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EX-31.1 - EX-31.1 - MATRIXX INITIATIVES INC | p16814exv31w1.htm |
EX-32.1 - EX-32.1 - MATRIXX INITIATIVES INC | p16814exv32w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
(Mark One)
þ | Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarter ended December 31, 2009
or
o | Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Commission File number 001-31404
Matrixx Initiatives, Inc.
(Name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) |
87-0482806 (I.R.S. Employer Identification Number) |
8515 E. Anderson Drive
Scottsdale, AZ 85255
(Address of principal executive offices)
Scottsdale, AZ 85255
(Address of principal executive offices)
(602) 385-8888
(Issuers telephone number)
(Issuers telephone number)
Indicate by check mark whether the registrant (1) 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 þ NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§229.405 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 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 þ | Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule
12b-2). YES o NO þ
There were 9,455,620 shares of the registrants common stock, $.001 par value, outstanding as of
February 5, 2010.
MATRIXX INITIATIVES, INC.
FORM 10-Q
INDEX
FORM 10-Q
INDEX
Unless otherwise indicated in this quarterly report, Matrixx, us, we, our, the Company
and similar terms refer to Matrixx Initiatives, Inc. and its subsidiaries. Zicam is a registered
trademark of our subsidiary, Zicam, LLC, and the Matrixx name and logo are trademarks of the
Company.
2
Table of Contents
MATRIXX INITIATIVES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
December 31, | March 31, | |||||||
2009 | 2009 | |||||||
ASSETS |
||||||||
Current Assets: |
||||||||
Cash and cash equivalents |
$ | 25,784,190 | $ | 25,144,088 | ||||
Certificates of deposit |
7,485,803 | 14,870,717 | ||||||
Accounts receivable: |
||||||||
Trade, net of allowance for doubtful accounts of $227,577 and $226,180 |
15,786,964 | 14,769,485 | ||||||
Other receivable |
311,669 | | ||||||
Insurance receivable |
50,900 | 25,514 | ||||||
Inventories |
5,340,214 | 7,740,343 | ||||||
Prepaid expenses |
4,376,150 | 2,035,628 | ||||||
Interest receivable |
7,879 | 13,867 | ||||||
Income tax receivable |
1,439,479 | 1,316,102 | ||||||
Current deferred tax asset |
5,192,481 | 1,636,707 | ||||||
Total Current Assets |
65,775,729 | 67,552,451 | ||||||
Property and Equipment, at cost: |
||||||||
Office furniture and computer equipment |
1,722,176 | 1,738,727 | ||||||
Machine tooling and manufacturing equipment |
4,402,847 | 4,581,866 | ||||||
Laboratory furniture and equipment |
486,459 | 484,215 | ||||||
Leasehold improvements |
562,738 | 544,211 | ||||||
7,174,220 | 7,349,019 | |||||||
Less accumulated depreciation |
(3,649,612 | ) | (3,219,081 | ) | ||||
Net Property and Equipment |
3,524,608 | 4,129,938 | ||||||
Other Assets: |
||||||||
Deposits |
636,924 | 2,913,855 | ||||||
Other assets |
30,789 | 30,789 | ||||||
Debt issuance costs, net of accumulated amortization of $14,395 and $12,596 |
| 1,799 | ||||||
Patents, net of accumulated amortization of $292,157 and $725,956 |
812,858 | 1,691,505 | ||||||
Non-current deferred tax asset |
2,754,926 | | ||||||
Goodwill |
| 15,039,836 | ||||||
Total Other Assets |
4,235,497 | 19,677,784 | ||||||
Total Assets |
$ | 73,535,834 | $ | 91,360,173 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current Liabilities: |
||||||||
Accounts payable |
$ | 2,359,212 | $ | 3,010,728 | ||||
Accrued expenses |
7,189,682 | 9,665,310 | ||||||
Sales commissions |
652,729 | 404,899 | ||||||
Sales returns and allowances |
1,305,492 | 1,611,052 | ||||||
Legal liability |
740,000 | 785,000 | ||||||
Total Current Liabilities |
12,247,115 | 15,476,989 | ||||||
Deferred tax liability |
| 2,806,001 | ||||||
Total Liabilities |
12,247,115 | 18,282,990 | ||||||
Commitments and Contingencies |
||||||||
Stockholders Equity: |
||||||||
Preferred stock: $.001 par value, 2,000,000 shares authorized, none issued or outstanding |
| | ||||||
Common stock: $.001 par value, 30,000,000 shares authorized, 9,455,620 and 9,273,949 shares issued |
9,455 | 9,274 | ||||||
Additional paid-in capital |
39,216,153 | 37,077,316 | ||||||
Retained earnings |
22,063,111 | 35,990,593 | ||||||
Total Stockholders Equity |
61,288,719 | 73,077,183 | ||||||
Total Liabilities and Stockholders Equity |
$ | 73,535,834 | $ | 91,360,173 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
3
Table of Contents
MATRIXX INITIATIVES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED DECEMBER 31, 2009 AND 2008
(Unaudited)
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED DECEMBER 31, 2009 AND 2008
(Unaudited)
2009 | 2008 | |||||||
Net sales |
$ | 28,462,685 | $ | 38,702,412 | ||||
Cost of sales |
7,649,820 | 11,204,657 | ||||||
Gross Profit |
20,812,865 | 27,497,755 | ||||||
Selling, general and administrative expenses |
14,067,533 | 18,869,536 | ||||||
Research and development |
543,478 | 796,996 | ||||||
Income From Operations |
6,201,854 | 7,831,223 | ||||||
Interest and other income |
33,553 | 47,929 | ||||||
Income Before Income Tax Provision |
6,235,407 | 7,879,152 | ||||||
Income tax provision |
2,409,024 | 3,127,707 | ||||||
Net Income |
$ | 3,826,383 | $ | 4,751,445 | ||||
Net Income Per Share of Common Stock: |
||||||||
Basic: |
||||||||
Weighted Average Number of Common Shares
Outstanding |
9,228,970 | 9,179,232 | ||||||
Net Income Per Share of Common Stock |
$ | 0.41 | $ | 0.52 | ||||
Diluted: |
||||||||
Weighted Average Number of Common Shares
Outstanding |
9,228,970 | 9,471,944 | ||||||
Net Income Per Share of Common Stock |
$ | 0.41 | $ | 0.50 |
The accompanying notes are an integral part of these consolidated financial statements.
4
Table of Contents
MATRIXX INITIATIVES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED DECEMBER 31, 2009 AND 2008
(Unaudited)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED DECEMBER 31, 2009 AND 2008
(Unaudited)
2009 | 2008 | |||||||
Net sales |
$ | 61,005,711 | $ | 80,842,362 | ||||
Cost of sales |
17,272,795 | 24,777,855 | ||||||
Gross Profit |
43,732,916 | 56,064,507 | ||||||
Selling, general and administrative expenses |
40,706,579 | 36,168,540 | ||||||
Research and development |
1,896,620 | 2,550,505 | ||||||
Impairment of goodwill and other assets |
23,867,158 | | ||||||
Income (Loss) From Operations |
(22,737,411 | ) | 17,345,462 | |||||
Interest and other income |
119,023 | 239,915 | ||||||
Income (Loss) Before Income Tax Provision
(Benefit) |
(22,618,418 | ) | 17,585,377 | |||||
Income tax provision (benefit) |
(8,690,936 | ) | 6,857,907 | |||||
Net Income (Loss) |
$ | (13,927,482 | ) | $ | 10,727,470 | |||
Net Income (Loss) Per Share of Common Stock: |
||||||||
Basic: |
||||||||
Weighted Average Number of Common Shares
Outstanding |
9,209,400 | 9,277,560 | ||||||
Net Income (Loss) Per Share of Common Stock |
$ | (1.51 | ) | $ | 1.16 | |||
Diluted: |
||||||||
Weighted Average Number of Common Shares
Outstanding |
9,209,400 | 9,564,561 | ||||||
Net Income (Loss) Per Share of Common Stock |
$ | (1.51 | ) | $ | 1.12 | |||
The accompanying notes are an integral part of these consolidated financial statements.
5
Table of Contents
MATRIXX INITIATIVES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31, 2009 AND 2008
(Unaudited)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31, 2009 AND 2008
(Unaudited)
2009 | 2008 | |||||||
Cash Flows From Operating Activities |
||||||||
Net income (loss) |
$ | (13,927,482 | ) | $ | 10,727,470 | |||
Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: |
||||||||
Depreciation |
579,557 | 1,017,754 | ||||||
Amortization |
75,723 | 112,863 | ||||||
Deferred income taxes |
(9,116,701 | ) | 60,135 | |||||
Common stock issued for compensation |
1,964,705 | 1,764,123 | ||||||
Asset impairments and abandonments |
24,287,130 | | ||||||
Changes in assets and liabilities: |
||||||||
Accounts receivable |
(1,017,479 | ) | (12,993,272 | ) | ||||
Insurance receivable |
(25,386 | ) | 19,815 | |||||
Interest and other receivables |
(305,681 | ) | 68,324 | |||||
Income taxes |
(123,377 | ) | (1,072,817 | ) | ||||
Inventories |
(1,527,632 | ) | 1,073,672 | |||||
Prepaid expenses and other |
(2,340,522 | ) | (382,460 | ) | ||||
Accounts payable |
(651,516 | ) | 4,943,409 | |||||
Accrued expenses |
(2,227,798 | ) | 2,589,166 | |||||
Legal liability |
(45,000 | ) | (35,000 | ) | ||||
Sales returns and allowances |
(305,560 | ) | 450,422 | |||||
Net Cash Provided (Used) By Operating Activities |
(4,707,019 | ) | 8,343,604 | |||||
Cash Flows From Investing Activities |
||||||||
Purchases of certificates of deposit |
(3,736,525 | ) | | |||||
Maturities of certificates of deposit |
11,121,439 | | ||||||
Capital expenditures |
(24,912 | ) | (447,331 | ) | ||||
Restricted cash |
| 500,000 | ||||||
Deposits and other |
(2,187,194 | ) | (14,464 | ) | ||||
Net Cash Provided By Investing Activities |
5,172,808 | 38,205 | ||||||
Cash Flows From Financing Activities: |
||||||||
Issuance of common stock |
1,362,219 | 1,138,157 | ||||||
Purchase of treasury stock |
(1,187,906 | ) | (6,786,597 | ) | ||||
Net Cash Provided (Used) By Financing Activities |
174,313 | (5,648,440 | ) | |||||
Net Increase in Cash and Cash Equivalents |
640,102 | 2,733,369 | ||||||
Cash and Cash Equivalents at Beginning of Period |
25,144,088 | 27,932,672 | ||||||
Cash and Cash Equivalents at End of Period |
$ | 25,784,190 | $ | 30,666,041 | ||||
Supplemental Disclosure of Cash Flow Information: |
||||||||
Cash paid for income taxes |
$ | 8,000 | $ | 7,588,795 | ||||
Supplemental Disclosure of Noncash Financing Activities: |
||||||||
Retirement of treasury stock |
$ | 1,187,906 | $ | 7,650,054 |
The accompanying notes are an integral part of these consolidated financial statements.
6
Table of Contents
MATRIXX INITIATIVES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Financial Statements
The accompanying condensed consolidated balance sheet as of March 31, 2009, which has been
derived from audited consolidated financial statements, and the unaudited interim condensed
consolidated financial statements of Matrixx Initiatives, Inc. as of and for the three and nine
months ended December 31, 2009 have been prepared in accordance with the rules prescribed for
filing condensed interim financial statements and, accordingly, do not include all disclosures that
may be necessary for complete financial statements prepared in accordance with U.S. generally
accepted accounting principles (GAAP). The disclosures presented are sufficient, in managements
opinion, to make the interim information presented not misleading. All adjustments, consisting of
normal recurring adjustments that are necessary so as to make the interim information not
misleading, have been made. All references made in this Report to Note or Notes refer to these
Notes to the Condensed Consolidated Financial Statements (Financial Statements). Results of
operations for the three and nine months ended December 31, 2009 are not necessarily indicative of
results of operations that may be expected for the fiscal year ending March 31, 2010. The
products we market are seasonal in nature. We record sales when products are shipped from our
warehouse facilities to customers. Generally, the Company realizes fluctuations in sales
volume as retailers stock our products and order displays to prepare for the cough and cold season,
which usually runs from October through March. Consumer purchases of our products at retail are
highest during the cough and cold season. It is recommended that this financial information be
read in conjunction with the complete financial statements included in Matrixxs Annual Report on
Form 10-K for the period ended March 31, 2009 previously filed with the Securities and Exchange
Commission.
On September 30, 2009, Matrixx adopted changes issued by the Financial Accounting Standards
Board (FASB) to the authoritative hierarchy of GAAP. These changes establish the FASB Accounting
Standards CodificationTM (Codification) as the source of authoritative accounting
principles recognized by the FASB to be applied in the preparation of financial statements in
conformity with GAAP. Rules and interpretive releases of the Securities and Exchange Commission
(SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC
registrants. The FASB will no longer issue new standards in the form of Statements, FASB Staff
Positions, or Emerging Issues Task Force Abstracts; instead, the FASB will issue Accounting
Standards Updates. Accounting Standards Updates will not be authoritative in their own right as
they will only serve to update the Codification. These changes and the Codification itself do not
change GAAP. Other than the manner in which new accounting guidance is referenced, the adoption of
these changes had no impact on the Financial Statements.
We have evaluated subsequent events through the time of filing this Form 10-Q with the SEC on
February 5, 2010.
2. Recently Issued Accounting Standards
In June 2009, the FASB issued guidance which will amend the Consolidation Topic of the
Codification (ASC Topic 810-10). This updated guidance requires an enterprise to determine whether
its variable interest or interests give it a controlling financial interest in a variable interest
entity; to require ongoing reassessments of whether an enterprise is the primary beneficiary of a
variable interest entity; to eliminate the quantitative approach previously required for
determining the primary beneficiary of a variable interest entity; to add an additional
reconsideration event for determining whether an entity is a variable interest entity when any
changes in facts and circumstances occur such that holders of the equity investment at risk, as a
group, lose the power from voting rights or similar rights of those investments to direct the
activities of the entity that most significantly impact the entitys economic performance; and to
require enhanced disclosures that will provide users of financial
statements with more transparent information about an enterprises involvement in a variable
interest entity. The guidance is effective for the Company on April 1, 2010. We do not expect the
adoption of this guidance to have an impact on our financial statements.
7
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MATRIXX INITIATIVES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In August 2009, the FASB issued guidance in the Fair Value Measurements and Disclosures
Topic of the Codification (ASC Topic 820-10) to provide guidance on the fair value measurement of
liabilities. This update requires clarification for circumstances in which a quoted price in an
active market for the identical liability is not available, a reporting entity is required to
measure fair value using one or more of the following techniques: 1) a valuation technique that
uses either the quoted price of the identical liability when traded as an asset or quoted prices
for similar liabilities or similar liabilities when traded as an asset; or 2) another valuation
technique that is consistent with the principles in ASC Topic 820 such as the income and market
approach to valuation. The amendments in this update also clarify that, when estimating the fair
value of a liability, a reporting entity is not required to include a separate input or adjustment
to other inputs relating to the existence of a restriction that prevents the transfer of the
liability. This update further clarifies that if the fair value of a liability is determined by
reference to a quoted price in an active
market for an identical liability, that price would be considered a Level 1 measurement in the fair
value hierarchy. Similarly, if the identical liability has a quoted price when traded as an asset
in an active market, it is also a Level 1 fair value measurement if no adjustments to the quoted
price of the asset are required. The guidance is effective for interim or annual reporting periods
ending after June 15, 2009, and shall be applied prospectively. We adopted this guidance effective
for the quarter ending June 30, 2009. There is no impact of the adoption on our financial
statements as of December 31, 2009.
In October 2009, the FASB issued the following Accounting Standards Update (ASU):
ASU No. 2009-13, Revenue Recognition (ASC Topic 605) Multiple-Deliverable Revenue
Arrangements, a consensus of the FASB Emerging Issues Task Force. This guidance modifies the fair
value requirements of ASC subtopic 605-25 Revenue Recognition-Multiple Element Arrangements by
allowing the use of the best estimate of selling price in addition to VSOE and VOE (now referred
to as TPE standing for third-party evidence) for determining the selling price of a deliverable. A
vendor is now required to use its best estimate of the selling price when VSOE or TPE of the
selling price cannot be determined. In addition, the residual method of allocating arrangement
consideration is no longer permitted.
This update requires expanded qualitative and quantitative disclosures and is effective for
fiscal years beginning on or after June 15, 2010. However, companies may elect to adopt as early as
interim periods ended September 30, 2009. This update may be applied either prospectively from the
beginning of the fiscal year for new or materially modified arrangements or retrospectively. We do
not expect the adoption of this guidance to have an impact on our financial statements.
3. Stock-Based Compensation
The Company measures the cost of services received in exchange for equity instruments
based on the grant-date fair value of the award and recognizes that cost in expense over the
requisite service period. The Company uses the Black-Scholes option-pricing model in valuing option
grants.
The Company did not recognize any compensation expense for previously granted option awards
during the three or nine months ended December 31, 2009 or 2008. There were no options exercised in
the three months ended December 31, 2009; 144,700 options were exercised in the nine months ended
December 31, 2009. No options were granted during the nine months ended December 31, 2009 or 2008.
8
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MATRIXX INITIATIVES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company has granted restricted stock to directors, officers, and employees as part of
its overall compensation plan. Compensation expense is based on the closing stock price on the
grant date, and is amortized on a straight-line basis over the requisite service period.
Stock-based compensation expense recognized in the quarter ended December 31, 2009, for restricted
stock awards previously granted, was approximately $371,000, or $225,000 after tax, compared to
approximately $107,000, or $66,000 after tax, for the quarter ended December 31, 2008. During the
nine months ended December 31, 2009, the Company recognized approximately $1.1 million, or $659,000
after tax, compared to $926,000, or $565,000 after tax, for the nine months ended December 31,
2008, of compensation expense related to restricted stock awards. A one-time expense associated
with a stock-based signing bonus accounted for approximately $270,000 or $170,000 after tax, of the
expense recorded for the nine months ended December 31, 2008.
4. Basic and Diluted Income (Loss) Per Share
Basic earnings (loss) per share are calculated using the weighted average number of common
shares outstanding. Diluted earnings (loss) per share are computed on the basis of the weighted
average number of common shares outstanding plus the effect of dilutive securities. The Companys
stock options and unvested restricted stock are considered dilutive securities and are included in
the computation of diluted earnings (loss) per share using the treasury stock method.
The table below summarizes the elements included in the calculation of basic and diluted net
income (loss) per common share for the three and nine months ended December 31, 2009 and 2008.
Unvested restricted stock and options to purchase 449,649 and 443,057 shares of common stock for
the three and nine months ended December 31, 2009, respectively, were not included in the
computation of diluted income (loss) per share because their effect would be anti-dilutive. Options
to purchase 157,000 and 176,000 shares of common stock for the three and nine months ended December
31, 2008, respectively, were not included in the computation of diluted income per share because
their effect would be anti-dilutive.
Three Months Ended | Nine Months Ended | |||||||||||||||
December 31, | December 31, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Net income (loss) applicable to common shareholders |
$ | 3,826,383 | $ | 4,751,445 | $ | (13,927,482 | ) | $ | 10,727,470 | |||||||
Weighted average common shares outstanding Basic |
9,228,970 | 9,179,232 | 9,209,400 | 9,277,560 | ||||||||||||
Dilutive Securities: |
||||||||||||||||
Options |
| 109,754 | | 126,243 | ||||||||||||
Restricted Stock |
| 182,958 | | 160,758 | ||||||||||||
Weighted average common shares outstanding Diluted |
9,228,970 | 9,471,944 | 9,209,400 | 9,564,561 | ||||||||||||
Net income (loss) per common share: |
||||||||||||||||
Basic |
$ | 0.41 | $ | 0.52 | $ | (1.51 | ) | $ | 1.16 | |||||||
Diluted |
$ | 0.41 | $ | 0.50 | $ | (1.51 | ) | $ | 1.12 |
9
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MATRIXX INITIATIVES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. Inventories
Inventories are stated at the lower of cost or market. The Company uses first-in, first-out
method to value inventory. Inventories consisted of the following at December 31, 2009 and March
31, 2009:
December 31, | March 31, | |||||||
2009 | 2009 | |||||||
Raw materials and packaging |
$ | 1,179,497 | $ | 2,618,261 | ||||
Finished goods |
4,160,717 | 5,122,082 | ||||||
Total |
$ | 5,340,214 | $ | 7,740,343 | ||||
6. Product Recalls and Withdrawals
Zicam Cold Remedy Nasal Gel and Cold Remedy Gel Swabs Recall
The Company received a warning letter from the Food and Drug Administration (the FDA) on
June 16, 2009. Because of allegations of loss of smell, the FDA asserted that the Company was in
violation of FDA regulations by failing to file a new drug application for its Zicam Cold Remedy
Nasal Gel and Zicam Cold Remedy Swabs and that those products were misbranded under FDA regulations
for failing to adequately warn of the risk of smell loss, also known as anosmia. Although the
Company disagrees with the FDAs allegations, the Company cooperated with the FDA and recalled the
Cold Remedy Nasal Gel and Cold Remedy Swabs from the market. In October 2009, the FDA advised the
Company that it was unwilling to reverse its position. On November 16, 2009, the Company filed its
response to the FDAs warning letter. In its response, the Company reiterated its position that
there is no valid scientific evidence that Zicam nasal Cold Remedy products are unsafe and
requested the FDA to withdraw the warning letter.
For the quarter ended June 30, 2009, the Company recorded a $9.0 million reserve for estimated
costs to recall the these products. The $9.0 million reserve was based on estimates associated with
the expected levels of affected product at retail, costs to return the products, estimates of
consumer returns, and other recall-related costs. The reserve charge was recorded in selling,
general and administrative expense in the accompanying statement of operations for the nine months
ended December 31, 2009. The Cold Remedy Nasal Gel and Cold Remedy Swabs accounted for
approximately 40% of the Companys net sales in fiscal 2009.
ChewCaps, RapidMelts® and RapidMelts + C Recall
In June 2008, the Company recalled certain lots of its Zicam ChewCaps, RapidMelts® and
RapidMelts +C products. The recall was issued initially in response to a recall by the Companys
manufacturer, Capricorn Pharma, Inc. (Capricorn). Capricorn issued its recall in response to
observations made by the FDA during a routine inspection of its facilities, which gave rise to
concerns that certain lots of the products may have contained small metal fragments. The Company
recall mirrored that of Capricorn and applied only to certain lots of the products; however, many
of the Companys customers returned additional products. There have been no reports of injury or
illness involving the affected products. The Class II recall action was a precautionary matter
made in consultation with the FDA based on an assessment that the affected products would not cause
serious adverse health consequences.
10
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MATRIXX INITIATIVES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the quarter ended June 30, 2008, the Company recorded a $1.0 million reserve for
estimated recall-related costs and charges. The $1.0 million reserve was based on estimates
associated with the expected levels of affected product at retail, costs to replace the product,
and other recall-related costs. For the year ended March 31, 2009, the Company incurred and
reserved an additional $1.0 million, for a total of $2.0 million for this recall. The reserve
charge was recorded in selling, general and administrative expense and reduced operating income by
an equal amount. On September 2, 2008, the Company filed suit against Capricorn in the United
States District Court for the District of Arizona to recover damages arising from the recall. On
October 27, 2009, the Company agreed to terms to settle such litigation. See Note 7 Legal
Proceedings below for a discussion of the litigation, the settlement and other proceedings
involving Capricorn.
Canadian Products Withdrawal
The Company introduced eight products for retail sales in Canada during the quarter ended
September 30, 2008. The Company decided to withdraw the eight products from the Canadian
marketplace and is focusing the Companys marketing efforts wholly on U.S. sales. The withdrawal
was initiated during the quarter ended September 30, 2009 and the Company recorded approximately
$1.6 million to reserve for withdrawal charges and fees. The $1.6 million reserve was based on
estimates of product at retail and costs to return the items to our distribution partner. In
addition, the Company recorded a charge of $423,000 to write-down the inventory of products that
are specific to the Canadian marketplace.
7. Legal Proceedings
The Company is involved in various product liability claims and other legal proceedings. The
Companys legal expense for these lawsuits continues to have a significant impact on the results of
operations as the Company defends itself against the various claims.
Among the principal matters pending to which the Company is a party are the following:
Product Liability Matters
General. Since 2003, many lawsuits have been filed against us alleging that our Zicam
Cold Remedy nasal gel products have caused the permanent loss or diminishment of the sense of smell
or smell and taste. Prior to the Companys receipt of the FDAs June 16, 2009 warning letter (see
Note 6 Product Recalls and Withdrawals), the number of lawsuits filed against the Company was
steadily declining; in fact, the numbers of pending lawsuits, plaintiffs, new lawsuits and
potential claimants were at their lowest levels since early 2004.
Since the Companys receipt of the FDA warning letter, numerous product liability
lawsuits have been filed against the Company, many of which cite the FDA warning letter as support
for their claims. The lawsuits principally fall into two categories of product liability claims:
(i) those seeking compensation for the loss or diminishment of the plaintiffs sense of smell or
smell and taste, alleged to have been caused by
the use of Zicam Cold Remedy nasal gel products (i.e., personal injury claims) and (ii) those
seeking compensation for the purchase price of the Zicam Cold Remedy nasal gel products or various
forms of equitable relief such as disgorgement of profits, restitution and injunctive relief based
on allegations that the Company misrepresented the safety and/or efficacy of such products to
consumers (i.e., consumer fraud claims). All of the consumer fraud lawsuits have been filed as
class actions but none of the classes have been certified to date (uncertified class actions are
referred to as putative class actions). On October 9, 2009, a judicial panel ordered the
centralization and transfer of a number of consumer fraud and personal injury actions pending in
federal court to a federal court in the District of Arizona pursuant to federal multidistrict
litigation procedures (See Multi-District Litigation Matters below for a discussion of the cases
that have been consolidated and transferred). The Company intends to vigorously defend itself
against each of these lawsuits.
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Our Position and Our Response. We believe the claims made in these lawsuits are
scientifically unfounded and misleading and we disagree strongly with the FDAs allegations that
Zicam Cold Remedy nasal gel products are unsafe and that they were unlawfully marketed. The
Companys position is supported by the cumulative science, a multi-disciplinary panel of
scientists, and the decisions of 10 separate federal judges in 10 different cases in multiple
jurisdictions. In October 2009, the FDA advised the Company that it was unwilling to reverse its
position. On November 16, 2009, the Company filed its response to the FDAs warning letter. In
its response, the Company reiterated its position that there is no valid scientific evidence that
Zicam nasal Cold Remedy products are unsafe and requested the FDA to withdraw the warning letter.
Product Safety. There is no known causal link between the use of Zicam Cold Remedy nasal gel
and impairment of smell or smell and taste. To date, no plaintiff has ever won a product liability
case against the Company on those grounds. The Company believes that upper respiratory infections
and nasal and sinus disease are the most likely causes of the smell dysfunctions reported by some
consumers. One of the most common causes of smell disorders is the cold itself, the very condition
our product is used to treat. Other causes are sinusitis and rhinitis, conditions which are
sometimes present when our product is used.
Federal law requires that the testimony of a scientific or medical expert witness be reliable
and based on valid scientific data and analysis before it can be allowed into evidence. To date,
the Company has submitted motions in ten federal lawsuits against the Company challenging the
reliability and admissibility of the testimony of expert witnesses who claim that Zicam Cold Remedy
is capable of causing or has caused smell and taste loss. To date, the courts have ruled in the
Companys favor on all ten motions. Each court has ruled that the theory that Zicam Cold Remedy
nasal gel causes smell loss, as promoted by the plaintiffs experts, has no reliable scientific
support and was reached without application of proper scientific standards and procedures. Federal
courts have made such rulings against the three most prominent causal experts that plaintiffs have
hired to date as well as various other expert witnesses.
In addition, on April 3, 2008, jurors in a California case unanimously found that Zicam was
not the cause of plaintiffs smell loss.
Product Effectiveness. Our claims and advertising are subject to the requirements of the
Federal Trade Commission Act, which is enforced by the Federal Trade Commission (the FTC). As
previously disclosed, on March 21, 2006, the FTCs East Central Region (Cleveland, Ohio office),
initiated a detailed inquiry to determine whether the Company engaged in unfair or deceptive acts
or practices in violation of the Federal Trade Commission Act in connection with the Companys
advertising and promotional activities for several of the Companys nasal and oral cold remedy
products, including Zicam Cold Remedy Nasal Gel and Zicam Cold Remedy Swabs the products that
are the subject of the FDA warning letter. As part of the inquiry, the FTC requested and received,
among other things, the Companys documentation regarding product safety, including side effects,
adverse events and consumer complaints, and efficacy, including the scientific proof establishing
the efficacy claims made by the Company. Following a nearly year-long process, during which the
Company provided the FTC with over 65,000 pages of documentation
and met with the FTC to discuss the information, on March 5, 2007, the FTC notified the Company
that it was is no longer pursuing the inquiry.
Total Pending Product Liability Lawsuits. As of January 25, 2010, the Company is aware of 117
pending product liability lawsuits against the Company, involving 530 plaintiffs. Of those cases,
73 are pending in Federal court and 44 are pending in State court (See Item 3 of our Annual Report
on Form 10-K for the fiscal year ended March 31, 2009 for additional information on pending cases).
Cases since September 30, 2009 (Pending in Federal Courts). The Company is aware of the
following pending federal court cases, covering 56 named plaintiffs, which were filed against
and/or served on the Company between September 30, 2009 and January 25, 2010:
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Personal Injury:
Date Filed | United States District Court | Lead Plaintiff | ||
10/1/09
|
Middle District, Florida | Luten | ||
10/1/09 | Western District, Oklahoma | Wyatt | ||
10/9/09 | Southern District, Texas | Mikolas | ||
10/16/09 | Arizona | Vaughan | ||
10/20/09 | Arizona | Shartle | ||
10/26/09 | Arizona | Marion | ||
10/26/09 | Arizona | McCluskey | ||
10/29/09 | Oregon | Smith | ||
11/6/09 | Northern District, Illinois | Wright | ||
11/9/09 | Idaho | Fargo | ||
11/17/09 | Minnesota | Bridenstine | ||
11/19/09 | Hawaii | Kwiatkowski | ||
11/19/09 | Hawaii | Wilcox | ||
11/20/09 | Rhode Island | Dugas | ||
11/20/09 | Northern District, California | Neilson | ||
11/24/09 | Central District, California | Kersanty | ||
12/2/09 | Eastern District, New York | Woods | ||
12/7/09 | Eastern District, Tennessee | Reich | ||
12/14/09 | Eastern District, Tennessee | George | ||
12/16/09 | Florida | Davis | ||
12/23/09 | Southern District, Indiana | Goodall | ||
12/23/09 | Middle District, Florida | Lewis | ||
12/30/09 | New York | Catalano | ||
1/8/10 | Northern District, Texas | McDaniel | ||
1/8/10 | Northern District, Texas | Rosenberg | ||
1/15/10 | Montana | Miller | ||
1/21/10 | Arizona | Poole |
Putative Class Actions for Consumer Fraud:
Date Filed | United States District Court | Lead Plaintiff | ||
10/12/09 | Northern District, Ohio | Suhr | ||
11/17/09 | Northern District, Illinois | Webb |
Multi-District Litigation Matters. As previously disclosed, the Company filed a motion to
consolidate and transfer all of the personal injury and consumer fraud matters, including any
purported class actions, pending against the Company in federal court to the District of Arizona,
pursuant to federal multidistrict litigation (MDL) procedures. On October 9, 2009, the Judicial
Panel on Multidistrict Litigation (Panel) established MDL No. 2096 In Re: Zicam Cold Remedy
Marketing and Sales Practices Litigation
and centralized the consumer fraud and personal injury actions that involve common questions
of fact before a federal court in the District of Arizona. With one exception, the Panel
transferred all of the consumer fraud cases at issue in the original MDL request. The Panel also
began the MDL transfer process for the remaining consumer fraud and personal injury matters pending
against the Company in federal courts across the country. The plaintiffs in these remaining cases
will have the opportunity to object to the MDL transfer of their specific case. The Panel
determined that the case of Hohman et. al. vs. Matrixx Initiatives, Inc. et. al. (Northern District
of Illinois) did not involve sufficient common questions of fact to allow for consolidation and
transfer to the MDL at the present time. The Company expects any federal consumer fraud and
personal injury matters filed in the future to be transferred and consolidated pursuant to the MDL
transfer process, subject to the plaintiffs opportunity to object.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Cases since September 30, 2009 (Pending in State Courts). The Company is aware of the
following state court cases, covering 241 named plaintiffs, which were filed against and/or served
on the Company between September 30, 2009 and January 25, 2010:
Personal Injury:
Date Filed | Court | Lead Plaintiff | ||
10/5/09 | Marin County, California | Nissim | ||
10/7/09 | Lahaina County, Hawaii | Welsh | ||
10/16/09 | San Francisco County, California |
Bobrink | ||
10/19/09 | Broward County, Florida | Bunin | ||
10/20/09 | King County, Washington | Touhey | ||
10/30/09 | Maricopa County, Arizona | Ambrose | ||
10/30/09 | Maricopa County, Arizona | Glasser | ||
11/24/09 | Dallas County, Texas | Touhey | ||
11/25/09 | Los Angeles County, California | Collins | ||
11/30/09 | Davis County, Utah | Olsen | ||
12/21/09 | St. Clark County, Illinois | Bollone | ||
12/22/09 | Merced County, California | Alexander | ||
12/23/09 | Maricopa County, Arizona | Kimball | ||
12/24/09 | Contra Costa County, California |
Bradley | ||
12/28/09 | Okeechobee County, Florida | Everett | ||
12/29/09 | Maricopa County, Arizona | Johnson | ||
12/31/09 | Madison County, Illinois | Glisson | ||
12/31/09 | Tarrant County, Texas | Nicholas | ||
1/5/10 | Kootenai County, Idaho | Campbell | ||
1/5/10 | Kootenai County, Idaho | Cooper | ||
1/14/10 | Kootenai County, Idaho | Moore | ||
1/14/10 | Durham County, North Carolina | Magers | ||
1/19/10 | Maricopa County, Arizona | Baietty | ||
1/19/10 | Maricopa County, Arizona | Colello | ||
1/19/10 | Maricopa County, Arizona | Remming | ||
1/20/10 | Maricopa County, Arizona | Alex | ||
1/20/10 | Maricopa County, Arizona | Marshall | ||
1/25/10 | Maricopa County, Arizona | Viviani |
Putative Class Action for Consumer Fraud: None.
Cases Dismissed Subsequent to September 30, 2009 (Federal Courts). As previously disclosed on
the Companys Form 10-Q filed for the period ending September 30, 2009, the case of Carter vs.
Matrixx Initiatives, Inc. et al., filed on February 29, 2008 and pending in the Federal District
Court for the Middle District of Louisiana, was dismissed on October 26, 2009; however, the
plaintiffs appealed the dismissal and the case is now pending in United States Court of Appeals for
the Fifth Circuit, New Orleans, Louisiana. There were no other federal court cases pending against
the Company dismissed subsequent to September 30, 2009.
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(Unaudited)
Cases Dismissed Subsequent to September 30, 2009 (State Courts). The following state
court case against the Company, which was a personal injury lawsuit, was dismissed subsequent to
September 30, 2009:
Date Filed | Court | Named Plaintiff | Date Dismissed | |||
8/14/09 | Stanislaus County, California | McDaniel | 10/15/09 |
Settlement with Certain Claimants. During fiscal 2010, the Company entered into
settlement agreements with approximately 65 claimants who had previously threatened to file
lawsuits against the Company. The individual settlement amounts were immaterial and were within our
litigation reserves (see Product Liability Litigation Reserves below). The settlement documents
for all claimants acknowledge that Matrixx denies any liability to them. Those who are eligible and
elect to participate in the settlement program dismiss their claims with prejudice and provide
written releases of their claims against the Company in return for their participation.
Potential Claimants. In addition to the claimants involved in the settlements described
above, approximately 500 potential claimants have advised the Company by means of a written notice
that they are considering filing a lawsuit against, or are interested in pursuing settlement
negotiations with, the Company. The Company is in the process of determining the nature or basis
of their purported claims and when or if these potential claimants will ultimately file one or more
lawsuits against the Company.
Plaintiffs law firms may continue to solicit potential claimants and, as a result, additional
lawsuits may be filed against us. We cannot predict the outcome of the litigation, but we will
defend ourselves vigorously. If any liability were to result from one or more of these or future
lawsuits, we believe our financial results could be materially impacted. Our financial results also
could be materially impacted by the adverse publicity that may result from the lawsuits.
Litigation Reserves. As of December 31, 2005, the Company established a reserve of $1.3
million for any future payment of settlement or losses related to the cold remedy litigation. This
reserve was based on certain assumptions, some of which are described below, and was the amount,
excluding defense costs, the Company believed it could reasonably estimate would be spent to
resolve the remaining cases that had been filed or to resolve matters with the potential claimants.
Some of the significant factors that were considered in the establishment of the reserve were as
follows: the actual costs incurred by the Company up to that time in resolving several claims; the
development of the Companys legal defense strategy; settlements; and the number of cases that
remained pending against the Company. There are events, such as the dismissal of any of the cases,
the filing of new lawsuits, threatened claims, the outcome of a trial, rulings on pending
evidentiary motions, or adverse publicity that may have an impact on the Companys conclusions as
to the adequacy of the reserve for the pending product liability lawsuits. The Company maintained a
$740,000 reserve balance as of December 31, 2009. However, following the Companys receipt of the
FDAs warning letter and the resulting increase in the number of product liability lawsuits
being filed, the amounts that may be spent to resolve matters with actual and potential claimants
could be higher than our reserve. The Company will continue to review the product liability
situation and will adjust the litigation reserve in the future when we can reasonably estimate
changes in the amounts and likelihood of resolving the claims. Litigation is inherently
unpredictable and excessive verdicts do occur. Although we believe we have substantial defenses in
these matters, we could, in the future, incur judgments or enter into settlements of claims that
could have a material adverse effect on our results of operations in any particular period.
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Product Recall Related Litigation
In June 2008, the Company recalled certain lots of its Zicam
ChewCapstm, RapidMelts® and RapidMelts +C
products. The recall was issued initially in response to a recall by Capricorn. See Note 6 -
Product Recalls for details regarding the product recall. For the fiscal year ended March 31,
2009, the Company incurred and reserved for recall-related expenses of approximately $2.0 million.
The reserve was based on estimates associated with the expected levels of affected product at
retail, costs to replace the product, and other costs related to the recall of product lots
manufactured by Capricorn. The charge was recorded in selling, general and administrative expense
and reduced operating income by an equal amount. On September 2, 2008, the Company filed suit
against Capricorn in the United States District Court for the District of Arizona, Case No.
2:08-CV-01615- SRB (the Arizona Action), to recover damages arising from the recall.
In response to the Companys filing of the Arizona Action, on November 21, 2008,
Capricorn filed suit against the Company in the United States District Court for the District of
Delaware, Case No. 1:08-CV-00873-JJF (the Delaware Action), alleging that the Company infringed
Capricorns patent and trademark rights and breached its confidentiality obligations. Capricorn
sought damages and injunctive relief.
On October 27, 2009, the Company agreed to terms to settle the Arizona Action and the
Delaware Action. In connection with the settlement, Capricorn paid the Company $350,000 as
reimbursement for recall-related expenses and granted the Company a limited license to certain of
Capricorns patents. In addition, the Company will retain ownership of the RapidMelts trademark for
its products, although Capricorn will be able to use the mark RapidMelt for its non-cold remedy
products now, and beginning after a period of three years from the settlement date, in connection
with cold remedy products.
Intellectual Property Protection
On December 10, 2008, GMP Technologies, LLC (GMP) filed suit against the Company in the
United Sates District Court for the Northern District of Illinois (Case No. 08CV7077) in response
to a major retailer removing from its store shelves a private label swab product produced for the
retailer by GMP. The complaint, as amended effective May 11, 2009, alleges that the retailer
discontinued sales of the private label swab product after having been made aware of the Companys
patents relating to Zicam Cold Remedy Swabs (Swab Patents), and that the Company acted in bad
faith in informing the retailer of the Swab Patents. GMP seeks to have the court determine that
GMPs product does not infringe the Swab Patents and to have the Companys Swab Patents declared
invalid. In addition, GMP seeks damages for its losses related to the retailers cancellation of
the private label product following the Companys providing notice to the retailer of the Swab
Patents. The Company believes GMPs allegations are without merit and intends to defend itself
vigorously. The Company also has asserted a counterclaim alleging that GMP is infringing the Swab
Patents.
Securities Litigation Matters
Two class action lawsuits were filed in April and May 2004 against the Company, our
previous President and Chief Executive Officer, Carl J. Johnson, and William J. Hemelt our
President and Chief Executive Officer, alleging violations of federal securities laws. On January
18, 2005, the cases were consolidated and the court appointed James V. Siracusano as lead
plaintiff. The amended complaint also includes our Vice President of Research and Development,
Timothy L. Clarot, as a defendant and was filed March 4, 2005. The consolidated case is Siracusano,
et al. vs. Matrixx Initiatives, Inc., et al., in the United States District Court, District of
Arizona, Case No. CV04-0886 PHX DKD. Among other things, the lawsuit alleges that between October
2003 and February 2004, we made materially false and misleading statements regarding our Zicam Cold
Remedy products, including failing to adequately disclose to the public the details of allegations
that our products caused damage to the sense of smell and of certain of the
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(Unaudited)
product liability lawsuits described above. We filed a motion to dismiss this lawsuit and, on
March 8, 2006, the Company received an Order dated December 15, 2005 granting the motion to dismiss
the case, without prejudice. On April 3, 2006, the plaintiff appealed the Order to the United
States District Court of Appeals, Ninth Circuit, and the parties made oral arguments to the Ninth
Circuit Court on June 9, 2009. On October 28, 2009, the Ninth Circuit Court issued its opinion.
The Ninth Circuit reversed the decision of the United States District Court, District of Arizona,
which had dismissed the case. On December 23, 2009, the Ninth Circuit denied the Companys
petition for rehearing. On January 15, 2010, the Ninth Circuit granted Matrixxs request to stay
the issuance of a mandate while the Company petitions the United States Supreme Court for
certiorari review.
A separate putative class action was filed on July 17, 2009 against the Company; William J.
Hemelt, our President and Chief Executive Officer; Samuel C. Cowley, our Vice President of Business
Development, General Counsel and Secretary; Timothy L. Clarot, our Vice President of Research &
Development; and Carl J. Johnson, our former President and Chief Executive Officer, alleging
violations of federal securities laws. Shapiro et al. vs. Matrixx Initiatives, Inc. et al., in the
United States District Court, District of Arizona, Case No. 2:09-cv-01479-ECV (the Shapiro
action). The lawsuit alleges that the Company and the named officers failed to disclose to the FDA
and to the public information about adverse events regarding the Zicam Cold Remedy nasal gel
products and that the Company and such officers made false and misleading statements regarding the
Companys compliance with FDA regulations. The motion for lead plaintiff and approval of lead
counsel is pending. The Company believes these allegations are without merit and intends to
vigorously defend the lawsuit.
In accordance with and subject to the provisions of the Companys Certificate of
Incorporation, Messrs. Hemelt, Cowley, Clarot and Johnson will be indemnified by the Company for
their expenses incurred in defending each of these lawsuits and for any other losses which they may
suffer as a result of these lawsuits. The Company has submitted each of these matters to its
insurance carriers. If any liability were to result from these lawsuits that is not covered by
insurance, we believe our financial results could be materially impacted.
Shareholder Derivative Lawsuits
On September 11, 2009, a shareholder derivative lawsuit was filed by Timothy Hall, on behalf
of the Company, against all of the Companys current directors and the following current and former
officers of the Company and Carl Johnson. The lawsuit alleges, among
other things, that the officers and directors named in the complaint violated their fiduciary
duties to the Company by (i) misrepresenting the safety of the Zicam Cold Remedy nasal gel
products, (ii) failing to warn consumers that use of the Zicam Cold Remedy nasal products could
result in anosmia and (iii) failing to disclose reports of anosmia to the FDA and otherwise
misrepresenting the Companys compliance with FDA regulations. Timothy Hall v. William J. Hemelt,
et al., United States District Court, District of Arizona.
On September 18, 2009, a shareholder derivative lawsuit was filed by Theodore C. Klatt, on
behalf of the Company, against all of the Companys current directors and the following current and
former officers of the Company, Carl Johnson, Timothy Clarot and
James Marini. The lawsuit alleges, among other things, that the officers and directors named in the
complaint violated their fiduciary duties to the Company by (i) misrepresenting the safety of the
Zicam Cold Remedy nasal gel products, (ii) failing to warn consumers and shareholders that use of
the Zicam Cold Remedy nasal products could result in anosmia and (iii) failing to disclose reports
of anosmia to the FDA and otherwise misrepresenting the Companys compliance with FDA regulations.
Theodore C. Klatt v. William J. Hemelt, et al., United States District Court, District of Arizona.
On October 14, 2009, the parties filed a stipulation to transfer the Klatt action and
consolidate it with the Hall action. On November 4, 2009, the stipulation was granted. On January
19, 2010, the Company moved for a stay of the consolidated derivative action pending the outcome of
the Shapiro action, and that motion is pending.
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On November 20, 2009, a shareholder derivative lawsuit was filed by Bette-Ann Liguori, on
behalf of the Company, against all of the Companys current directors and certain of their spouses,
and the following current and former officers and directors of the Company and certain of their
spouses: Carl Johnson, Timothy Clarot, Timothy Connors, Lynne Romero, Michael Voevodsky, James
Marini, and Edward Faber. The lawsuit alleges, among other things, that the officers and directors
named in the complaint violated their fiduciary duties to the Company by (i) misrepresenting the
safety of the Zicam Cold Remedy nasal gel products, (ii) failing to warn consumers and shareholders
that use of the Zicam Cold Remedy nasal products could result in anosmia and (iii) failing to
disclose reports of anosmia to the FDA and otherwise misrepresenting the Companys compliance with
FDA regulations. Liguori v. Egan, et al., Superior Court of the State of Arizona, County of
Maricopa. On January 19, 2010, the Company filed a motion to stay the action pending the outcome of
the Shapiro action or, in the alternative, pending the outcome of the consolidated derivative
action filed in Federal court, and that motion is pending.
In accordance with and subject to the provisions of the Companys Certificate of
Incorporation, each of the named directors and current and former officers will be indemnified by
the Company for their expenses incurred in defending each of these lawsuits and for any other
losses that they may suffer as a result of these lawsuits.
Related Legal Matters Informal Inquiries
On June 19, 2009, the Company received an informal inquiry from the Securities and Exchange
Commission (SEC) requesting certain documents and information relating to the FDA warning letter.
The Company provided requested documents to the SEC and met with SEC representatives to provide
additional information. By letter dated November 24, 2009, the SEC advised the Company that it had
completed its investigation and does not intend to recommend any enforcement action to the
Commission.
The Company has received an inquiry from several county district attorneys in one state regarding
enforcement of certain consumer protection statutes involving our product packaging size. The
Company is cooperating fully, but is unsure about what actions may be taken. The matter could
result in fines or litigation over the Companys alleged non-compliance with the applicable package
size statutes. Based on information available to the Company, the Company does not believe this
matter would have a material adverse impact on its operations, liquidity or cash flow.
Legal Expense
The Company is incurring significant legal expense for the lawsuits referenced above. For the
quarter ended December 31, 2009, legal expense for product liability litigation, responding to the
FDA warning letter, and the SEC informal inquiry, and litigating claims with one of its former
manufacturers was approximately $1.8 million, compared to $439,000 for the quarter ended December
31, 2008. For the nine months ended December 31, 2009 legal expense for product liability
litigation, responding to the FDA warning letter and the SEC informal inquiry, and litigating
claims with one of its former manufacturers was approximately $4.7 million, compared to $1.9
million for the nine months ended December 31, 2008. Although the amount of product liability
legal expense had been declining in recent quarters, it has significantly increased as a result of
the numerous lawsuits filed since the Companys receipt of the FDAs warning letter.
8. Goodwill and Asset Impairment Charges
Intangibles consist of goodwill (which is the excess of purchase price over the net assets of
businesses acquired), intellectual property, and trademarks. Goodwill is not amortized but
finite-lived intangibles are amortized using the straight-line method. The Companys $15.0 million
in goodwill was related to the Companys acquisition of the 40% Zicam, LLC interest acquired from
Zensano, Inc. in
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December 2001. The business of Zicam, LLC at that time was to develop and produce homeopathic
nasal gel products based on a proprietary zincum gluconium delivery system.
Goodwill and certain other assets must be tested upon a triggering event to identify potential
impairments and the amount of any impairment loss. In connection with the Companys receipt of the
FDA warning letter and the resulting recall of our nasal Cold Remedy products, the Company
concluded a triggering event had occurred and performed an impairment assessment as of June 30,
2009. The Company performed an assessment within the fair value hierarchy, in which it evaluated,
among other things, the impact of the foregoing events on the markets perception of the value of
the Companys stock, the expected increase in legal activity, and the expected decline of Zicam
product sales. The Company first determined the fair value using two valuation methodologies: (a)
the income approach, which uses discounted cash flow projections, and (b) the market value
approach, which uses quoted market prices. The assessment resulted in the Company recording a
charge of $23.9 million, in the quarter ended June 30, 2009, to reduce the carrying amounts of
goodwill and other tangible and intangible assets to fair value.
The determination of fair value requires the use of significant judgment and estimates about
assumptions that management believes were appropriate in the circumstances, although it is
reasonably possible that actual performance will differ from these assumptions. The most
significant assumptions include those relating to our ability to sell nasal gel Cold Remedy
products in the future, our ability to introduce new nasal products, sales expectations of our
other swab products, and market trading multiples for the Company. These charges include: a
non-cash impairment charge of $15.0 million related to the goodwill associated with the zincum
gluconium nasal gel products; a non-cash impairment charge of $3.9 million to write-down the
inventory value of nasal Cold Remedy products and other nasal application inventory; an impairment
charge of $4.3 million ($3.4 million of which is non-cash) for a new swab manufacturing line that
was recently built to produce our nasal swab product; and $616,000 for the unamortized amount of
our Cold Remedy nasal gel patent. The charge totaled approximately $23.9 million ($14.6 million
after-tax) and was included in Impairment of Goodwill and Other Assets in the accompanying
statement of operations for the nine months ended December 31, 2009.
The changes in the carrying amount of goodwill and certain other assets measured at fair value
on a nonrecurring basis during the nine months ended December 31, 2009 were as follows:
Quoted | ||||||||||||||||||||
Prices in | Significant | |||||||||||||||||||
Active | Other | Significant | ||||||||||||||||||
Markets for | Observable | Unobservable | Total | |||||||||||||||||
Identical Assets | Inputs | Inputs | Gains | |||||||||||||||||
Description | December 31, 2009 | (Level 1) | (Level 2) | (Level 3) | (Losses) | |||||||||||||||
Goodwill |
$ | 0 | $ | 0 | ($15,039,836 | ) | ||||||||||||||
Deposits |
$ | 0 | $ | 0 | ($4,283,685 | ) | ||||||||||||||
Patent |
$ | 0 | $ | 0 | ($615,877 | ) |
In addition to the impairment charges associated with our nasal Cold Remedy products discussed
above, we recorded a charge of $420,000 to write down the value of patents and certain other assets
associated with the development of an oral care product developed to reduce tartar. We had been in
discussions with potential partners to help commercialize the product but have been unable to find
another entity to launch this product. We do not anticipate launching this product on our own and
determined the assets associated with the products development were impaired. This charge was
recorded in research and development expense.
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MATRIXX INITIATIVES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
9. Financial Instruments Fair Value
The Company follows the FASB guidance that defines fair value, establishes a framework for
measuring fair value, and expands disclosures about fair value measurements for all financial
assets and liabilities.
Cash, cash equivalents, accounts payable and accounts receivable: Carrying amounts approximate
fair value because of the short maturity of those instruments.
Certificates of Deposit: The Company purchases certificates of deposit from FDIC insured
institutions at or below the FDIC insured limits and all certificates of deposit have maturities of
one year or less. The purchase price of each certificate of deposit is treated as its fair market
value on the purchase date. We account for these certificates of deposit at amortized costs and
they are held to maturity.
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
Overview
The Company develops, markets and sells innovative, over-the-counter (OTC) healthcare products
with an emphasis on those that utilize unique, novel and/or proprietary delivery systems that
provide consumers with Better Ways to Get Better®. The Company currently markets its products
within the U.S. $4.0-$5.0 billion overall cough and cold category at retail. Our Zicam products are
sold in the cold remedy, allergy/sinus, cough and multi-symptom relief market groups of the overall
cough and cold category. The Zicam Cold Sore and Healthy Z-ssentials products are also part of the
cough/cold category. A mix of our products is currently available at all of the major food, drug,
and mass merchant retailers.
Most of the products we market are seasonal in nature, and sales at retail generally increase
as the incidence of colds and flu rises. We record sales when products are shipped from our
warehouse facilities to customers. During the July through September quarter, the Companys sales
volume is primarily affected by retailers stocking our products and ordering displays to prepare
for the upcoming cough and cold season. Additional sales (re-orders) to retailers are highly
dependent upon the incidence of illness within the population. Retail sales of our products are
highest during the cough and cold season, which usually runs from October through March. We
increase our advertising campaigns to coincide with the cough and cold season and generally realize
higher advertising expense in the October through March time periods. Because of the seasonality of
our business, results for any single quarter are not necessarily indicative of the results that may
be achieved for the full fiscal year.
On June 16, 2009 the Company received a warning letter from the Food and Drug Administration
(the FDA) about two of its Zicam products, specifically Zicam Cold Remedy Nasal Gel and Zicam
Cold Remedy Swabs. The FDA referred to complaints it had received of smell loss, also known as
anosmia, associated with these products and asserted that the Company is in violation of FDA
regulations by failing to file a new drug application for its Zicam Cold Remedy Nasal Gel and Zicam
Cold Remedy Swabs and that those products are misbranded under FDA regulations for failing to
adequately warn of the risk of smell loss. Zicam Cold Remedy oral products and our other products
in the Zicam Allergy/Sinus, Cough and Multi-symptom lines were not included in the letter.
Although the Company disagrees with the FDAs allegations, the Company has cooperated with the
FDA and recalled Zicam Cold Remedy Swabs and Zicam Cold Remedy Nasal Gel from the market. Consumer
safety is and has always been the Companys top priority and the Companys position is supported by
the cumulative science and has been confirmed by a multi-disciplinary panel of scientists. It is
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well understood in the medical and scientific communities that one of the most common causes
of anosmia is the common cold, which Zicam Cold Remedy intranasal gel products are taken to treat
(see Note 6-Product Recalls and Withdrawals and Note 7-Legal Proceedings for more information
on the Companys position with respect to the FDA warning letter). Given the enormous number of
doses sold and colds treated, there is no reason to believe the rate of complaints of anosmia
received is more than what would be expected in the general population. Nevertheless, in October
2009, the FDA advised the Company that it was unwilling to reverse its position. The FDA warning
letter has had a material adverse impact on our business. The recall of two of our best-selling
products required us to record a reserve for the recall and take impairment charges.
Zicam Cold Remedy Nasal Gel and Zicam Cold Remedy Swabs constituted approximately 40% of the
Companys net sales in fiscal 2009. Our goal is to convert consumers that used our nasal Cold
Remedy products to our oral Cold Remedy offerings. Our promotional and marketing support during the
2009/2010 cold season has primarily focused on Zicam oral Cold Remedy products. Due to the
foregoing uncertainties, the Company withdrew its original sales and earnings guidance for fiscal
2010. The Company is now executing operating plans that reflect fiscal 2010 revenue in the $68
million to $72 million range. In addition, due to the marketing and promotional support for the
brand during the cold season and the quarterly variations in sales, the Company expects to incur a
sizable net loss in the fiscal fourth quarter.
The Company introduced eight of its Zicam products for retail sales in Canada during the
fiscal quarter ended September 30, 2008. The Company decided to withdraw the eight products from
the Canadian marketplace and is focusing the Companys marketing efforts wholly on U.S. sales. The
withdrawal was initiated during the quarter ended September 30, 2009, and the Company recorded
approximately $1.6 million to reserve for withdrawal charges and fees. The $1.6 million reserve was
based on estimates of product at retail and costs to return the items to our distribution partner.
In addition, the Company recorded a charge of $423,000 to write-down the inventory of Canadian
products.
Certain information is set forth below for our operations, expressed in thousands of dollars
and as a percentage of net sales, for the periods indicated:
3 Months Ended December 31, | 9 Months Ended December 31, | |||||||||||||||||||||||||||||||||||||||
$000s | 2009 | % NS | 2008 | % NS | 2009 | % NS | 2008 | % NS | ||||||||||||||||||||||||||||||||
Net Sales |
$ | 28,463 | 100 | % | $ | 38,702 | 100 | % | $ | 61,006 | 100 | % | $ | 80,842 | 100 | % | ||||||||||||||||||||||||
Marketing |
$ | 8,643 | 30 | % | $ | 13,209 | 34 | % | $ | 14,473 | 24 | % | $ | 19,840 | 25 | % | ||||||||||||||||||||||||
Sales |
$ | 1,374 | 5 | % | $ | 1,025 | 3 | % | $ | 2,847 | 5 | % | $ | 2,913 | 4 | % | ||||||||||||||||||||||||
General & Administrative |
$ | 2,293 | 8 | % | $ | 4,197 | 11 | % | $ | 18,659 | 31 | % | $ | 11,474 | 14 | % | ||||||||||||||||||||||||
Litigation |
$ | 1,758 | 6 | % | $ | 439 | 1 | % | $ | 4,727 | 8 | % | $ | 1,941 | 2 | % | ||||||||||||||||||||||||
Total Selling, General,
and Administrative |
$ | 14,068 | 49 | % | $ | 18,870 | 49 | % | $ | 40,706 | 67 | % | $ | 36,168 | 45 | % | ||||||||||||||||||||||||
Research & Development |
$ | 543 | 2 | % | $ | 797 | 2 | % | $ | 1,897 | 3 | % | $ | 2,551 | 3 | % | ||||||||||||||||||||||||
Asset Impairments |
$ | 0 | 0 | % | $ | 0 | 0 | % | $ | 23,867 | 39 | % | $ | 0 | 0 | % | ||||||||||||||||||||||||
Net sales for the fiscal third quarter ended December 31, 2009 decreased 26% to $28.5 million
compared to $38.7 million in the quarter ended December 31, 2008. The lower sales comparison is
primarily due to the loss of our nasal Cold Remedy products. However, for the quarter ended
December 31, 2009, unit sales of our other Zicam products increased 19%, lead by a 62% increase in
Cold Remedy oral products, compared to the quarter ended December 31, 2008.
Net income for the quarter ended December 31, 2009 was $3.8 million, or $0.41 per diluted
share, compared to net income of approximately $4.8 million, or $0.50 per diluted share, for the
quarter ended December 31, 2008. Legal expense (for litigation and regulatory matters) increased
approximately $1.3 million to approximately $1.7 million during the quarter, compared to the prior
year. We anticipate future legal expense will be between $1.5 million and $2.0 million per quarter.
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For the nine months ended December 31, 2009, net sales decreased 25% to $61.0 million, versus
$80.8 million in the nine months ended December 31, 2008. The lower sales comparison is primarily
due to the loss of our Cold Remedy nasal products. However, for the nine months ended December 31,
2009, unit sales of our other Zicam products increased 13%, led by a 53% increase in Cold Remedy
oral products, compared to the nine months ended December 31, 2008.
The Company incurred a net loss for the nine months ended December 31, 2009 of approximately
$13.9 million, or $(1.51) per diluted share, compared to net income of $10.7 million, or $1.12 per
diluted share, for the nine months ended December 31, 2008. This $24.6 million income decline
includes pre-tax charges associated with the FDA warning letter and recall of our nasal Cold Remedy
products. The charges include $9.0 million to reserve for recall related costs and $23.9 million
for goodwill and other asset impairments in the quarter ended June 30, 2009. Net income in the
prior years nine months ended December 31, 2008 included a $2.0 million reserve for recall related
charges associated with the recall of certain lots of Zicam Cold Remedy RapidMelt and ChewCap
products.
We expect future operating results to be significantly affected by the cold season, level of
sales, the timing and amount of our advertising, research and development expenses, and the timing
and amount of expenses incurred in defense of product liability and securities litigation matters.
Expenditures for advertising and research and development will vary by quarter throughout the year
and could be significantly different in future periods than the amounts incurred in the same period
in earlier years. We expect that advertising expenses will be highest during the cold season (third
and fourth fiscal quarters). We anticipate quarterly operating results will continue to vary along
with the seasonality of sales and the level of marketing and legal expense.
The Companys management reviews several key indicators in evaluating overall performance.
Historically, management has reviewed the indicators below; however, due to the recall of our nasal
Cold Remedy products, the indicators below may not be indicators of future performance:
1) | We compare our year-to-date sales and net income performance against our stated annual goal for each. Due to the FDA action, we withdrew our previous guidance. The Company is now executing operating plans that reflect fiscal 2010 revenue in the $68 million to $72 million range. In addition, the Company anticipates spending approximately $10 million on marketing activities during the quarter ending March 31, 2010 to further invest in our oral Cold Remedy products. Due to the high level of marketing support planned for the fourth quarter relative to anticipated sales, the Company expects to incur a sizable loss in that quarter. | ||
2) | We monitor our share of the cough and cold market because increased consumer purchases of our products are an indicator of growth. Due to the recall and withdrawal from the market of our nasal Cold Remedy products, we are now focusing on consumer consumption of our oral Cold Remedy products. We believe this focus will allow us to better evaluate the strength of the brand as well as conversion to oral Cold Remedy products. For the 12 weeks ended December 27, 2009, retail unit sales of our oral Cold Remedy products (as measured by three outlet syndicated scanner data, not including our largest customer, Wal-Mart and excluding nasal Cold Remedy) increased approximately 16% over the comparable period in the previous year, while the entire cough and cold category increased approximately 5% over the same period. | ||
3) | We measure our ability to maintain strong gross margins on our products. During the nine months ended December 31, 2009, we realized an average gross margin of 72%, compared to the 69% average gross margin achieved in the nine months ended December 31, 2008. Gross margins on our existing products vary between 55% and 80%. The higher average gross margin realized in the period was due to the mix of products sold and a lower average cost per unit sold. | ||
4) | We evaluate our operating performance by reviewing, over time, our ability to decrease operating expenses as a percentage of net sales. We evaluate our ability to control operating expenses on an annual basis due to the seasonal fluctuations in quarterly net sales. If we realize a lower level of sales in the future due to an inability to sell our nasal Cold Remedy products, our operating expense as a percentage of sales will increase. |
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5) | We review the distribution and mix of our products by key national retailers. Our ten largest retail customers account for a substantial majority of our annual sales, and we encourage our largest customers to carry a mix of our highest-selling products. Retailers generally reset their cough and cold sections during the third calendar quarter of each year, at which time they add or discontinue products. During the past year, a number of our largest customers began selling store brand versions of certain Zicam products. We have seen the number of store brand products significantly increase going into this years cold season. Store brand products are generally sold at a substantial discount to branded products. An increase in store brand sales could adversely affect our mix of products at retail as well as our future sales levels. |
Critical Accounting Policies and Estimates
Our consolidated financial statements and accompanying notes have been prepared in accordance
with U.S. Generally Accepted Accounting Principles (GAAP) applied on a consistent basis. The
preparation of financial statements in conformity with GAAP requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, the disclosure of
contingent liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting periods.
We regularly evaluate the accounting policies and estimates that we use to prepare our
consolidated financial statements. In general, managements estimates are based on historical
experience, information from third party professionals, and various other assumptions that are
believed to be reasonable under the facts and circumstances. Actual results could differ from those
estimates made by management.
We believe that our critical accounting policies and estimates include the accounting for
intangible assets and goodwill, accounting for income taxes, revenue recognition, accounting for
sales returns and allowances, accounts receivable and allowance for doubtful accounts, accounting
for legal contingencies, and accounting for product recalls.
Intangible Assets and Goodwill: We recorded approximately $15.0 million in goodwill in connection
with the acquisition of the 40% Zicam, LLC interest acquired from Zensano, Inc. in December 2001.
Goodwill must be tested when a triggering event occurs or at least annually to identify a potential
impairment and the amount of any impairment loss. Our annual valuation of goodwill (as of September
1, 2008) was completed in January 2009 and no impairment was identified. In connection with the
Companys receipt of the FDA warning letter and the resulting recall of our Cold Remedy Nasal Gel
and Cold Remedy Swabs, as well as the associated negative publicity, impact on the markets
perception of the value of the Companys stock, higher legal activity, and the expected decline of
Zicam product sales, the Company performed an impairment assessment as of June 30, 2009, which
resulted in the Company recording a charge of $15.0 million to reduce the book value of goodwill.
The determination of fair value requires the use of significant judgment and estimates about
assumptions that management believes were appropriate in the circumstances, although it is
reasonably possible that actual performance will differ from these assumptions. The most
significant assumptions included those relating to our ability to sell nasal gel Cold Remedy
products in the future, our ability to introduce new nasal products, sales expectations of our
other swab products, and market trading multiples for the Company. These charges include: a
non-cash impairment charge of $15.0 million related to the goodwill associated with the acquisition
of zincum gluconium nasal gel products and $616,000 for the unamortized amount of our Cold Remedy
nasal gel patent. These charges were recorded in the quarter ended June 30, 2009 and are reflected
in asset impairments in our Consolidated Statements of Operations for the nine months ended
December 31, 2009. In addition, due to our inability to commercialize our oral care product, we
recorded a charge of $420,000 to write down the value of patents and certain other assets
associated with the development of an oral care product developed to reduce tartar. We do not
anticipate launching this product on our own and determined the assets associated with the
products development were impaired. This charge was recorded in research and development expense.
Income Taxes. The provision for, or benefit from, income taxes is calculated using the asset
and liability method, under which deferred tax assets and liabilities are recorded based on the
difference between the financial statement and tax basis of assets and liabilities using enacted
tax rates in effect for the year in which the differences are expected to reverse. The Company has
recorded deferred tax assets
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associated with tax loss carrybacks and carryforwards. These deferred tax asset amounts
increased during the fiscal 2010 nine-month period as a result of the Companys current operating
loss position. Deferred tax assets are evaluated on a quarterly basis to determine whether a
valuation allowance is required. The Company assesses whether a valuation allowance should be
established based on its determination of whether it is more likely than not that some portion or
all of the deferred tax assets will not be realized. The ultimate realization of deferred tax
assets depends primarily on the generation of future taxable income during the periods in which
those temporary differences become deductible. Judgment is required in determining the future tax
consequences of events that have been recognized in the Companys consolidated financial statements
and/or tax returns. Differences between anticipated and actual outcomes of these future tax
consequences could have a material impact on the Companys consolidated financial position or
results of operations.
Revenue Recognition: The Company recognizes revenue from product sales when the risks and
rewards of ownership have transferred to the customer, which is considered to have occurred upon
shipment of the finished product to retailers. Sales incentives, promotional allowances, and
returns are estimated and recognized at the date of shipment based upon historical activity and
current agreements with customers. The Company evaluates these estimates on a monthly basis and
revises them as necessary.
Sales Returns and Allowances: The estimate for sales allowances reflects in-store promotional
programs with our retail customers. Such programs include temporary price reductions, coupons, and
rebates. We record the estimated cost for those programs when they occur. We review the allowances
provision at least quarterly and adjust the reserve amounts if actual results differ materially
from our estimate.
The estimate for product returns reflects our historical experience of sales to retailers and
is reviewed regularly to reflect estimated product returns. We record a returns provision of 3.5%
of gross sales for all of our products. We review the return provision at least quarterly and
adjust the reserve amounts if actual product returns differ materially from our reserve percentage.
Additionally, we adjust the returns provision when a determination is made that a product will be
discontinued, either in whole or by certain retailers. Should the actual level of product returns
vary significantly from our estimates, our operating and financial results would be materially
affected. During the quarter ended June 30, 2009, we recorded a $750,000 increase to our return
reserve, in excess of the customary 3.5% of gross sales, for anticipated returns expected in
connection with retailers announced discontinuation of certain products. During the quarter ended
June 30, 2008, we recorded a $1.0 million increase to our return reserve, in excess of the
customary 3.5% of gross sales, for anticipated returns expected in connection with retailers
announced discontinuation of certain products. For the remaining six months ended December 31, 2009
and 2008, we recorded returns provisions at 3.5% of gross sales.
Accounts Receivable and Allowance for Doubtful Accounts: The allowance for doubtful accounts
is the Companys best estimate of the amount of probable credit losses in the Companys existing
accounts receivable. Based on historical performance, the Company records an allowance for doubtful
accounts of 0.02% of gross sales. We review the allowance for doubtful accounts at least quarterly
and adjust the allowance amounts if actual or probable losses differ materially from our reserve
percentage.
Legal Contingencies: We are subject to lawsuits, investigations and claims arising out of the
normal conduct of our business. See Note 7 Legal Proceedings to the Financial Statements for
additional information regarding our pending and threatened litigation and our reserves for product
liability litigation. While we are vigorously defending the Company in these proceedings, the
outcome of these and any other proceedings that may arise cannot be predicted with certainty. The
Company is required to accrue a contingent loss when the loss is deemed probable and reasonably
estimable. The Company maintained a $740,000 reserve balance as of December 31, 2009. However,
following the Companys receipt of the FDAs warning letter and the resulting increase in the
number of product liability lawsuits being filed, the amounts that may be spent to resolve matters
with actual and potential claimants could be higher than our reserve. The Company will continue to
review the product liability situation and will adjust the litigation reserve in the future when we
can reasonably estimate changes in the amounts and likelihood of resolving the claims.
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Product Recalls: For the nine months ended December 31, 2009, the Company recorded a $9.0
million reserve for estimated costs to recall the Cold Remedy Nasal Gel and Cold Remedy Swabs. The
reserve was based on estimates associated with the expected levels of affected product at retail,
costs to return the products, estimates of consumer returns, and other recall-related costs. The
reserve charge is recorded in selling, general and administrative expense in the accompanying
statement of operations for the nine months ended December 31, 2009. We review the reserve at least
quarterly and will adjust the reserve amounts if actual results differ materially from our
estimate.
Results of Operations for the Three Months Ended December 31, 2009 Compared to the Three
Months Ended December 31, 2008
Certain information is set forth below for our operations expressed in dollars and as a
percentage of net sales for the periods indicated:
Three Months Ended December 31, | ||||||||||||||||
2009 | 2008 | |||||||||||||||
Net sales |
$ | 28,462,685 | 100 | % | $ | 38,702,412 | 100 | % | ||||||||
Cost of sales |
7,649,820 | 27 | 11,204,657 | 29 | ||||||||||||
Gross profit |
20,812,865 | 73 | 27,497,755 | 71 | ||||||||||||
Selling, general and administrative |
14,067,533 | 49 | 18,869,536 | 49 | ||||||||||||
Research & development |
543,478 | 2 | 796,996 | 2 | ||||||||||||
Income from operations |
6,201,854 | 22 | 7,831,223 | 20 | ||||||||||||
Interest and other income |
33,553 | | 47,929 | | ||||||||||||
Interest expense |
| | | | ||||||||||||
Income before income taxes |
6,235,407 | 22 | 7,879,152 | 20 | ||||||||||||
Provision for income taxes |
2,409,024 | 9 | 3,127,707 | 8 | ||||||||||||
Net Income |
$ | 3,826,383 | 13 | % | $ | 4,751,445 | 12 | % | ||||||||
Net Sales
Net sales for the three months ended December 31, 2009 were $28.5 million, versus net sales of
$38.7 million for the quarter ended December 31, 2008. The decrease in net sales during the quarter
ended December 31, 2009 is primarily associated with the inability to sell and market our nasal
Cold Remedy products. Unit sales of our other Zicam products increased 19%, lead by a 62% increase
in Cold Remedy oral products. Our average selling price per unit did not change materially versus
the prior year.
Cost of Sales
For the quarter ended December 31, 2009, our cost of sales decreased to $7.6 million, compared
to $11.2 million for the quarter ended December 31, 2008. The decrease was primarily due to the
lower number of units sold. In addition, the average cost per unit sold decreased due to lower unit
product costs for several of our oral Cold Remedy products.
Gross Profit
Gross profit for the three months ended December 31, 2009 was approximately $20.8 million,
compared to gross profit of approximately $27.5 million for the quarter ended December 31, 2008.
The lower gross profit is primarily attributable to the decreased net sales recorded during the
quarter, compared to the prior year. Gross margin for the quarter ended December 31, 2009 was 73%,
compared to 71% in the comparable quarter ended December 31, 2008. The gross margin improvement is
attributable to the lower average unit cost realized in the quarter. Gross margin is affected by
the relative mix of products sold, promotional activity, and changes in product sales prices and
costs.
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Selling, General & Administrative (SG&A)
SG&A expense for the quarter ended December 31, 2009 was approximately $14.1 million, compared
to approximately $18.9 million in the quarter ended December 31, 2008. The decreased SG&A expense
is primarily due to $4.6 million of lower marketing expense. In addition, labor expense decreased
$1.2 million compared to the third quarter of fiscal 2009. Labor expense in the quarter ended
December 31, 2009 included $905,000 of expense associated with the Companys fiscal 2010 retention
plan. Labor expense in the quarter ended December 31, 2008 included $825,000 of expense associated
with the retirement of a senior manager as well as $835,000 for the accrual of 75% of fiscal 2009
annual bonus plan compensation. During the quarter ended December 31, 2009, the Company received
$350,000 as reimbursement related to the recall of certain oral cold remedy products (see Note
7-Legal Proceedings, Product Recall Related Litigation for additional information).
Legal expense associated with litigation and regulatory activities increased approximately
$1.3 million, to approximately $1.8 million during the quarter, compared to the prior year. We
anticipate future legal expense will be between $1.5 million and $2.0 million per quarter (see Note
7-Legal Proceedings for additional information).
Research and Development
Research and development expense was approximately $543,000 in the quarter ended December 31,
2009, versus $797,000 in the quarter ended December 31, 2008. The timing of research and
development spending can vary throughout the year and is not generally associated with our seasonal
sales patterns.
Interest & Other Income
Interest and other income was approximately $34,000 in the quarter ended December 31, 2009
versus approximately $48,000 in the quarter ended December 31, 2008. Despite our higher cash
balances, interest income decreased due to lower interest rates. There was no interest expense in
the quarters ended December 31, 2009 or 2008.
Income Before Income Taxes
Income before income tax for the three months ended December 31, 2009 was approximately $6.2
million, compared to approximately $7.9 million for the quarter ended December 31, 2008. The lower
income is due to the lower level of sales. We expect that income (loss) in future periods will be
significantly impacted by the sales levels of our remaining products, product introductions, and
changes in our advertising, research and development, and legal expenses. We anticipate quarterly
operating results will continue to vary along with the seasonality of sales.
Provision for Income Taxes
We recorded an income tax expense at our combined estimated annual effective tax rate of
approximately 39%. Due to income from operations incurred in the quarter ended December 31, 2009,
we recognized income tax expense of approximately $2.4 million, compared to $3.1 million in the
quarter ended December 31, 2008.
Net Income
Net income was approximately $3.8 million in the quarter ended December 31, 2009, compared to
net income of approximately $4.8 million in the quarter ended December 31, 2008.
Results of Operations for the Nine Months Ended December 31, 2009 Compared to the Nine Months
Ended December 31, 2008
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Certain information is set forth below for our operations expressed in dollars and as a
percentage of net sales for the periods indicated:
Nine Months Ended December 31, | ||||||||||||||||
2009 | 2008 | |||||||||||||||
Net sales |
$ | 61,005,711 | 100 | % | $ | 80,842,362 | 100 | % | ||||||||
Cost of sales |
17,272,795 | 28 | 24,777,855 | 31 | ||||||||||||
Gross profit |
43,732,916 | 72 | 56,064,507 | 69 | ||||||||||||
Selling, general and administrative |
40,706,579 | 67 | 36,168,540 | 45 | ||||||||||||
Research & development |
1,896,620 | 3 | 2,550,505 | 3 | ||||||||||||
Asset Impairments |
23,867,158 | 39 | | | ||||||||||||
Income (Loss) from operations |
(22,737,441 | ) | (37 | ) | 17,345,462 | 21 | ||||||||||
Interest and other income |
119,023 | | 239,915 | | ||||||||||||
Interest expense |
| | | | ||||||||||||
Income (Loss) before income taxes |
(22,618,418 | ) | (37 | ) | 17,585,377 | 22 | ||||||||||
Provision (Benefit) for income taxes |
(8,690,936 | ) | (14 | ) | 6,857,907 | 8 | ||||||||||
Net Income (Loss) |
$ | (13,927,482 | ) | (23 | )% | $ | 10,727,470 | 13 | % | |||||||
Net Sales
Net sales for the nine months ended December 31, 2009 were $61.0 million, versus net sales of
$80.8 million for the nine months ended December 31, 2008. The decrease in net sales is primarily
associated with the inability to sell and market our nasal Cold Remedy products. Unit sales of our
other Zicam products increased 13%, led by a 53% increase in Cold Remedy oral products. The average
unit sales price did not change significantly for the nine month year-over-year comparison. For the
nine months ended December 31, 2009, we recorded a $750,000 increase to our return reserve, in
excess of the customary 3.5% of gross sales, for anticipated returns expected in connection with
retailers discontinuation of certain products. This compares to a $1.0 million increase recorded
in the comparable quarter of the prior year.
Cost of Sales
For the nine months ended December 31, 2009, our cost of sales decreased to $17.3 million,
compared to $24.8 million for the nine months ended December 31, 2008. The decrease was primarily
due to the lower number of units sold. In addition, the average cost per unit sold decreased due to
lower unit product costs for several of our oral Cold Remedy products.
Gross Profit
Gross profit for the nine months ended December 31, 2009 was approximately $43.7 million,
compared to gross profit of approximately $56.1 million for the nine months ended December 31,
2008. The lower gross profit is primarily attributable to the decreased net sales recorded during
the nine month period, compared to the prior year. Gross margin for the nine months ended December
31, 2009 was 72%, compared to 69% gross margin achieved in the comparable period ended December 31,
2008. Gross margin was affected by the relative mix of products sold, which resulted in a lower
average unit cost in the nine months ended December 31, 2009 compared to 2008.
Selling, General & Administrative (SG&A)
SG&A expense for the nine months ended December 31, 2009 increased to approximately $40.7
million from approximately $36.2 million in the nine months ended December 31, 2008. The higher
SG&A expense is primarily due to a $9.0 million charge recorded in the quarter ended June 30, 2009,
to account for estimated costs and charges related to the recall of nasal Cold Remedy products. In
addition, a $1.6 million charge was recorded in the quarter ended September 30, 2009 to account for
costs and charges related to the withdrawal of Zicam products from Canada. During the comparable
nine months of the prior year there was a $2.0 million charge due to a recall of certain oral Cold
Remedy products.
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Marketing expense in the nine months ended December 31, 2009 declined approximately $5.4
million due to a $3.1 million decrease in marketing our allergy/sinus and Xcid antacid products.
The remaining decline is associated with decreased levels of Cold Remedy marketing expense.
Labor expense in the nine months ended December 31, 2009 included $1.4 million of expense
associated with the Companys fiscal 2010 retention plan. There was $825,000 of expense associated
with senior management retirement recorded in the nine months ended December 31, 2008, as well as
$835,000 for a portion of fiscal 2009 bonus amounts We expect SG&A expenses in future periods will
vary largely in relation to the level of our advertising and legal expenditures.
Legal expense for litigation and regulatory matters was approximately $4.7 million for the
nine months ended December 31, 2009, compared to approximately $1.9 million in the nine months
ended December 31, 2008. We anticipate future legal expense will be between $1.5 million and $2.0
million per quarter (see Note 7- Legal Proceedings).
Research and Development
Research and development expense was approximately $1.9 million in the nine months ended
December 31, 2009, versus $2.6 million in the nine months ended December 31, 2008. Due to our
inability to commercialize our oral care product, we recorded a charge of $420,000 during the nine
months ended December 31, 2009 to write down the value of patents and certain other assets
associated with the development of an oral care product developed to reduce tartar. The timing of
research and development spending can vary throughout the year and is not generally associated with
our seasonal sales patterns.
Asset Impairments
In connection with the Companys receipt of the FDA warning letter and the resulting recall of
our Cold Remedy Nasal Gel and Cold Remedy Swabs, the Company performed an impairment assessment as
of June 30, 2009, in which it evaluated, among other things, the impact of the foregoing events on
the markets perception of the value of the Companys stock, the expected increase in legal
activity, and the expected decline of total product sales. The assessment resulted in the Company
recording a charge of $23.9 million to reduce the carrying amounts of goodwill and other tangible
and intangible assets to fair value. This charge includes: a non-cash impairment charge of $15.0
million related to the goodwill associated with the acquisition of the zincum gluconium nasal gel
products; a non-cash impairment charge of $3.2 million to write-down the inventory value of nasal
Cold Remedy products and other nasal application inventory; an impairment charge of $4.3 million
($3.4 million of which is non-cash) for a new swab manufacturing line that was recently built to
produce our nasal swab product; and $616,000 for the unamortized amount of our Cold Remedy nasal
gel patent.
Interest & Other Income
Interest and other income was approximately $119,000 in the nine months ended December 31,
2009 versus approximately $240,000 in the nine months ended December 31, 2008. Interest income
decreased due to lower interest rates. There was no interest expense in the nine months ended
December 31, 2009 or 2008.
Income (Loss) Before Income Taxes
Loss before income tax for the nine months ended December 31, 2009 was approximately ($22.6)
million, compared to income before taxes of approximately $17.6 million for the nine months ended
December 31, 2008. The loss is primarily due to the recall-related charges and the impairments to
goodwill and other assets associated with the recall of our nasal Cold Remedy products discussed
above. We expect that income (loss) in future periods will be significantly impacted by the sales
levels of our remaining products, product introductions, and changes in our advertising, research
and development, and legal expenses. We anticipate operating results will continue to vary along
with the seasonality of sales.
Provision (Benefit) for Income Tax Expense
We recorded an income tax benefit at our combined estimated annual effective tax rate of
approximately 39%. Due to the loss from operations incurred in the nine months ended December 31,
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2009, we recognized a benefit for income tax expense of approximately $8.7 million, compared
to income tax expense of $6.9 million in the nine months ended December 31, 2008.
Net Income (Loss)
Net loss was approximately $13.9 million in the nine months ended December 31, 2009, compared
to net income of approximately $10.7 million in the nine months ended December 31, 2008.
Liquidity and Capital Resources
As of December 31, 2009, our cash, cash equivalents and certificates of deposit balance
was $33.3 million, $6.7 million below the $40.0 million at March 31, 2009. The decrease in cash
and cash equivalents is primarily due to refunds associated with the recall of our nasal Cold
Remedy products. The Company generally invests the majority of excess cash directly in a fund of
U.S. Treasury Securities, U.S. government securities and repurchase agreements, and bank
certificates of deposit insured by the U.S. government. Our working capital was $53.5 million as of
December 31, 2009, compared to $52.1 million at March 31, 2009.
During the quarter ended December 31, 2009, trade receivables decreased to $15.8 million from
$23.0 million at September 30, 2009. The Companys principal source of liquidity is cash generated
from sales of our products to retailers and distributors. The majority of sales are given 30-day
credit terms; however, payment terms are occasionally extended, as retailers begin to increase
inventory of our products prior to the onset of the cough and cold season. The Company records an
estimated allowance for potentially uncollectible accounts, which is reviewed at least quarterly.
We believe our allowance as of December 31, 2009 is adequate. As a result of the Companys current
operating loss position, the Company has recorded deferred tax assets associated with tax loss
carrybacks and tax credit carryforwards. Differences between anticipated and actual outcomes of
these deferred tax assets could have a material impact on the Companys cash position in future
periods.
The change in accounts receivable, inventory, accounts payable and accrued expenses largely
reflects the seasonal nature of the Companys business. Our working capital requirements fluctuate
with the seasonality of our sales and are generally highest in the July through September quarter.
The Company records the bulk of its sales, which is reflected in higher accounts receivable, in the
second, third, and fourth fiscal quarters; generally builds inventory during the first through
third fiscal quarter periods; and advertises its products, which is generally the largest component
of accrued expenses, primarily in the third and fourth fiscal quarters. Although affected by the
build-up of inventory, accounts payable and accrued expenses are more significantly affected by
advertising spending. Generally, to the extent our operations are profitable, our business is cash
flow positive.
The Company is involved in various product liability claims and other legal proceedings. The
Companys legal expense for these lawsuits continues to have a material impact on the results of
operations and requires a significant use of cash as the Company defends itself against the various
claims. Litigation is inherently unpredictable and excessive verdicts do occur. Although we believe
we have defenses in these matters, we could, in the future, incur judgments or enter into
settlements of claims that could have a material adverse effect on our cash position in any
particular period. In addition, due to the various product liability claims, we may need to reserve
a significant amount of cash for product liability insurance coverage.
Historically, the Company has had low capital expenditures because we rely on third party
manufacturers to produce our products. Typical capital expenditures include investments in
technology, office furniture, leasehold improvements, and small tooling requirements. The Company
leased new corporate office and R&D space in March 2008. The relocation required capital
expenditures and tenant improvements of approximately $650,000, which we will amortize over the
term of the new lease (approximately five years). The Company occasionally provides deposits and
prepayments to our manufacturers to improve and increase manufacturing capabilities for our
products. In 2006, the Company invested $4.2 million for an automated manufacturing line that
produces our swab products. Based on the sales growth of our swab products, and our previous
assumptions as to continued growth, we purchased a
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second swab manufacturing line. However, due to the recall of our Cold Remedy swab product, we
determined the new swab manufacturing line was impaired and, during the quarter ended June 30,
2009, we recorded a charge of $4.3 million to reduce the carrying amount of the new manufacturing
line to fair value.
In July 2009, the Companys credit facility with Comerica Bank expired in accordance with its
terms. The credit facility allowed for borrowings of up to $8.0 million but the Company had not
made any borrowings under the facility since it was last renewed in July 2007. In light of recent
developments, the Company did not attempt to renew the credit line. We believe that our existing
capital resources will be sufficient to fund our operations and capital requirements for at least
the next 12 months.
Off-Balance Sheet Arrangements
As of December 31, 2009, we did not have any off-balance sheet arrangements.
Contractual Obligations
We have entered into certain long-term contractual obligations that will require various
payments over future periods as follows:
Contractual Cash Obligations | ||||||||||||||||||||
(In thousands of dollars) | ||||||||||||||||||||
Payments due by Period as of December 31, 2009 | ||||||||||||||||||||
Less than | After | |||||||||||||||||||
Total | 1 year | 1-3 years | 3-5 years | 5 years | ||||||||||||||||
Long-Term Debt Obligations |
$ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||||
Capital Lease Obligations |
0 | 0 | 0 | 0 | 0 | |||||||||||||||
Operating Lease Obligations |
1,665 | 426 | 892 | 347 | 0 | |||||||||||||||
Purchase Obligations |
3,006 | 3,006 | 0 | 0 | 0 | |||||||||||||||
Other Long-Term Liabilities Reflected on the
Companys Balance Sheet under GAAP |
0 | 0 | 0 | 0 | 0 | |||||||||||||||
Total |
$ | 4,671 | $ | 3,432 | $ | 892 | $ | 347 | $ | 0 | ||||||||||
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Forward Looking Statements
This Report on Form 10-Q, including documents incorporated herein by reference, contains
forward-looking statements within the meaning of the Private Securities Litigation Reform Act of
1995. The words believe, expect, estimate, anticipate, intend, may, might, will,
would, could, project and predict, or similar words and phrases generally identify
forward-looking statements. Forward looking statements contained herein and in documents
incorporated by reference herein include, but are not limited to statements regarding:
| our belief that the reserve for recall costs will be sufficient; | ||
| our expectations regarding the impact of the recall on demand for Zicam products; | ||
| our expectation that certain previous users of our nasal Cold Remedy product will now purchase our oral Cold Remedy product; |
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| our expectations regarding returns of discontinued products; | ||
| our expectation regarding continued expansion of the Zicam line of products; | ||
| our expectation of achieving fiscal 2010 revenue in the $68 million to $72 million range; | ||
| our expectation of incurring a sizable net loss in the fourth quarter of fiscal 2010; | ||
| our belief that our allowance for uncollectible accounts is adequate; | ||
| our expectation that ongoing legal expense will be between $1.5 million and $2 million per quarter; | ||
| our expectation that any federal consumer fraud and personal injury matter filed in the future will be transferred and consolidated pursuant to the MDL transfer process, subject to the plaintiffs opportunity to object; | ||
| our intention to vigorously defend the Zicam Cold Remedy product liability and securities litigation claims, our expectation that additional product liability lawsuits may be filed against us, and our belief that any liability resulting from these or other lawsuits, including any adverse publicity, could materially impact our financial results; | ||
| our expectations regarding litigation reserves; | ||
| our expectation of utilizing deferred tax assets; | ||
| our expectation that sales in future periods may be affected by the recall of our nasal Cold Remedy products; | ||
| our expectations regarding the effect of accounting standard updates; | ||
| our expectation that our mix of products sold will change due to seasonality and varying growth rates within the market groups; | ||
| our expectation that retailers will replace, at least in part, discontinued items with new or different Zicam products; | ||
| our expectations regarding store brand competition; | ||
| our expectation that over time, sales to retailers will reflect retail sales of our products to consumers; | ||
| our intention to review our product return reserve provision regularly and adjust the reserve amounts if actual product returns differ materially from our reserve estimates; | ||
| our expectation of making income tax payments at our statutory rates in future years; | ||
| our expectation regarding the utilization of our tax loss benefit; | ||
| our expectation that the average unit cost of goods sold and gross margin will continue to be affected by the relative mix of products sold; | ||
| our expectation that our net income and operating expenses in future periods will vary largely with the seasonality of our sales, the severity of the cold season, the revenues and expenses associated with new products, and the timing and amount of advertising, research and development, and legal expenses; | ||
| our expectations regarding derivative instruments; |
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| our expectations regarding the amount of advertising expense and that advertising expense will be highest in our third and fourth fiscal quarters; | ||
| our intention of focusing promotional and marketing support on Zicam oral Cold Remedy products during the 2009/2010 cold season; | ||
| our belief that focusing on consumer consumption of our oral Cold Remedy products will allow us to evaluate the strength of the Zicam brand; | ||
| our belief that our existing capital resources are sufficient to fund our operations and capital requirements for the next 12 months; | ||
| our expectations regarding our manufacturers ability to timely produce inventory adequate for sales of products through the 2009/2010 cough and cold season; | ||
| our belief that moderate interest rate increases and current uncertainties regarding the availability of credit will not have a material adverse impact on our results of operations or financial position in the foreseeable future. |
We may make additional written or oral forward-looking statements from time to time in filings
with the Securities and Exchange Commission or in public news releases. Such additional statements
may include, but not be limited to, projections of revenues, income or loss, capital expenditures,
acquisitions, plans for future operations, financing needs or plans, the impact of inflation and
plans relating to our products or services, as well as assumptions relating to the foregoing.
Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot
be predicted or quantified. Future events and actual results could differ materially from those set
forth in, contemplated by, or underlying our forward-looking statements.
Statements in this Report on Form 10-Q, including those set forth in the sections entitled
Managements Discussion and Analysis of Financial Condition and Results of Operations, and Risk
Factors, describe factors that could contribute to or cause actual results to differ materially
from our expectations. Other such factors include (i) the possibility that future sales of our
products will not be as strong as expected; (ii) a weak cough and cold season; (iii) lack of market
acceptance for or uncertainties concerning the efficacy or safety of our products; (iv) regulatory
or enforecement actions, including product recalls, that could restrict our ability to market our
products; (v) changing or modified regulatory or enforecement standards that could impact our
ability to market our products; (vi) difficulties in manufacturers or suppliers meeting production
requirements or maintaining sufficient inventories to meet unexpectedly high demand in the short
term; (vii) financial difficulties encountered by one or more of our principal customers; (viii)
increased competition from store brand versions of our products; (ix) material litigation
involving, product liability claims, consumer issues, securities violation claims, or patent and
contractual claims; (x) the possibility of delays or other difficulties in implementing product
improvements and introducing to the marketplace new products; (xi) adverse publicity regarding our
products or advertising restrictions; and (xii) adverse economic changes that affect consumer
demand.
Forward-looking statements contained in this Report on Form 10-Q speak only as of the date of
this Report on Form 10-Q or, in the case of any document incorporated by reference, the date of
that document. We do not undertake, and we specifically disclaim any obligation, to publicly
update or revise any forward-looking statement contained in this Report on Form 10-Q or in any
document incorporated herein by reference to reflect changed assumptions, the occurrence of
unanticipated events or changes to future operating results over time.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Our line of credit with Comerica Bank expired in July 2009 and we did not attempt to
renew it. At no time during fiscal 2010 did we have any outstanding borrowings on this line of
credit. Consequently, we believe that interest rate increases and the current uncertainties
regarding available credit will not have a material adverse impact on our results of operations or
financial position in the foreseeable future.
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As of December 31, 2009 and March 31, 2009, we did not participate in any financial-market
risk-sensitive commodity instruments for which fair value disclosure would be required. We believe
that we are not subject in any material way to other forms of market risk, such as foreign currency
exchange risk or foreign customer purchases or commodity price risk.
Item 4. Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of our
President and Chief Executive Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures pursuant to Rules 13a-15 and 15d-15 of the Securities Exchange
Act of 1934. Based upon that evaluation, our President and Chief Executive Officer concluded that,
as of the end of the period covered by this report, our disclosure controls and procedures were
effective to ensure that information required to be disclosed in reports filed under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the required time
periods and is accumulated and communicated to our management, including our President and Chief
Executive Officer, as appropriate to allow timely decisions regarding required disclosure. There
have been no changes in our internal controls over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) that occurred during the fiscal quarter ended December 31, 2009 that
have materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
PART II
OTHER INFORMATION
OTHER INFORMATION
Item 1. Legal Proceedings
See Note 7 Legal Proceedings for a discussion of the principal legal proceedings to
which the Company is a party.
Item 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully
consider the risk factors disclosed in Part I, Item 1A. Risk Factors of our Annual Report on Form
10-K for the period ended March 31, 2009, each of which could materially affect the business,
financial condition or future results of the Company. The risks described in such Form 10-K, and
this Form 10-Q are not the only risks facing the Company. Additional risks and uncertainties not
currently known to us or that we currently deem to be immaterial in the future, also may materially
adversely affect the business, financial condition and/or operating results of the Company.
Item 6. Exhibits
Exhibit No. | Title | |||
3.01 | Articles of Incorporation and Amendments thereto of the registrant (1) |
|||
3.02 | Bylaws of the registrant (2) |
|||
4.01 | Rights Agreement dated as of July 22, 2002 by and between the registrant and
Corporate Stock Transfer, Inc. (3) |
|||
31.1* | Certification of CEO and CFO pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 |
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Exhibit No. | Title | |||
32.1* | Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350 |
* | Filed with this Report on Form 10-Q. | |
** | Indicates management compensatory contract, plan or arrangement. | |
(1) | Incorporated by reference to the Registrants Amendment No. 1 to Form 8-A, filed June 18, 2002, file number 000-27646. | |
(2) | Incorporated by reference to the Registrants Report on Form 8-K, filed July 25, 2006, file number 001-31404. | |
(3) | Incorporated by reference to the Registrants Registration Statement on Form 8-A, filed July 23, 2002, file number 001-31404. |
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Matrixx Initiatives, Inc. |
||||
/s/ William J. Hemelt | ||||
William Hemelt | ||||
Chief Executive Officer and Principal Financial Officer February 5, 2010 |
||||
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