Summary of Significant Accounting Policies

9 Months Ended

Sep. 30, 2011

Significant Accounting Policies [Text Block]

Note 2 Summary of Significant Accounting Policies

Principles of consolidation

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

Use of estimates

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

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

Risks and uncertainties

The Company operates in an industry that is subject to intense competition and change in consumer demand. The Company's operations are subject to significant risk and uncertainties including financial and operational risks including the potential risk of business failure.

The Company has experienced, and in the future expects to continue to experience, variability in sales and earnings. The factors expected to contribute to this variability include, among others, (i) 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.

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.

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

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.

- Definition

The entire disclosure for all significant accounting policies of the reporting entity.

+ References+ Details

NXT Nutritionals Holdings, Inc. 10-Q