase or decrease in the fair value being recorded in results of operations as an adjustment to fair value of derivatives. In addition, the fair value of freestanding derivative instruments such as warrants, are also valued using the binomial option-pricing model.

Debt Issue Costs and Debt Discount -These items are amortized over the life of the debt to interest expense. If a conversion, extinguishment or repayment of the underlying debt occurs, a proportionate share of these amounts is immediately expensed.

Beneficial Conversion Feature - For convertible debt issued in 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. 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 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable because we are a smaller reporting company.

Item 4. Controls and Procedures.

We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in the reports we file pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”) are recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated to our Chief Executive Officer (“CEO”), who also serves as the Company’s Principal Financial Officer (“PFO”), to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can only provide a reasonable assurance of achieving the desired control objectives, and in reaching a reasonable level of assurance, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Management designed the disclosure controls and procedures to provide reasonable assurance of achieving the desired control objectives.

We carried out an evaluation, under the supervision and with the participation of our management, including our CEO and PFO, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report. Based upon that evaluation, the Chief Executive Officer and Principal Financial Officer concluded that the Company’s disclosure controls and procedures are effective.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal controls over financial reporting (as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act) during the quarter ended September 30, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

There is no pending litigation against NXT Nutritionals Holdings, Inc., or any of the subsidiaries of NXT Nutritionals Holdings, Inc.

Item 1A. Risk Factors

In addition to the other information set forth in this report, information regarding risks affecting the Company appears in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010. These are not the only risks facing the Company. Additional risks and uncertainties not currently known to us or that management currently considers to be non-material may in the future adversely affect the Company’s business, financial condition and operating results.

OUR ABILITY TO CONTINUE AS A GOING CONCERN IS DEPENDENT UPON OUR EXECUTION OF A NUMBER OF ACTIVITIES.

Although management of the Company has raised additional working capital through the Investment (See Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations – Overview) our current liabilities continue to exceed our current assets resulting in a working capital deficit. Consequently, notwithstanding the closing of the Investment, ability of the Company to continue as a going concern depends on the Company’s execution of a number of activities including securing additional capital through convertible note offerings, securing favorable raw material and manufacturing rates with our vendors, and 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 activities.

WE MAY BE UNABLE TO REFINANCE OUR OBLIGATIONS UNDER THE 2009 DEBENTURES OR RAISE ADDITIONAL FINANCING IN ADVANCE OF THE APPLICABLE MATURITY DATES OF THE 2009 DEBENTURES.

The holders of approximately 30% of the outstanding principal amount of the Company’s 2009 Securities (as defined below) did not execute the First Amendment in connection with the Investment and consequently the Maturity Date under their 2009 Debentures (as defined below) have remained unmodified. Unless the Company can refinance its obligations under those 2009 Debentures or raise additional financing in advance of the applicable maturity dates, the holders of such 2009 Debentures would have the right to declare all or any portion of the outstanding principal amount of such 2009 Debentures due and payable and institute proceedings Company for payment. Such action by those holders of the 2009 Debentures would have a material adverse impact on the Company.

Item 5. Other Information

Item 6. Exhibits

31.1			Certification of Chief Executive Officer, pursuant to Rule 13a – 14(a).

31.2			Certification of Chief Financial Officer, pursuant to Rule 13a – 14(a).

32.1			Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2			Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		NXT NUTRITIONALS HOLDINGS, INC.

Date:	December 9, 2011	By:	/s/ Francis McCarthy
		Name:	Francis McCarthy
		Title:	Chief Executive Officer

Date:	December 9, 2011	By:	/s/ David Briones
		Name:	David Briones
		Title:	Chief Financial Officer

Exhibit Index


Exhibit No.		Description

31.1		Certification of Chief Executive Officer, pursuant to Rule 13a – 14(a).

31.2		Certification of Chief Financial Officer, pursuant to Rule 13a – 14(a).

32.1		Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.