UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
DC 20549
   FORM
10-Q
 
 x QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
  For the
quarterly period ended September 30, 2009
  o TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
  For the
transition period from _________________ to
________________________.
  Commission
File Number 0-14983
  NUTRITION 21,
INC.
 (Exact
Name of Registrant as Specified in its Charter)
  New
      York
                11-2653613(State
      or other jurisdiction of incorporation or organization)
                (I.R.S. Employer
      Identification No.)
 
 4
      Manhattanville RoadPurchase,
      New York
                  10577-2197(Address
      of Principal Executive Offices)
                  (Zip
      Code)
 
 (914)
701-4500
 (Registrant's
telephone number, including Area Code)
  None
 (Former
name, former address and former fiscal year, if changed since last
report)
 
 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 twelve (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 ninety (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 during the preceding
12 months ( or for such shorter period that the registrant was required to
submit and post such files).
 Yes  o
                No  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  o
                Smaller
      Reporting Company   x
 
 Indicate
by check mark whether registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
 Yes  o
              No  x
 
 Indicate
the number of shares outstanding of Registrant’s Common Stock as of the latest
practicable date.
 
 Class
                                            
                                            Outstanding at November 12,
      2009Common
      Stock, $0.005 par value per share
                                            
                                            75,181,383
      shares
 NUTRITION
21, INC.
 
 INDEX
 
 
 PART I
                          FINANCIAL INFORMATION
                          PAGEITEM
      1
                          Financial
      Statements(a)
                          Condensed
      Consolidated Balance Sheets at September 30, 2009 (unaudited) and June 30,
      2009
                          3(b)
                          Condensed
      Consolidated Statements of Operations for the three month periods ended
      September 30, 2009 and 2008 (unaudited)
                          5(c)
                          Condensed
      Consolidated Statement of Stockholders’ Deficit forthe
      three month period ended September 30, 2009 (unaudited)
                          6(d)
                          Condensed
      Consolidated Statements of Cash Flows for the threemonth
      periods ended September 30, 2009 and 2008 (unaudited)
                          7(e)
                          Notes
      to Condensed Consolidated Financial Statements (unaudited)
                          8ITEM
      2
                          Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                          12ITEM
      3
                          Quantitative
      and Qualitative Disclosures About Market Risk
                          13ITEM
      4(T)
                          Controls
      and Procedures
                          14PART II
                          OTHER INFORMATIONITEM
      6
                          Exhibits
                          15
 
  2
  NUTRITION
21, INC.
 CONDENSED
CONSOLIDATED BALANCE SHEETS
 (in
thousands, except share and per share data)
 
 September
      30,
                                                            2009
                                                          
                                                          
                                                          June
      30,
                                                            2009(unaudited)
                                                          
                                                          
                                                          (Note
      1)ASSETSCurrent
      assets:Cash
      and cash equivalents
                                                          
                                                          $
                                                          592
                                                          
                                                          
                                                          $
                                                          1,373Accounts
      receivable (less allowances for doubtful accounts and returns of $270 and
      $327 at September 30, 2009 and June 30, 2009,
respectively)
                                                          
                                                          
                                                          2,357
                                                          
                                                          
                                                          
                                                          2,752Other
      receivables
                                                          
                                                          
                                                          90
                                                          
                                                          
                                                          
                                                          516Inventories
                                                          
                                                          
                                                          3,582
                                                          
                                                          
                                                          
                                                          3,878Prepaid
      expenses and other current assets
                                                          
                                                          
                                                          264
                                                          
                                                          
                                                          
                                                          467Total
      current assets
                                                          
                                                          
                                                          6,885
                                                          
                                                          
                                                          
                                                          8,986Property
      and equipment, net
                                                          
                                                          
                                                          44
                                                          
                                                          
                                                          
                                                          46Patents,
      trademarks and other amortizable intangibles (net of accumulated
      amortization of $26,743 and $26,643 at September 30, 2009 and June 30,
      2009, respectively)
                                                          
                                                          
                                                          750
                                                          
                                                          
                                                          
                                                          766Goodwill
                                                          
                                                          
                                                          636
                                                          
                                                          
                                                          
                                                          636Other
      intangibles with indefinite lives
                                                          
                                                          
                                                          3,000
                                                          
                                                          
                                                          
                                                          3,000Other
      assets
                                                          
                                                          
                                                          1,116
                                                          
                                                          
                                                          
                                                          1,389TOTAL
      ASSETS
                                                          
                                                          $
                                                          12,431
                                                          
                                                          
                                                          $
                                                          14,823
 
 See accompanying notes to condensed
consolidated financial statements.
  3
  NUTRITION
21, INC.
 CONDENSED
CONSOLIDATED BALANCE SHEETS
 (in
thousands, except share and per share data)
  September
      30,
                                                        2009
                                                      
                                                      
                                                      June
      30,
                                                        2009(unaudited)
                                                      
                                                      
                                                      (Note
      1)LIABILITIES
      AND STOCKHOLDERS' DEFICITLIABILITIESCurrent
      liabilities:Short-term
      borrowings
                                                      
                                                      $
                                                      3,070
                                                      
                                                      
                                                      $
                                                      4,457Accounts
      payable
                                                      
                                                      
                                                      4,016
                                                      
                                                      
                                                      
                                                      4,439Accrued
      expenses
                                                      
                                                      
                                                      1,592
                                                      
                                                      
                                                      
                                                      2,218Deferred
      income
                                                      
                                                      
                                                      144
                                                      
                                                      
                                                      
                                                      361Total
      current liabilities
                                                      
                                                      
                                                      8,822
                                                      
                                                      
                                                      
                                                      11,475Deferred
      income taxes
                                                      
                                                      
                                                      1,200
                                                      
                                                      
                                                      
                                                      1,2008%
      Series J convertible preferred stock subject to mandatory redemption
      (redemption value $17,750 at September 30, 2009 and June 30,
      2009)
                                                      
                                                      
                                                      13,658
                                                      
                                                      
                                                      
                                                      13,218Total
      liabilities
                                                      
                                                      
                                                      23,680
                                                      
                                                      
                                                      
                                                      25,893Commitments
      and contingenciesSTOCKHOLDERS’
      DEFICIT:Preferred
      stock, $0.01 par value, authorized 5,000,000 shares, 100,000 shares
      designated as Series H, none issued and outstanding; 17,750 shares
      designated as Series J convertible preferred stock issued and outstanding
      at September 30, 2009 and June 30, 2009 (see liabilities
      above)
                                                      
                                                      
                                                      –
                                                      
                                                      
                                                      
                                                      –Common
      stock, $0.005 par value, authorized 150,000,000 shares; 72,651,336 shares
      and 71,231,450 issued and outstanding at September 30, 2009 and June 30,
      2009, respectively
                                                      
                                                      
                                                      360
                                                      
                                                      
                                                      
                                                      353Additional
      paid-in capital
                                                      
                                                      
                                                      118,218
                                                      
                                                      
                                                      
                                                      117,761Accumulated
      deficit
                                                      
                                                      
                                                      (129,827
                                                      )
                                                      
                                                      
                                                      (129,184
                                                      )Total
      stockholders’ deficit
                                                      
                                                      
                                                      (11,249
                                                      )
                                                      
                                                      
                                                      (11,070
                                                      )TOTAL
      LIABILITIES AND STOCKHOLDERS’ DEFICIT
                                                      
                                                      $
                                                      12,431
                                                      
                                                      
                                                      $
                                                      14,823
  See accompanying notes to condensed
consolidated financial statements.
  4
  NUTRITION
21, INC.
 CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
 (in
thousands, except share and per share data)
 (unaudited)
 
 Three
      Months
                            EndedSeptember
      30,2009
                        
                        
                        2008Net
      sales
                        
                        $
                        4,542
                        
                        
                        $
                        12,609Other
      revenues
                        
                        
                        94
                        
                        
                        
                        51TOTAL
      REVENUES
                        
                        
                        4,636
                        
                        
                        
                        12,660COSTS
      AND EXPENSESCost
      of revenues
                        
                        
                        1,813
                        
                        
                        
                        4,745Advertising
      and promotion expenses
                        
                        
                        1,303
                        
                        
                        
                        5,362General
      and administrative expenses
                        
                        
                        980
                        
                        
                        
                        798Research
      and development expenses
                        
                        
                        79
                        
                        
                        
                        80Depreciation
      and amortization
                        
                        
                        105
                        
                        
                        
                        363TOTAL
      COSTS AND EXPENSES
                        
                        
                        4,280
                        
                        
                        
                        11,348OPERATING
      PROFIT
                        
                        
                        356
                        
                        
                        
                        1,312Interest
      income
                        
                        
                        2
                        
                        
                        
                        44Interest
      expense
                        
                        
                        (1,001
                        )
                        
                        
                        (1,142
                        )(LOSS)
      INCOME BEFORE INCOME TAXES
                        
                        
                        (643
                        )
                        
                        
                        214Income
      taxes
                        
                        
                        –
                        
                        
                        
                        –NET
      (LOSS) INCOME
                        
                        $
                        (643
                        )
                        
                        $
                        214Basic
      and diluted (loss) earnings per common share
                        
                        $
                        (0.01
                        )
                        
                        $
                        0.00Weighted
      average number of common shares – basic and diluted
                        
                        
                        72,455,162
                        
                        
                        
                        64,134,052
 
 See accompanying notes to condensed
consolidated financial statements.
  5
  NUTRITION
21, INC.
 CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT
 (in
thousands, except share data)
 (unaudited)
 
 Common Stock
                    
                    
                    Additional
                      Paid-In
                      Capital
                    
                    
                    Accumulated
                      Deficit
                    
                    
                    TotalShares
                    
                    
                    
                    $
                    
                    
                    
                    $
                    
                    
                    
                    $
                    
                    
                    
                    $Balance
      at June 30, 2009
                    
                    
                    71,231,450
                    
                    
                    
                    353
                    
                    
                    
                    117,761
                    
                    
                    
                    (129,184
                    )
                    
                    
                    (11,070
                    )Issuance
      of common stock for dividends on Series J preferred stock
                    
                    
                    1,419,886
                    
                    
                    
                    7
                    
                    
                    
                    348
                    
                    
                    
                    –
                    
                    
                    
                    355Stock-based
      compensation expense
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    109
                    
                    
                    
                    –
                    
                    
                    
                    109Net
      loss for the period
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    (643
                    )
                    
                    
                    (643
                    )Balance
      at September 30, 2009
                    
                    
                    72,651,336
                    
                    
                    $
                    360
                    
                    
                    $
                    118,218
                    
                    
                    $
                    (129,827
                    )
                    
                    $
                    (11,249
                    )
 
  6
  NUTRITION
21, INC.
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 (in
thousands)
 (unaudited)
  Three
      Months Ended
                                September
      30,2009
                              
                              
                              2008Cash
      flows from operating activities:Net
      (loss) income
                              
                              $
                              (643
                              )
                              
                              $
                              214Adjustments
      to reconcile net (loss) income to net cash provided by (used in) operating
      activities:Depreciation
      of property and equipment
                              
                              
                              5
                              
                              
                              
                              7Amortization
      of intangibles
                              
                              
                              100
                              
                              
                              
                              355Accretion
      of preferred stock and amortization of deferred financing
      costs
                              
                              
                              517
                              
                              
                              
                              585Accretion
      on note payable to Iceland Health
                              
                              
                              12
                              
                              
                              
                              18Convertible
      preferred stock dividends paid in common stock charged as interest
      expense
                              
                              
                              355
                              
                              
                              
                              409Stock-based
      compensation expense
                              
                              
                              109
                              
                              
                              
                              124Changes
      in operating assets and liabilities:Accounts
      receivable
                              
                              
                              395
                              
                              
                              
                              (2,685
                              )Other
      receivables
                              
                              
                              426
                              
                              
                              
                              207Inventories
                              
                              
                              296
                              
                              
                              
                              (550
                              )Prepaid
      expenses and other current assets
                              
                              
                              203
                              
                              
                              
                              457Accounts
      payable
                              
                              
                              (424
                              )
                              
                              
                              (474
                              )Accrued
      expenses
                              
                              
                              (600
                              )
                              
                              
                              47Deferred
      income
                              
                              
                              (217
                              )
                              
                              
                              (217
                              )Net
      cash provided by (used in) operating activities
                              
                              
                              534
                              
                              
                              
                              (1,503
                              )Cash
      flows from investing activities:Contingent
      payments for acquisitions, allocated to goodwill, patents and
      trademarks
                              
                              
                              (83
                              )
                              
                              
                              (165
                              )Purchases
      of property and equipment
                              
                              
                              (3
                              )
                              
                              
                              –Payments
      for patents and trademarks
                              
                              
                              –
                              
                              
                              
                              (51
                              )Net
      cash used in investing activities
                              
                              
                              (86
                              )
                              
                              
                              (216
                              )Cash
      flows from financing activities:Proceeds
      from stock option exercises
                              
                              
                              –
                              
                              
                              
                              4Repayments
      of short-term borrowings, net
                              
                              
                              (1,229
                              )
                              
                              
                              (424
                              )Net
      cash used in financing activities
                              
                              
                              (1,229
                              )
                              
                              
                              (420
                              )Net
      decrease in cash and cash equivalents
                              
                              
                              (781
                              )
                              
                              
                              (2,139
                              )Cash
      and cash equivalents at beginning of period
                              
                              
                              1,373
                              
                              
                              
                              4,817Cash
      and cash equivalents at end of period
                              
                              $
                              592
                              
                              
                              $
                              2,678
 
 See
accompanying notes to condensed consolidated financial
statements.
  7
  NUTRITION
21, INC.
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (in
thousands, except share data)
 (unaudited)
 
 Note
      1
                BASIS OF
      PRESENTATION
 
 The
accompanying unaudited condensed consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission (“SEC”) for Quarterly Reports on Form 10-Q and do not include all of
the information and note disclosures required by accounting principles generally
accepted in the United States of America.  Accordingly, the unaudited
condensed consolidated financial statements should be read in conjunction with
the Company’s audited consolidated financial statements and notes thereto for
the fiscal year ended June 30, 2009 included in the Company’s Annual Report on
Form 10-K/A filed on October 23, 2009 (the “Form 10-K/A”).  The
accompanying unaudited condensed consolidated financial statements reflect all
adjustments (consisting of normal recurring adjustments) which are, in the
opinion of the management, considered necessary for a fair presentation of
financial position, results of operations and cash flows for the interim
periods.  The June 30, 2009 balance sheet has been derived from the
audited consolidated financial statements included in the Form 10-K/A. Operating
results for the three month period ended September 30, 2009 are not necessarily
indicative of the results that may be expected for the fiscal year ending June
30, 2010.
 
 Our
consolidated financial statements have been prepared assuming that we will
continue as a going concern, which contemplates the realization of assets and
the settlement of liabilities in the normal course of business and accordingly,
no adjustments have been made to recorded amounts to reflect the outcome of this
uncertainty.  For several years we have incurred significant losses,
and have relied on financing activities to supplement cash from
operations.  At September 30, 2009, we had cash and cash equivalents
of $0.6 million, a decrease of $0.8 million from June 30, 2009, and we had a
working capital deficiency of approximately $1.9 million and are past due or in
forbearance agreements on $3.1 million of debt. We have incurred annual
operating losses and, at September 30, 2009, we had an accumulated deficit of
approximately $129.8 million.
 
 In
addition, the current economic conditions which negatively impacted our revenues
in fiscal year 2009 are expected to continue to negatively impact our ability to
generate net income. Our continuation as a going concern is based on our ability
to generate or obtain sufficient cash to meet our obligations on a timely basis
and ultimately to attain profitable operations.
 
 
 Note
      2
                STOCK-BASED
      COMPENSATION
 
 Stock-based
employee compensation cost is measured at the grant date, based on the estimated
fair value of the award, and is recognized as expense over the requisite service
period. The Company has no awards with market or performance
conditions.
 
 Stock-based
compensation expense recognized in the condensed consolidated statements of
operations for the three-month periods ended September 30, 2009 and 2008 are
based on awards ultimately expected to vest, and is reduced for estimated
forfeitures. Forfeitures are estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ from those
estimates.  Pre-vesting forfeitures are estimated to be approximately
10%, based on historical experience.
 
 The
Company recorded $0.1 million in stock-based compensation expense for stock
options and restricted stock awards during the three-month periods ended
September 30, 2009 and 2008, respectively.  Stock-based compensation
expense is recorded in general and administrative expenses.
  8
  NUTRITION
21, INC.
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (in
thousands, except share data)
 (unaudited)
 
 Note
      2
                STOCK-BASED
      COMPENSATION (continued)
 
 The
following is a summary of option activity for the three-month period ended
September 30, 2009:
 
 Options
                                
                                Shares
                                  (000)
                                
                                
                                Weighted-AverageExercise Price
                                
                                
                                Weighted
      Average RemainingContractualTerm (Yrs.)
                                
                                
                                Aggregate
                                  Intrinsic
      Value
                                  ($000)Outstanding
      at July 1, 2009
                                
                                
                                4,799
                                
                                
                                $
                                0.67Granted
                                
                                
                                --
                                
                                
                                $
                                --Exercised
                                
                                
                                --
                                
                                
                                $
                                --Forfeited
      or expired
                                
                                
                                (439
                                )
                                
                                $
                                0.69Outstanding
      at September 30, 2009
                                
                                
                                4,360
                                
                                
                                $
                                0.67
                                
                                
                                
                                5.5
                                
                                
                                $
                                0Exercisable
      at September 30, 2009
                                
                                
                                3,154
                                
                                
                                $
                                0.79
                                
                                
                                
                                4.3
                                
                                
                                $
                                0
 
 The
following is a summary of restricted stock activity for the three-month period
ended September 30, 2009:
 
 Restricted Stock
                                  
                                  Shares
                                    (000)
                                  
                                  
                                  Weighted-AverageExercise Price
                                  
                                  
                                  Weighted
                                    Average
      Remaining ContractualTerm
      (Yrs.)
                                  
                                  
                                  Aggregate
                                    Intrinsic
      Value
                                    ($000’s)Outstanding
      at July 1, 2009
                                  
                                  
                                  169
                                  
                                  
                                  $
                                  1.57Granted
                                  
                                  
                                  –
                                  
                                  
                                  
                                  –Exercised
                                  
                                  
                                  –
                                  
                                  
                                  
                                  –Forfeited
      / expired or cancelled
                                  
                                  
                                  (38
                                  )
                                  
                                  
                                  –Outstanding
      at September 30, 2009
                                  
                                  
                                  131
                                  
                                  
                                  $
                                  1.49
                                  
                                  
                                  
                                  –
                                  
                                  
                                  $
                                  –Exercisable
      at September 30, 2009
                                  
                                  
                                  87
                                  
                                  
                                  $
                                  1.49
                                  
                                  
                                  
                                  –
                                  
                                  
                                  
                                  –
 
 At
September 30, 2009, there was $0.4 million of unrecognized compensation costs
related to nonvested options and restricted stock awards. The costs are expected
to be recognized over a weighted average period of 1.9 years.
 
 Note
      3
                FINANCIAL
      INSTRUMENTS
 
 The fair
value of cash and cash equivalents, short-term investments, accounts receivable,
accounts payable and short-term borrowings approximate carrying amounts due to
the short maturities of these instruments.
 
 Note
      4
                INVENTORIES
 
 Inventories,
which consist primarily of finished goods, are carried at the lower of cost (on
a first-in, first-out method) or estimated net realizable
value.
  9
  NUTRITION
21, INC.
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (in
thousands, except share data)
 (unaudited)
 
 Note
      5
                EARNINGS (LOSS) PER
      COMMON SHARE
 
 Diluted
earnings (loss) per common share for the three month periods ended September 30,
2009 and 2008 does not reflect the total of any incremental shares related to
the assumed conversion or exercise of preferred stock, stock options, and
warrants (26,450,134 and 29,207,134 shares for the three month periods ended
September 30, 2009 and 2008, respectively) as the effect of such inclusions
would be anti-dilutive due to recorded net loss.  In addition,
unvested restricted stock of 130,748 and 367,001 for the three month periods
ended September 30, 2009 and 2008 respectively, was not included as the effect
of such inclusion would be anti-dilutive.
 
 Note
      6
                SUPPLEMENTAL CASH FLOW
      INFORMATION
 
 
 Three
      months ended
                            September
      30,2009
                          
                          
                          2008Supplemental
      disclosure of cash flow information:Cash
      paid for income taxes
                          
                          
                          –
                          
                          
                          
                          –Cash
      paid for interest
                          
                          $
                          85
                          
                          
                          $
                          98Supplemental
      schedule of non-cash financing activities:Increase
      in obligation for Nutrition 21 contingent payments
                          
                          $
                          –
                          
                          
                          $
                          45Issuance
      of common stock for dividends on Series J preferred stock
                          
                          $
                          355
                          
                          
                          
                          –
 
 Note
      7
                8% SERIES J
      CONVERTIBLE PREFERRED STOCK
 
 As
further explained in Note 12 in the Form 10-K/A, the Company must redeem its 8%
Series J convertible preferredstock at the original issue price plus accrued
dividends on September 11, 2011 and, accordingly, the carrying value of the
preferred stock is included in non-current liabilities in the condensed
consolidated balance sheets.  The agreement also provides for early
redemption of the preferred stock on the occurrence of certain default
events.
 
 Cumulative
dividends of 8% of the stated value per share per annum may be paid in cash or
common stock at the sole election of the Company.  Common stock
dividends are valued at 90% of the average 20 VWAPs (daily volume average price
of the Company’s common stock) immediately prior to the dividend payment
date.   For the three-month period ended September 30, 2009, the
Company issued 1,419,886 shares of common stock with a fair value of $0.4
million in lieu of a cash dividend.  At September 30, 2009, the
outstanding Series J preferred stock was convertible into 14,599,441 shares of
common stock.
 
 Note
      8
                SHORT-TERM
      BORROWINGS
 
 On July
27, 2007, the Company entered into a loan and security agreement with Gerber
Finance Inc. (“Lender”).  Under the agreement, the Company may, on a
revolving basis and at Lender’s discretion, borrow from Lender, against eligible
receivables and eligible inventory under a formula set forth in the agreement
amended February 8, 2008, up to a maximum of $2,000,000 at any
time.  Borrowings bear interest at the prime rate plus 3.75% and are
secured by a security interest in all of the assets of the
Company.  The agreement also provides for various fees and expenses
payable by the Company to Lender.  The terms of the agreement were
extended until June 30, 2010, or earlier on certain defaults, including the
breach of any designated financial covenants.  The termination date
shall be automatically extended for successive periods of one (1) year each
unless the Company has provided Lender with written notice of termination at
least sixty (60) days prior to the expiration of the termination
date.
  10
  NUTRITION
21, INC.
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (in
thousands, except share data)
 (unaudited)
 
 Note
      8
                        SHORT-TERM BORROWINGS
      (continued)
 
 In the
agreement, the Company covenanted among other things that without Lender’s
consent it will not (i) borrow (other than from Lender) more than $2 million at
any time outstanding, (ii) declare or pay dividends on its common stock or
repurchase its common stock, or (iii) enter into any merger or purchase or sale
of stock or assets or joint venture transaction, or into any similar
transaction, unless the effective purchase price or capital or other
contribution is valued at not more than $15 million, or (iv) incur a net loss in
a fiscal year quarter. As of September 30, 2009 and June 30, 2009, the Company
had outstanding borrowings of $0.8 million and $1.9 million,
respectively.
 
 In August
2009, the Lender declared that our fiscal year 2009 fourth quarter loss
constituted a breach of a financial covenant. The Lender waived the breach and
agreed to the Company repaying the borrowings by November 15, 2009. At September
30, 2009, the Company had $0.8 million of borrowings outstanding with Gerber
Finance, Inc.
 
 As a
result of the acquisition of Iceland Health, Inc. on August 26, 2006, the
Company delivered to the former stockholders a $2.5 million 5% note that was due
on August 25, 2009. At September 30, 2009, the principal amount of notes payable
to the former owners of Iceland Health plus interest that are secured by our
Iceland Health Trademark are past due. At September 30, 2009, the carrying value
of the note was $2.3 million. In addition, we entered into negotiations to
restructure the $2.5 million principal amount of the notes due each former
owner.  As of November 12, 2009, the negotiations have not been
resolved.
 
 Note
      9
                SEGMENT
      REPORTING
 
 The
Company’s business segments are based on the organization structure used by the
Company’s chief operating decision maker for making operating and investment
decisions and for assessing performance.  As a result, the Company
operates in two business segments:  as a supplier of essential
minerals, most notably chromium picolinate (Ingredients Products Group), and as
a supplier of finished goods to food, drug and mass retailers (Branded Products
Group).
 
 The
Company evaluates the performance of its operating segments based solely on its
operating results before income taxes; therefore assets of the Company are not
allocated by segment.  Unallocated corporate expenses include
executive salaries, research and development expenditures, depreciation,
amortization, interest expense, net and external professional fees, such as
accounting, legal and investor relations costs.
 
 Financial
data by segment was as follows (000’s):
 
 Three
      Months EndedSeptember
      30,2009
                                    
                                    
                                    2008Net
      salesIngredients
      Products Group
                                    
                                    $
                                    2,216
                                    
                                    
                                    $
                                    1,849Branded
      Products Group
                                    
                                    
                                    2,326
                                    
                                    
                                    
                                    10,760Sales
      to external customers
                                    
                                    
                                    4,542
                                    
                                    
                                    
                                    12,609Other
      revenues
                                    
                                    
                                    94
                                    
                                    
                                    
                                    51Total
      revenues
                                    
                                    $
                                    4,636
                                    
                                    
                                    $
                                    12,660Income
      (loss) before income taxesIngredients
      Products Group
                                    
                                    $
                                    1,527
                                    
                                    
                                    $
                                    1,175Branded
      Products Group
                                    
                                    
                                    (100
                                    )
                                    
                                    
                                    1,326Unallocated
      corporate expenses
                                    
                                    
                                    (2,070
                                    )
                                    
                                    
                                    (2,287
                                    )(Loss)
      income before income taxes
                                    
                                    $
                                    (643
                                    )
                                    
                                    $
                                    214Unallocated
      corporate assets
                                    
                                    $
                                    12,431
                                    
                                    
                                    $
                                    40,075
 
 Substantially all of the Company’s
revenues are generated in the United States.
  11
 
 Item
2 – Management’s Discussion and Analysis of Financial Condition and Results of
Operations
 
 The
following discussion should be read in conjunction with the condensed
consolidated financial statements and related notes thereto of the Company
included elsewhere herein.
 
 Forward-Looking
Statements and Risk Factors
 
 This
quarterly report and the documents incorporated by reference contain
forward-looking statements which are intended to fall within the “safe harbor”
provisions of the Private Securities Litigation Reform Act of 1995, Section 27A
of the Securities Act of 1933, and Section 21E of the Securities Act of
1934.  Words such as “anticipates”, “expects”, “intends”, “plans”,
“believes”, “seeks”, and “estimates” and similar expressions identify
forward-looking statements.  Statements that are “forward-looking
statements” are based on current expectations and assumptions that are subject
to risks and uncertainties.  Actual performance and results could
differ materially.
 
 We
undertake no obligation to update or review any guidance or other
forward-looking information, whether as a result of new information, future
developments or otherwise.
 
 General
 
 Revenues
from the Ingredient Products Group are primarily derived from the sale of
proprietary ingredients together with the grant of patent licenses to use the
ingredients, to manufacturers of vitamin and mineral supplements. The fees for
the licenses are bundled on an undifferentiated basis with the price that the
Company charges for its ingredients, since licenses are not sold
separately.
 
 Revenues
from the Branded Products Group are principally derived from the sale of branded
products to food, drug and mass retailers.  Revenue, net of an
estimate for returns, is recognized when the products are received by the
retailers or, if the retailer has the right to return all unsold product,
revenue is recognized when the end user takes possession of the
product.  Upon shipment by the Company, amounts billed to customers
with the right to return all unsold product are included as accounts receivable,
inventory is relieved, the sale is deferred and the gross profit is reflected as
a current liability until the product is sold to the end user.
 
 Cost of
revenues includes both direct and indirect manufacturing
costs.  Research and development expenses include internal
expenditures as well as expenses associated with third party
providers.  Advertising and promotion expenses include fees and
expenses directly related to the selling of the Company’s products including the
cost of advertising, promotional expenses and third party
fees.  General and administrative expenses include salaries and
overhead, third party fees and expenses, and costs associated with the
operations of the Company.  The Company capitalizes patent costs and
intangible assets with finite lives, and amortizes them over periods not to
exceed seventeen years.
 
 Results
of Operations
 
 Revenues
 
 Net sales
of the Ingredient Products Group were $2.2 million for the three month period
ended September 30, 2009 compared to $1.8 million in the comparable period a
year ago.  Revenues from new customer distribution was the primary
reason for the improvement.
 
 Net
product sales of the Branded Products Group for the three months ended September
30, 2009 were $2.3 million compared to $10.8 million in the comparable period a
year ago. Net product sales in both channels were negatively impacted by
economic conditions. A weakening economy, rapidly rising unemployment, tighter
credit terms placed on our customers as well as reductions of inventory levels
by our retail customers all contributed to lower sales.
 
 Cost of
revenues
 
 Cost of
revenues for the Ingredients Products Group were $0.5 million and $0.4 million,
respectively, for the three month periods ended September 30, 2009 and 2008,
respectively.
 
 Cost of
revenues for the Branded Products Group were $1.2 million for the three month
period ended September 30, 2009 compared to $4.3 million in the same period a
year ago.  Lower product sales accounted for the
difference.
  12
  Item
2 – Management’s Discussion and Analysis of Financial Condition and Results of
Operations (continued)
 
 Advertising and Promotion
Expenses (“Advertising”)
 
 Advertising
expenses for the Branded Products Group for the three months ended September 30,
2009 were $1.1 million compared to $5.2 million in the comparable period a year
ago.  Advertising expenditures to support the retail products were
$0.6 million in the current period compared to $0.9 million in the same period a
year ago. Advertising to support sales made through the direct response channel
were $0.5 million compared to $4.3 million in the comparable period a year
ago.  The decline in Advertising was due to our efforts to refocus our
direct response advertising spend.
 
 Ingredients
Product Group Advertising in the three month periods were not materially
different.
 
 Unallocated Corporate
Expenses
 
 Unallocated
corporate expenses for the three month period ended September 30, 2009 were $2.2
million compared to $2.3 million in the comparable period a year
ago.  The decrease is primarily due to a reduction in overall interest
expense ($0.1 million).
 
 Net Loss
 
 Net loss
for the three month period ended September 30, 2009 was $0.6 million compared to
net income of $0.2 million in the comparable period a year ago.  Lower
revenues offset by lower advertising spend from the Branded Products Group was
the primary reason for the decline.
 
 Liquidity and Capital
Resources
 
 Cash and
cash equivalents at September 30, 2009 were $0.6 million compared to $1.4
million at June 30, 2009.
 
 During
the three month period ended September 30, 2009, net cash of $0.5 million was
provided by operating activities, compared to cash used in operating activities
of $1.5 million in the comparable period a year ago.  Improvement in
the use of  our operating assets and liabilities account for the
improvement.
 
 During
the three month period ended September 30, 2009, net cash used in investing
activities was $86 thousand compared to cash used in investing activities of
$0.2 million in the comparable period a year ago.
 
 During
the three month period ended September 30, 2009, net cash used in financing
activities was $1.2 million compared to $0.4 million in the comparable period a
year ago.
 
 Gerber
Finance Inc. declared that our fiscal year 2009 fourth quarter loss constituted
a breach of a financial covenant.  Gerber waived the breach and agreed
to the Company repaying its borrowings by November 15, 2009.  In
addition we entered into negotiations to restructure the $2.5 million principal
amount of notes payable to the former owners of Iceland Health plus interest
that are past due and are secured by our Iceland Health trademark. These
negotiations have not been resolved as of November 12, 2009.  We
are also seeking a replacement loan facility.
 
 Our
consolidated financial statements have been prepared assuming that we will
continue as a going concern, which contemplates the realization of assets and
the settlement of liabilities in the normal course of business. For several
years we have incurred significant losses, and have relied on financing
activities to supplement cash from operations.  At September 30, 2009,
we had cash and cash equivalents of $0.6 million, a decrease of  $0.8
million from June 30, 2009, and we had a working capital deficiency of
approximately $2.1 million. We have incurred annual operating losses and, at
September 30, 2009, we had an accumulated deficit of approximately $129.8
million.
 
 In
addition, the current economic conditions which negatively impacted our revenues
in fiscal year 2009 are expected to continue to negatively impact our ability to
generate net income. Our continuation as a going concern is based on our ability
to generate or obtain sufficient cash to meet our obligations on a timely basis
and ultimately to attain profitable operations.
 
 Item
3 – Quantitative and Qualitative Disclosures about Market Risk
 
 Market
risk represents the risk of changes in value of a financial instrument,
derivative or non-derivative, caused by fluctuations in interest rates, foreign
exchange rates and equity prices.  The Company has no financial
instruments that give it exposure to foreign exchange rates or equity
prices.
  13
  Item
4 (T) – Controls and Procedures
 
 We
maintain disclosure controls and procedures designed to ensure that information
required to be disclosed in reports filed under the Securities Exchange Act of
1934, as amended (“Exchange Act”), is recorded, processed, summarized and
reported within the specified time periods and accumulated and communicated to
our management, including our principal executive officer and principal
financial officer, as appropriate to allow timely decisions regarding required
disclosure.
 
 Our
management, with the participation of the Chief Executive Officer (CEO) and our
Chief Financial Officer (CFO), evaluated the effectiveness of our disclosure
controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) promulgated
under the Exchange Act) as of September 30, 2009.  Based on that
evaluation, our CEO and CFO concluded that, as of that date, our disclosure
controls and procedures required by paragraph (b) of Exchange Act Rules 13a-15
or 15d-15 were effective.
 
 There
were no changes in our internal controls over financial reporting or in other
factors during the period ended September 30, 2009 which have materially
affected or are reasonably likely to materially affect our internal controls
over financial reporting.
  14
  PART
II - OTHER INFORMATION
 
 Items 1, 1A, 2, 3, 4 and 5 and are
not applicable and have been omitted.
 
 
 Item
6 - Exhibits
 
 (a)
                Exhibits
 
 31.1
                  Certifications
      of the President and Chief Executive Officer pursuant to Section 302 of
      theSarbanes-Oxley Act of
2002.
 31.2
                  Certifications
      of the Chief Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.
 32.1
                    Certifications
      of the President and Chief Executive Officer pursuant to Section 906 of
      the Sarbanes-Oxley
      Act of 2002.
 32.2
                  Certification
      of the Chief Financial Officer pursuant to Section 906 of the
      Sarbanes-OxleyAct of
2002.
  15
  NUTRITION
21, INC.
 
 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.
 
 NUTRITION 21,
INC.
 Registrant
 
 Date:  November
      13, 2009
                    By:
                    /s/ Michael A. ZeherMichael
      A. Zeher
                      President
      and Chief Executive Officer
                      (Principal
      Executive Officer)
  16