UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

 

 

 

Form 10-K

 

 

Commission File No. 001-31404

Matrixx Initiatives, Inc.
(Exact Name of Registrant as Specified in Its Charter)

 

 

8515 E. Anderson Drive
Scottsdale, AZ 85255
602-385-8888
(Address of principal executive offices, Registrant’s Telephone Number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K, is not to be contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ

 

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 definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

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

 

The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $51.3 million based on the closing price of $5.68 per share of common stock as reported on the Nasdaq Global Select Market on September 30, 2009.

 

As of June 1, 2010, 9,399,987 shares of the registrant’s common stock were outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the Registrant’s definitive proxy statement prepared in connection with the Registrant’s 2010 annual meeting of stockholders are incorporated by reference into Part III, Items 10, 11, 12, 13 and 14 of this Form 10-K.

 

Unless otherwise indicated in this Form 10-K, “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.

 

 

TABLE OF CONTENTS

 

 

 

Introduction

 

General.  We develop market and sell innovative, over-the-counter (OTC) healthcare products with an emphasis on those that utilize unique delivery systems. Through our subsidiaries, we market and sell products under the Zicam^® brand. As discussed in more detail below, our current Zicam offerings compete in the following product classes within the cough and cold category: Cold Remedy; Allergy/Sinus; Cough and Multi-Symptom relief; and other cough/cold. We have sales in one business segment, over-the-counter pharmaceuticals and dietary supplements. Currently, all of our revenues are attributed to sales within the United States. Our principal executive offices are at 8515 E. Anderson Drive, Scottsdale, AZ 85255 and our telephone number is (602) 385-8888.

 

We were incorporated in Utah in 1991 as Gum Tech International, Inc. On June 18, 2002, we reincorporated in Delaware and changed our name from Gum Tech International, Inc. to Matrixx Initiatives, Inc. We develop and market our Zicam products through our wholly owned subsidiary Zicam, LLC. In May 2008, we formed Zicam Canada, Inc. to commercialize sales of Zicam products in Canada. In fiscal 2010 we discontinued the marketing of Zicam products in Canada.

 

As used herein, except as otherwise indicated, references to “we,” “us,” “our,” or the “Company” refer to Matrixx Initiatives, Inc. and its subsidiaries.

 

FDA Warning Letter; Recall of Zicam Nasal Gel Products.  The Company received a warning letter from the Food and Drug Administration (the “FDA”) on June 16, 2009 regarding 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 was in violation of FDA regulations by failing to file a new drug application for the products. The FDA also asserted that the products were misbranded under FDA regulations for failing to adequately warn of the risk of smell loss. Although the Company disagreed with the FDA’s allegations (see “Legal Proceedings” in Part I, Item 3 of this Report for more information on the Company’s position with respect to the FDA’s warning letter), the Company cooperated with the FDA and recalled the Cold Remedy Nasal Gel and Cold Remedy Swabs from the market. Following months of informal discussions, 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 FDA’s 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. By letter dated March 4, 2010, the FDA reaffirmed its original position and denied the Company’s request.

 

The recall of Zicam Cold Remedy Nasal Gel and Zicam Cold Remedy Swabs, and the subsequent litigation have had a material adverse impact on our business. The recalled products accounted for approximately 40%, or $42.5 million, of our fiscal 2009 net sales. The recall required us to record a $9.2 million reserve and take impairment charges of $23.9 million. Our primary focus during fiscal 2010 was to convert consumers that used our nasal Cold Remedy products to our oral Cold Remedy offerings. As a result, our promotional and marketing support during the 2009/2010 cold season primarily focused on repositioning Zicam oral Cold Remedy products and attracting new users to the Zicam franchise.

 

Access to Our Filings with the Securities and Exchange Commission

 

Our website is www.matrixxinc.com. Through a link on the Financial Information section of our website, we make available the following filings as soon as reasonably practicable after they are electronically filed with or furnished to the SEC: our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. All such filings are available free of charge. Information contained on the Company’s website is not part of this report.

Markets and Company Products

 

Our current Zicam products are marketed in the cough and cold market category. That market, which is estimated at $4.0 to $5.0 billion annually in retail sales in the United States, includes a wide variety of tablets, liquids, gels, sprays, and syrups that remedy and/or provide relief to cold, allergy and sinus congestion sufferers. The largest sub-segment of the cough and cold category includes products formulated to relieve symptoms associated with the common cold or allergies.

 

Our Cold Remedy and Allergy/Sinus products are our core offerings. The following table details our sales by product class for the periods indicated, with further details below:

 

 

Cold Remedy

 

Zicam Cold Remedy was formulated to reduce the duration of the common cold. Zicam Cold Remedy is distinctive from the products in the cough and cold category that solely make symptom relief claims. Customer awareness of our Cold Remedy products has increased as a result of our marketing and public relations efforts and word-of-mouth experience by consumers.

 

As a result of the June 2009 FDA warning letter, the Company recalled its Zicam Cold Remedy Nasal Gel and Zicam Cold Remedy Swabs. See “Business — Introduction — FDA Warning Letter; Recall of Zicam Nasal Gel Products” above. The Company continues to market oral delivery forms of Zicam Cold Remedy products. The oral Cold Remedy products are designed to deliver a dose of ionic zinc to the oral mucosa and reduce the duration of the common cold. We continued to expand our oral Cold Remedy product offerings in fiscal 2010 with the introduction of Zicam Zavors (a coated chewable product) and Zicam Liqui-loz (a liquid center lozenge).

 

Allergy/Sinus

 

Zicam Allergy Relief, a homeopathic nasal gel formula, was introduced in 2000. Zicam Allergy Relief is designed to control allergy symptoms for sufferers of hay fever and other upper respiratory allergies. We believe Zicam Allergy Relief is distinctive from most allergy products available on the market due to the absence of side effects such as drowsiness. In fiscal 2009, the Company introduced Zicam Allergy Relief Swabs, which utilize our proprietary swab delivery platform. We also market two allopathic Zicam nasal gel products: Extreme Congestion Relief and Sinus Relief. Those two products combine the active ingredient oxymetazoline hydrochloride into our gel matrix to provide fast-acting, long- lasting relief of nasal congestion and sinus pressure.

 

Cough and Multi-Symptom

 

We market one cough spray product and two multi-symptom relief products. Zicam Cough Max is a liquid spray formulation designed to deliver fast, effective cough relief and soothe throat irritation. Our Zicam Multi-Symptom Cold & Flu Relief products provide consumers a flavor-neutral liquid that can be poured into a beverage (hot or cold) for relief of cold and flu symptoms. The cough and multi-symptom products have not achieved the level of consumer acceptance needed to support these products at all retailers and sales of these products have declined over the past few years, and we expect they will continue to decline.

Other Cough/Cold

 

In fiscal 2009, we introduced Zicam Cold Sore Swabs. The cold sore product utilizes our proprietary swab platform to help consumers get over their cold sores faster. This product has had minimal distribution since its introduction.

 

We introduced our Healthy Z-ssentials^tm products (orange and lemon-lime) in fiscal 2009. Healthy Z-ssentials are rapidly dissolving tablets formulated with ingredients to promote health and well-being. These products were introduced to be complementary to our existing cough/cold products and offer an alternative to consumer purchases of products promoted as immune boosting. We anticipate sales of these other cough/cold products will continue to decline.

 

Business Strategy

 

Our business objective is to be a growth oriented over-the-counter (OTC) healthcare company marketing products that utilize unique delivery systems. To achieve our objective, we intend to continue to develop and refine our sales and marketing efforts to increase market penetration of our products in U.S. households. Such efforts include improving creative messaging, timing, and consistency of marketing activities; executing effective trial generating programs; implementing programs with retailers to enhance consumer awareness of our products; and seeking to increase recommendations from healthcare professionals. We are continuing to implement new creative advertising approaches and public relations efforts. We believe these efforts will continue to build brand awareness, trial, and sales of our products. We are also seeking growth opportunities through internal research and development efforts to pursue development of other over-the-counter healthcare products.

 

Customers

 

We sell our products directly to major food, drug, mass market (e.g., Wal-Mart, Target) and wholesale warehouse retailers throughout the United States, and to distributors that sell to smaller retail establishments. Our core products, which include Zicam Cold Remedy and Allergy/Sinus products, have achieved broad distribution and a mix of these products is sold in virtually every major food, drug, and mass merchant retail outlet in the country. We are highly dependent on a small group of large national retailers for our product distribution. Our top 15 customers accounted for more than 84% of our net sales in fiscal 2010, and three customers each accounted for more than 10% of our net sales in fiscal 2010 (Wal-Mart, 20%; Walgreens, 21%; and CVS, 10%). During the fiscal year ended March 31, 2009, our top 15 customers accounted for approximately 80% of our net sales, and three customers each accounted for more than 10% of the year’s net sales (Wal-Mart, 22%; Walgreens, 17%; CVS, 12%). Our agreements with our customers generally permit them to return damaged, out-of-date, or discontinued products. We provide in our financial results, as an offset against sales, an estimate for expected returns (see Note 4 to the Consolidated Financial Statements). During fiscal 2010, we experienced product returns related to our non-core products (which include cough, multi-symptom, and other cough cold products) and several discontinued products. In fiscal 2010, we recorded an increase to our returns allowance of approximately $3.0 million, in excess of our customary reserve, to account for this increase in returns. To the extent that any of our largest customers were to stop carrying our products for any reason, or were to fail to pay us for our products, our sales and financial results could be negatively impacted in a material way.

 

Prior to fiscal 2008, we contracted with a third party organization to provide sales management and broker oversight. During fiscal 2008, we hired and trained a dedicated sales force to call on national and regional retail accounts, wholesale distribution companies, and to oversee brokers. Our sales force is focused on increasing distribution, improving shelf placement of our products, and developing trade promotional programs. We rely on brokers to provide retail support to our smaller customers.

 

Manufacturing and Distribution

 

Our products are manufactured and packaged by third-party manufacturers. Each of our manufacturers is registered with the FDA, which requires each manufacturer to adhere to current Good Manufacturing Practices in its production processes and procedures. Each manufacturer is responsible for sourcing raw materials used in its production of our products from third-party suppliers. We rely on individual production orders to meet our needs

from these suppliers. We are in the process of negotiating supply agreements with certain manufacturers at this time. We have some flexibility in securing other manufacturers to produce our products; however, in some circumstances we may be limited in our alternatives due to proprietary technologies that are utilized in some of the products.

 

Our manufacturers are subject to reporting, facility inspection, and governmental review. In general, subsequent discovery of previously unrecognized problems or failure to comply with applicable regulatory requirements could result in restrictions on manufacturing or marketing of the products, product recalls or withdrawal, fines, seizure of product, as well as withdrawal or suspension of regulatory approvals.

 

We use third-party manufacturers and packagers for production processes, including compounding and producing product mixtures, filling bottles, assembling finished product and packing finished product in master cases. In several instances our drug manufacturers ship bulk formula to our packaging contractors to fill product into primary and secondary packaging and assemble finished product in master cases. Finished products are shipped to an independent warehouse in Indiana for storage prior to shipment to our customers.

 

Research and Development

 

Research and development of new products is an important part of our business. Expenditures during fiscal 2010 reflect costs associated with products introduced in fiscal 2010, as well as expenses associated with line extensions we anticipate introducing in fiscal 2011 and in future years. During 2010, research and development expenses were $2.4 million, or 4% of 2010 net sales. We expect to commit approximately 3%-4% of net sales to research and development in subsequent years in order to develop new products to meet our sales growth targets. Research and development expense was approximately $3.2 million and $4.1 million for the fiscal years ended March 31, 2009, and 2008, respectively.

 

FDA, FTC and Other Government Regulation

 

We are subject to various federal, state and local laws and regulations that affect our business. All of our products are subject to regulation by the FDA, including regulations with respect to manufacturing processes and procedures, ingredients in the products, labeling and claims made. Our drug products are commercially distributed by following the Homeopathic Pharmacopeia or FDA’s OTC monographs. The OTC monographs classify certain drug ingredients as safe and effective for specified uses and establish categorical requirements for the marketing of drugs containing such ingredients without pre-approval. All of our Zicam Cold Remedy, Zicam Allergy Relief, and Zicam Cold Sore products are subject to the requirements of the Homeopathic Pharmacopeia of the United States. Zicam Extreme Congestion Relief, Zicam Sinus Relief, the Zicam cough product, and the Zicam multi-symptom relief products are subject to the requirements of the FDA as allopathic drugs. All of our claims and advertising are subject to the rules of the Federal Trade Commission (FTC). Although we believe that our products and claims comply in all material respects with the regulatory requirements, if the FDA or FTC were to determine that we are in violation of any such requirement, either agency could restrict our ability to market the products, require us to change the claims that we make or cause us to remove the products from the market. For example, as a result of the June 2009 FDA warning letter, the Company recalled its Zicam Cold Remedy Nasal Gel and Zicam Cold Remedy Swabs. See “Business — Introduction — FDA Warning Letter; Recall of Zicam Nasal Gel Products” above.

 

Environmental Matters

 

Compliance with environmental rules and regulations did not significantly affect our earnings or competitive position during fiscal 2010, 2009 or 2008. All of our Zicam product manufacturing and warehousing operations are currently outsourced to third party contractors and, as a result, we do not incur any direct expenses related to environmental monitoring and regulatory compliance. With our continued outsourcing of Zicam product manufacturing and storage, and no present plans to directly manufacture or store our products, we expect these expenses to remain low in the foreseeable future. We recognize that climate change mitigation programs and regulations may cause general economic risk. For further information on the risks of climate change, see “Risk Factors” in Part I, Item 1A of this Form 10-K. To the extent higher costs are incurred by our manufacturers for environmental compliance and/or the potential for higher energy costs driven by climate change regulations that are passed on to us, our cost of goods may be impacted.

Trademarks, Trade Names, and Proprietary Rights

 

We have been issued two United States patents for Gel Swab^tm technology (U.S. Patent Nos. 7,115,275 and 7,597,901), one patent directed to a nasal moisturizing technology (U.S. Patent No. 7,439,269), one patent directed toward the Extreme Congestion Relief nasal gel and the Intense Sinus Relief nasal gel (U.S. Patent No. 7,714,011), and four patents relating to zinc nasal gel technology (U.S. Patent Nos. 6,080,783, 6,365,624, 6,673,835, and 7,348,360). In October 2005, we acquired a patent (U.S. Patent No. 6,516,947) and other associated intellectual property related to the dry handle swab technology used in manufacturing the Gel Swab^tm products. These patents are expected to be effective until August 12, 2019 for the nasal moisturizing technology, August 11, 2020 for the dry handle swab technology, June 5, 2024 for the Gel Swab^tm technology and the Extreme Congestion Relief and the Intense Sinus Relief nasal gels, and September 1, 2018 for the zinc nasal gel technology. As discussed above, as a result of the FDA warning letter, we recalled our Cold Remedy nasal gel products, including those employing the swab technology. We continue to market Zicam^® Allergy Relief Gel Swab products. Patent applications are pending in the United States for compositions and methods relating to Zicam^® Cold Remedy RapidMelts^®, Zicam^® Cold Remedy Chewables^tm, Zicam^® Cold Remedy Oral Mist^tm, Gel Swabs^tm, Zicam^® Multi-Symptom Cold & Flu, Zicam^® Cough Max^tm cough spray, Nasal Comfort^®, oral care technology, and zinc nasal gel technology. We have issued patents relating to Zicam^® Cold Remedy Oral Mist in Australia (No. 2004235732), the European Union (No. EP 1617817), and Canada (No. 2524074). In addition, we have foreign patents and applications relating to zinc nasal gel technology. We hold registrations for the Zicam^® trademark in the United States, the European Union, Japan, Australia, Canada, Mexico, Taiwan, China, and Brazil. We also hold additional registrations for the Better Ways to Get Better^®, The Cold Solution^®, RapidMelts^®, No-Drip Liquid^®, Cough Mist^®, Nasal Comfort^®, Get Over Your Cold Faster^®, XCID^®, Don’t Let a Cold Run You Down^®, and Healthy Z-ssentials^® trademarks in the United States. We anticipate that we will continue to file for patent and trademark protection for the other products we expect to develop and introduce in the future. There can be no assurance, however, that our existing patents, or any additional patents that we may secure in the future, will be adequate to protect the Company’s intellectual property from a competitor’s actions or that the Company’s products will not be found to infringe the intellectual property rights of others. Further, patent infringement litigation can be very time consuming and costly. Even if we prevail in such litigation, the cost of litigation could adversely affect our operating results and financial condition.

 

Employees

 

As of June 1, 2010, we had 29 employees. Currently 25 of our employees work in our Scottsdale, Arizona corporate office and four of our sales personnel work from home offices in other states. Our employees consist of executive officers and individuals responsible for administration, operations, marketing, sales, research and development, regulatory compliance, finance, and accounting.

 

Seasonality

 

Retail sales of Zicam products to end-user consumers are highly seasonal, with most sales generally occurring during the cold and flu season and, to a lesser degree, the allergy season. The cold and flu season generally runs from October through March, while the allergy season runs from April through October. Both of these seasons can vary in intensity and duration from year to year. Our sales to retailers generally mirror this pattern of consumer demand, but are impacted by the level of promotional support we commit to retailers and by their inventory management practices. During the third calendar quarter, the Company usually receives orders from retailers preparing for the cold season. The quarter ended September 30 has historically been the most profitable quarter during our fiscal year, as retailers increase inventory and there is no increase in marketing expense. Generally, the quarter ended June 30 accounts for only 7% to 8% of annual sales, and the Company has historically recorded negative earnings in that quarter.

 

Backlog

 

There were no significant product backlogs at March 31, 2010, 2009, or 2008.

Competition

 

All of the Zicam products compete in the highly competitive over-the-counter cold, allergy/sinus, and symptom relief market groups of the overall cough and cold category. Our products compete against a vast number of well-established brands marketed by large pharmaceutical and consumer products companies as well as an increasing number of store brand products. Store brand products are generally sold at a substantial discount to branded products. Participants in the cough and cold category compete primarily on the basis of price, product benefit, quality of product, and brand recognition. Most of our competitors have substantially greater financial, marketing and other resources, longer operating histories, larger product portfolios and greater brand recognition than we do. With our limited resources, we aim to succeed in this category by emphasizing the unique claims regarding our products and providing consumers with innovative delivery systems. Specifically, regarding Zicam Cold Remedy, we emphasize its ability to reduce the duration of the common cold, while the majority of products in the cough and cold category make symptom relief claims.

 

We face substantial and increasing competition from new or existing store brand and/or other branded over-the-counter products. Store brand competitors in particular are becoming more aggressive and their products are an increasing percentage of overall category sales. Further, store brand products are generally lower in price and demand for lower-price products may increase in times of economic uncertainty.

 

We utilize data from independent market research firms, including Information Resources, Inc. (“IRI”), to assess market share, size, and ranking of our products and brands versus competitors. IRI reports retail sales in food, drug, and mass merchant markets, and does not include warehouse stores or Wal-Mart. For the 52 weeks ended March 21, 2010, Zicam achieved a 1.9% dollar share of the $4.5 billion cough/cold category as measured by IRI and a 1.1% unit share.

 

 

We may fail to compete effectively, particularly against larger more established pharmaceutical and health products companies, or low cost generic drug manufacturers, causing our business and operating results to suffer.

 

The consumer health products industry is highly competitive. We compete with companies that are engaged in the development of both traditional and innovative healthcare products. Many of these companies have much greater financial and technical resources, and production and marketing capabilities than we do. As well, many of these companies have already achieved significant product acceptance and brand recognition with respect to products that compete directly with our products. We also face substantial and increasing competition from new or existing store brand over-the-counter products. Store brand competitors in particular are becoming more aggressive and their products are an increasing percentage of overall category sales. Further, store brand products are generally lower in price and demand for lower-price products may increase. Generic or store brand alternatives to some of our products, such as the Zicam Cold Remedy Oral Mist and Zicam Cold Remedy RapidMelts products, can be found in the marketplace.

 

The intellectual property rights that protect our products are of varying strengths and durations. Although it is our general policy to protect our intellectual property rights, we may not be able to prevent the emergence of competing products. If consumers prefer these products, or if these products have better safety, efficacy, or pricing characteristics or are easier to administer, our results could be negatively impacted.

 

Our business is subject to seasonality that may cause our quarterly operating results to fluctuate materially and cause the market price of our stock to decline.

 

Sales of our existing Zicam products are extremely seasonal in nature and are dependent upon the severity of the cold and flu season. Sales at retail generally increase as the level of population suffering from colds rises. During the quarter ending September 30, the Company usually realizes increased sales volume as retailers stock our products and order displays to prepare for the upcoming cold/flu season. Additional sales (re-orders) to retailers are highly dependent upon the incidence of illness within the population. Retail consumption of our products is highest during the cold/flu season, which usually runs from October through March. If there is a mild cold/flu season,

revenues from sales of our Zicam products will be adversely affected. Because it is difficult to anticipate the length and severity of the cold/flu season, we cannot estimate the fluctuation of our sales from quarter to quarter in a fiscal year or the impact of the cold/flu season year to year. If our operating results fall below financial analysts’ or investors’ expectations due to cold/flu seasonality factors, the market price of our common stock may decline.

 

We may continue to incur significant costs resulting from product liability, economic injury, or securities litigation.

 

Numerous lawsuits have been filed against us. The vast majority of our existing lawsuits were filed against us following our receipt of the June 2009 FDA warning letter (see “Business — Introduction — FDA Warning Letter; Recall of Zicam Nasal Gel Products” in Part I, Item 1 above). The lawsuits principally fall into two categories of product liability claims: (i) those alleging that our Zicam Cold Remedy nasal gel products caused the permanent loss or diminishment of the sense of smell or smell and taste (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 based on allegations that the Company misrepresented the safety and/or efficacy of such products to consumers (i.e., economic injury claims). Various defendants in the lawsuits, including manufacturers and retailers, have sought indemnification or other recovery from us for damages related to the lawsuits. Although we believe the product liability claims are without merit, they have resulted in significant legal defense and aggregate settlement costs, which have increased our expenses and lowered our earnings. Such claims, whether or not proven to be valid, could have a material adverse effect on our brand equity and goodwill, resulting in reduced market acceptance of our products. In addition, any adverse decision in such litigation could require significant damages to be paid or result in adverse publicity, either of which could materially adversely affect our results of operations and financial condition. Separately, certain officers, directors, and former officers of the Company, are also subject to class action and derivative lawsuits alleging violations of securities laws. Any adverse decision in such litigation could materially adversely affect our results of operations and financial condition.

 

Because a significant portion of our business depends substantially on a small group of large national retailers, our sales, operating margins and income would be adversely affected by any disruption of our relationship with these retailers, or any other material adverse change in such retailers’ businesses.

 

We are highly dependent on a small group of large national retailers for our product distribution, such that our top 15 customers accounted for more than 80% of our net sales in fiscal 2010 and prior years. Three customers, Wal-Mart, Walgreens, and CVS, together accounted for 51% of net sales in fiscal 2010, 50% of net sales in fiscal 2009, and 48% of our net sales in fiscal 2008. Should any of our top customers encounter financial difficulties, stop carrying our products for any reason, or should our current relationship with any of our top customers adversely change in any way, the resulting loss of business, exposure on uncollectible receivables and unusable inventory could have a material adverse impact on our financial position and results of operations. In addition, our results could be affected by fluctuations in buying patterns and inventory levels of these top customers.

 

Climate change theories pose potential regulatory risks that could harm our results of operations or affect the way we conduct our business.

 

Climate change mitigation programs and regulations can increase our costs. For example, emissions trading programs that may be imposed by government regulation could affect our manufacturers’ costs and may be passed on to us. There is also a potential for higher energy costs driven by climate change regulations. Our costs could increase if utility companies pass on their costs, such as those associated with carbon taxes, emission cap and trade programs, or renewable portfolio standards.

 

Growth in the sales of our over-the-counter healthcare products may be affected, in part, by factors beyond our control, such as media attention, adverse publicity, and regulatory changes.

 

In the event of future unfavorable scientific results or media attention, sales of our products could be materially adversely affected. In addition, if any of our products receive additional adverse publicity, our operating results and prospects could be materially adversely affected. Changes in the regulatory environment that restrict certain over-the-counter active drug ingredients could materially adversely affect sales of our products.

Our future growth will depend in part upon our ability to develop and achieve sales of new products.

 

We cannot be certain that any of our products will achieve or continue to enjoy widespread acceptance by the market. While we are working to increase the market presence of our products, including new products, we cannot be certain that demand for our products will grow. If new products or brands do not achieve consumer acceptance, operating results could be materially adversely affected.

 

Our business is subject to regulation in the U.S.

 

Changes in laws, regulations and the related interpretations or enforcement actions could alter our business environment and impact our ability to market and sell our products. This includes changes in competitive, product-related, and regulatory laws, as well as changes in accounting standards and taxation. Accordingly, our ability to manage and resolve pending regulatory and legal matters without significant liability, which could require us to take significant reserves in excess of amounts accrued to date or pay significant fines during a reporting period, may materially impact our results.

 

Unanticipated problems associated with product development and commercialization of new and existing products could adversely affect our operating results.

 

Our successful maintenance of existing products and development of new products are subject to the risks of failure and delay inherent in the development and commercialization of products. These risks include the possibilities that:

 

 

Research, development and testing can be long, expensive and uncertain processes. Our future success depends, in part, on our ability to complete development of new products. If we are unsuccessful in advancing our early stage products into marketable consumer-ready products for any reason, our business prospects could be harmed.

 

The inability to provide scientific proof for product claims may adversely affect our sales.

 

The marketing of our Zicam products involves claims that these products assist in reducing the duration of the common cold (in the case of Zicam Cold Remedy products) and controlling allergy symptoms (in the case of Zicam Allergy Relief). Under FDA and FTC rules, we are required to obtain scientific data to support any claims we make concerning our products. We have scientific data for our product claims; however, we cannot be certain that these scientific data will be deemed acceptable to the FDA, FTC or other regulatory bodies. If any regulatory body requests supporting information and we are unable to provide support that is acceptable, either the FDA or FTC could force us to stop making the claims in question or restrict us from selling the affected products.

 

FDA and other government regulation may restrict our ability to sell our products or require us to recall products.

 

We are subject to various federal, state and local laws and regulations affecting our business. Our Zicam products are subject to regulation by the FDA, including regulations with respect to manufacture and labeling of products, approval of ingredients in products, claims made regarding the products, and disclosure of product

ingredients. If we, or our third-party manufacturers, do not comply with these regulations or if these regulations or interpretations change in the future, the FDA could force us to stop selling the affected products or require us to incur substantial costs in adopting measures to maintain compliance with these regulations. If the FDA came to believe that any of our products do not comply with the regulations or caused harm to consumers, we could be required to stop selling that product or subject the product to a recall. Our advertising claims regarding our products are also subject to the jurisdiction of the FTC. In both cases we are required to possess scientific data to support any advertising or labeling claims we make concerning our products, although no pre-clearance or filing is required to be made with either agency. If we are unable to provide the required support for such claims, the FTC may stop us from making such claims or require us to stop selling the affected products. For example, as a result of the June 2009 FDA warning letter, the Company recalled its Zicam Cold Remedy Nasal Gel and Zicam Cold Remedy Swabs. See “Business — Introduction — FDA Warning Letter; Recall of Zicam Nasal Gel Products” in Part I, Item 1 above.

 

If we are unable to protect our intellectual property or if we infringe the intellectual property of others, our financial condition and future prospects could be materially harmed.

 

We rely significantly on the protections afforded by patent and trademark registrations that we routinely seek from the U.S. Patent and Trademark Office (“USPTO”) and from similar agencies in foreign countries. We cannot be certain that any patent or trademark application that we file will be approved by the USPTO or foreign agencies. In addition, we cannot be certain that we will be able to successfully defend any trademark, trade name or patent that we hold against claims from, or use by, competitors or other third parties. No consistent policy has emerged from the USPTO or the courts regarding the breadth of claims allowed or the degree of protection afforded under biotechnology and similar patents. Our future success will depend, in part, on our ability to prevent others from infringing on our proprietary rights, as well as our ability to operate without infringing upon the proprietary rights of others. We may be required at times to take legal action to protect our proprietary rights and, despite our best efforts, we may be sued for infringing on the patent rights of others. Patent litigation is costly and, even if we prevail, the cost of such litigation could adversely affect our financial condition. If we do not prevail, in addition to any damages we might have to pay, we could be required to stop the infringing activity or obtain a license. We cannot be certain that any required license would be available to us on acceptable terms, or at all. If we fail to obtain a license, our business could be materially adversely affected. In addition to seeking patent protection, we rely upon a combination of non-disclosure agreements, other contractual restrictions and trade secrecy laws to protect proprietary information. There can be no assurance that these steps will be adequate to prevent misappropriation of our proprietary information or that our competitors will not independently develop technology or trade secrets that compete with our proprietary information or know-how.

 

Under our current business model, we do not have manufacturing capabilities of our own.

 

We outsource all of our product manufacturing and packaging operations under our current business model. As a result, we do not have the physical or human resources to independently manufacture our existing products or any other products that we may develop. If we are unable to enter into cost-effective or otherwise suitable arrangements for manufacturing our Zicam products or any other products, or if our third-party contractors fail to adequately perform their manufacturing operations, experience problems with product quality or regulatory compliance, or timeliness of product delivery, our sales and related financial results could be materially adversely affected. If, in the future, we decide to establish our own manufacturing facilities, we will require substantial additional funds and significant additional personnel to undertake such operations. We cannot be certain that such funding or a sufficient number of such qualified persons will be available for such an undertaking.

 

We may pursue strategic acquisitions of technologies, products, and/or brands, which involve a variety of costs, and we may not realize the anticipated benefits of such acquisitions.

 

We may pursue strategic acquisitions to acquire delivery technologies, brands, and products that would allow us to leverage our operating model. We have limited experience in identifying and consummating acquisitions. Additionally, acquisitions typically have many risks, including: unanticipated integration costs and delays; potentially substantial indebtedness; and diversion of management’s attention. If we are not able to successfully integrate an acquisition, we may incur substantial charges that could adversely affect our results of operations.

We may experience product backlogs.

 

We have established inventory plans to support sales expectations for all of our products. However, we cannot be certain that these measures will be sufficient to prevent backlogs of product availability in the future. Any such future backlogs will potentially result in higher production costs, higher freight costs to expedite shipment of raw materials and finished goods, fines from certain retailers, cancelled orders and lost revenue. These in turn could materially affect our results of operations and financial condition.

 

Loss of key personnel could have a material adverse effect on our operations and financial results.

 

We have a limited number of employees and our success depends on the continued services of our senior management and key employees as well as our ability to attract additional members to our management team with experience in the consumer health products industry. The unexpected loss of the services of any of our management or other key personnel, or our inability to attract new management when necessary, could have a material adverse effect upon our operations and financial results.

 

To protect against various potential liabilities, we maintain a variety of insurance programs. Significant increases in the cost or decreases in the availability of such insurance could adversely impact our financial condition.

 

We maintain insurance, including property, general and product liability, and directors’ and officers’ liability, to protect against potential loss exposures. In addition to the risks associated with product liability insurance discussed above, we cannot predict whether deductible or retention amounts associated with all of our insurance programs will increase, or whether insurance coverage, generally speaking, will be reduced in the future. To the extent that losses occur, there could be an adverse effect on our financial results depending on the nature of the loss and the level of insurance coverage we have maintained. From time to time, we may reevaluate and change the types and levels of insurance coverage that we purchase.

 

Our Board of Directors is authorized to issue shares of preferred stock that could have rights superior to our outstanding shares of common stock and, if issued, could adversely impact the value of our common stock.

 

Our certificate of incorporation permits our Board of Directors, in its sole discretion, to issue up to 2,000,000 shares of authorized but unissued preferred stock. These shares may be issued by our Board without further action by our shareholders, and may include any of the following rights (among others) as our Board may determine, which rights may be superior to the rights of our outstanding common stock:

 

 

Since our Board of Directors has the authority to determine, from time to time, the terms of our authorized preferred stock, there is no limit on the amount of common stock that could be issuable upon conversion of any future series of preferred stock that may be issued. The rights of holders of our common stock will be subject to, and may be adversely affected by, the rights of the holders of any series of preferred stock that may be issued in the future. In addition, the market price of our common stock may be adversely affected by the issuance of any series of preferred stock with voting or other rights superior to those of our common stock. The issuance of any series of preferred stock could also have the effect of making it more difficult for a third party to acquire a majority of our outstanding common stock.

The price of our stock may be volatile.

 

The market price of our common stock, which is quoted for trading on the Nasdaq Global Select Market, has been highly volatile and may continue to be volatile in the future. Any one, or combination, of the following factors could cause the market value of our common stock to decline quickly: operating results that differ from market expectations; negative or other unanticipated results of clinical trials or other testing; delays in product development; technological innovations or commercial product introductions by our competitors; lack of timely availability of product or inventory; changes in laws or government regulations; adverse government enforcement actions; developments concerning proprietary rights, including pending or threatened patent litigation; public concerns regarding the safety of any of our products or any recall of our products; the outcome of litigation against the Company; the trading volume of our stock; and general economic and stock market conditions. The stock market has experienced, and it may continue to experience, significant price and volume fluctuations. Historically, these fluctuations particularly affect the market prices of equity securities of small micro-capitalization companies like Matrixx. Often, the effect on the price of such securities is disproportionate to the operating performance of such companies. In our case, such fluctuations may adversely affect our stockholders’ ability to dispose of our shares at a price equal to or above the price at which they purchased such shares.

 

We have agreed to indemnify our officers and directors from liability.

 

Our Certificate of Incorporation requires us to indemnify our officers and directors who are or were made a party to, or are or were threatened to be made a party to, any threatened, pending, or completed action, suit or proceeding because he or she is or was a director or officer of the Company. These provisions require us to advance expenses to an indemnified party in connection with defending any such proceeding, upon receipt of an undertaking by the indemnified party to repay those amounts if it is later determined that the party is not entitled to indemnification. These provisions may also reduce the likelihood of derivative litigation against directors and officers and discourage or deter stockholders from suing directors or officers for breaches of their duties to us, even though such an action, if successful, might otherwise benefit us and our stockholders. In addition, to the extent that we expend funds to indemnify directors and officers, funds will be unavailable for operational purposes.

 

 

None.

 

 

In March 2008, we entered into a five-year renewable lease for corporate office and research and development space, comprising approximately 23,000 square feet, at 8515 E. Anderson Drive, in Scottsdale, Arizona. The new facility combines our corporate office and research and development activities in one building and increases our laboratory capabilities. Our warehouse storage and shipping of our finished goods are provided by a contract warehouse in Plainfield, Indiana.

 

 

The Company is involved in various product liability claims and other legal proceedings. The Company’s 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 Company’s receipt of the FDA’s June 16, 2009 warning letter (see “Business — Introduction — FDA Warning Letter; Recall of Zicam Nasal Gel Products” in Part I, Item 1 of this Report), 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 Company’s 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 alleging that our Zicam Cold Remedy nasal gel products caused the permanent loss or diminishment of the sense of smell or smell and taste (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 based on allegations that the Company misrepresented the safety and/or efficacy of such products to consumers (i.e., economic injury claims). All of the economic injury lawsuits have been filed as class actions but none of the classes has 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 economic injury 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.

 

Our Position and Our Response.  We believe the claims made in these lawsuits are scientifically unfounded and misleading and we disagree strongly with the FDA’s allegations that Zicam Cold Remedy nasal gel products may be unsafe and that they were unlawfully marketed. The Company’s 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, in response to the Company’s request, the FDA advised the Company that it was unwilling to reverse its position. On November 16, 2009, the Company filed its response to the FDA’s 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. By letter dated March 4, 2010, the FDA reaffirmed its original position and denied the Company’s request.

 

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 Company’s 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 plaintiff’s smell loss.

 

Product Effectiveness.  Our claims and advertising are subject to the requirements of the Federal Trade Commission Act, which is enforced by the FTC. On March 21, 2006, the FTC’s 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 Company’s advertising and promotional activities for several of the Company’s 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 Company’s 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 no longer pursuing the inquiry.

 

Total Pending Product Liability Lawsuits.  As of May 30, 2010, the Company is aware of 176 pending product liability lawsuits against the Company, involving 671 plaintiffs. Of those cases, 127 are pending in Federal court and 49 are pending in State court (see below).

 

Active Pending Cases as of May 30, 2010 (Pending in Federal Courts); Consolidation and Transfer Pursuant to Multi-District Litigation Procedures.  Of the 127 product liability cases, involving 310 plaintiffs, pending against the Company in Federal court as of May 30, 2010, 112 of them are personal injury cases, involving 279 plaintiffs, and 15 of them are economic injury cases, involving 31 plaintiffs. In August 2009, the Company filed a motion to consolidate and transfer all of the personal injury and economic injury 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 economic injury 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 economic injury cases at issue in the original MDL request. The Panel also began the MDL transfer process for the remaining economic injury 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. (filed June 18, 2009, Northern District of Illinois) did not involve sufficient common questions of fact to allow for consolidation and transfer to the MDL at that time. The Company expects any federal economic injury 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.

Active Pending Cases as of May 30, 2010 (Pending in State Courts).  The Company is aware of the following state court cases, covering 361 named plaintiffs, which have been filed against and/or served on the Company as of May 30, 2010:

 

Personal Injury:

 

Putative Class Action for Economic injury:

 

 

From December 31, 2009 through May 30, 2010, 77 new product liability cases were filed against the Company and 3 product liability cases were voluntarily dismissed without prejudice.

 

Cases Dismissed Subsequent to December 31, 2009 (Federal Courts).  None of the federal court cases pending against the Company were dismissed subsequent to December 31, 2009.

 

Cases Dismissed Subsequent to December 31, 2009 (State Courts).  There were three state court cases pending against the Company dismissed subsequent to December 31, 2009:

 

 

Potential Claimants.  Approximately 435 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 Company’s 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 Company’s conclusions as to the adequacy of the reserve for the pending product liability lawsuits. The Company maintained a $740,000 reserve balance as of March 31, 2010, compared to $785,000 at March 31, 2009. The decline in the reserve balance was due to settlements of certain claims. However, following the Company’s receipt of the FDA’s 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.

 

Intellectual Property Protection

 

On December 10, 2008, GMP Technologies, LLC (“GMP”) filed suit against the Company in the United States 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, alleged that the retailer discontinued sales of the private label swab product after having

been made aware of the Company’s 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 sought to have the court determine that GMP’s product did not infringe the Swab Patents and to have the Company’s Swab Patents declared invalid. In addition, GMP sought damages for its losses related to the retailer’s cancellation of the private label product following the Company’s providing notice to the retailer of the Swab Patents. The Company denied any wrongdoing and asserted a counterclaim alleging that GMP was infringing the Swab Patents. On February 9, 2010, the parties voluntarily dismissed the case and counterclaim without prejudice and with each party bearing its own costs.

 

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 product liability lawsuits pending at that time. 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. On October 28, 2009, the Ninth Circuit Court reversed the decision of the United States District Court, District of Arizona. On December 23, 2009, the Ninth Circuit denied the Company’s petition for rehearing. On January 15, 2010, the Ninth Circuit granted Matrixx’s 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 Executive 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 Company’s 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 Company’s 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 Company’s current directors and the following current and former officers of the Company: William Hemelt, Samuel Cowley 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 Company’s 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 Company’s current directors and the following current and former officers of the Company: William Hemelt, Samuel Cowley, 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 Company’s 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 (discussed under “Securities Litigation Matters” above), which the Court granted on March 1, 2010.

 

On November 20, 2009, a shareholder derivative lawsuit was filed by Bette-Ann Liguori, on behalf of the Company, against all of the Company’s 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, Lynn Romero, Michael Voevodsky, James Marini, and Edward Faber (Liguori v. Egan, et al., Superior Court of the State of Arizona, County of Maricopa). 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 Company’s compliance with FDA regulations. 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. On May 18, 2010, the court granted defendants’ motion and ordered the parties to file a status report in six months.

 

In accordance with and subject to the provisions of the Company’s 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

 

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 Company’s 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 year ended March 31, 2010, legal expense for product liability litigation, responding to the FDA warning letter and other regulatory matters, and litigating claims with one of its former manufacturers was approximately $7.2 million, compared to $2.6 million for the year ended March 31, 2009, and $2.5 million for the year ended March 31, 2008. Product liability legal expense has significantly increased as a result of the numerous lawsuits filed since the Company’s receipt of the FDA’s warning letter.

 

The names, ages, positions and business experience of each of our executive officers are listed below. Each executive officer is elected by our Board of Directors to hold office until his or her successor is appointed and qualified or until such earlier time as such officer may resign or be removed by the board.

William J. Hemelt, 56, President and Chief Executive Officer

 

Mr. Hemelt joined Matrixx in June 1998 as our Chief Financial Officer, Treasurer, and Secretary. Mr. Hemelt served as Secretary until February 2005 and Treasurer until July 2007. In October 2008, Mr. Hemelt was named Acting President and Chief Operating Officer, in addition to his position as Chief Financial Officer. In August 2009, Mr. Hemelt was elected to the Matrixx Board of Directors and named President and Chief Executive Officer. From 1980 to 1997, Mr. Hemelt held a variety of financial positions with Arizona Public Service Company, Arizona’s largest utility, including six years as Treasurer and four years as Controller. Mr. Hemelt earned a Master of Business Administration and a Bachelor of Science in Electrical Engineering from Lehigh University.

 

Timothy L. Clarot, 55, Vice President of Research & Development

 

Mr. Clarot joined Matrixx in 1999 and became Director of Operations in 2001, overseeing our manufacturing and distribution processes and development of new products. In June 2003, Mr. Clarot was named Director, Research and Development. Mr. Clarot was promoted to Vice President, Research and Development in January 2004. Mr. Clarot oversees product-related regulatory compliance activities, product development and consumer affairs. From 1981 to 1998, Mr. Clarot held positions of increasing responsibility, including Quality Control Manager, with Reckitt Benckiser, a world leader in consumer products. Mr. Clarot holds a Bachelor of Science in Chemistry from California State University at Fresno.

 

Samuel Cowley, 50, Executive Vice President, Business Development, General Counsel and Secretary

 

Mr. Cowley was elected to the Matrixx Board of Directors in July 2005. In May 2008, Mr. Cowley joined the Company as Executive Vice President, Business Development, General Counsel and Secretary. Previously, Mr. Cowley served until May 2007 as Executive Vice President and General Counsel for Swift Transportation Co., Inc. and was a member of Swift’s Board of Directors. Since October 2009, Mr. Cowley has also served as a member of the Board of Directors of Education Management Corporation, a provider of post-secondary education. Prior to joining Swift in March 2005, Mr. Cowley had been a practicing attorney with the law firm of Snell & Wilmer L.L.P., Phoenix, Arizona since March 1990. Mr. Cowley’s practice was concentrated in mergers and acquisitions, securities regulation, including Sarbanes-Oxley Act compliance, and corporate finance. Previously, he was associated with Reid & Priest, New York, New York. Mr. Cowley is a graduate of Cornell Law School, and of Brigham Young University with a B.A. in Economics. Mr. Cowley is admitted to practice law in the States of Arizona and New York.

 

James A. Marini, 48, Vice President of Sales

 

Mr. Marini joined Matrixx in July 1997 as National Sales Manager and was promoted to Vice President of Sales in January 2004. Mr. Marini has directed the introduction and development of the national sales program for Zicam Cold Remedy since 1999. Mr. Marini is responsible for Matrixx’s sales efforts and oversight of our sales force and contract broker network. From 1977 to 1997 Mr. Marini held a variety of positions with Dominos Supermarkets in New York, including six years as Vice President. Mr. Marini attended Mercy College.

 

William J. Barba, 38, Vice President, Finance and Accounting, and Treasurer

 

Mr. Barba joined Matrixx in 2004 in a financial analyst and investor relations role and became Director of Planning and Administration in 2006. In July 2007, Mr. Barba was named Treasurer. Mr. Barba was promoted to Vice President of Finance and Accounting in May 2010. Mr. Barba oversees finance and accounting as well as the Company’s information technology and manufacturing and distribution processes. Prior to joining Matrixx, Mr. Barba held a variety of financial management positions with increasing responsibilities at Mesa Air Group, Honeywell Intellectual Properties, Avnet, and MicroAge. Mr. Barba holds a Bachelor of Science degree in finance from Arizona State University.

 

 

Our common stock trades on the Nasdaq Global Select Market under the symbol MTXX. The following table sets forth, for the periods indicated, the range of high and low prices of our common stock as reported by the Nasdaq Global Select Market.

 

 

As of June 1, 2010, we had approximately 5,800 record and beneficial stockholders.

 

Dividend Policy

 

Since our initial public offering in 1996, we have not paid dividends on our common stock and do not expect to pay dividends in the foreseeable future. The amount of future dividends, if any, will be determined by the Board of Directors based upon our earnings, financial condition, capital requirements and other factors, including any contractual or statutory restrictions on our ability to pay dividends.

 

Stock Performance Graph

 

The following graph compares our cumulative total stockholder return with those of the Nasdaq Stock Market Index and the Russell Microcap Index for the five fiscal years ended March 31, 2010. The graph assumes that $100 was invested on March 31, 2005 in (1) our Common Stock, (2) the Nasdaq Stock Market Index, and (3) the Russell 2000 Growth Index, including in each case, if applicable, reinvestment of dividends. Note: We caution that the stock price performance shown in the graph below should not be considered indicative of potential future stock price performance.

 

PERFORMANCE TABLE

 

 

This Nasdaq index comprises all domestic shares traded on the NASDAQ Global Select, NASDAQ Global Market, and The NASDAQ Capital Market, excluding preferred, rights and warrants. The Russell 2000 Growth Index is a growth industry index that measures the performance of the 2,000 smallest companies in the Russell 3000 Index with the highest, proportionately weighted, growth. We use the Russell 2000 Growth index because we do not believe there is an accurate industry index for micro-cap OTC companies.

 

Issuer Purchases of Equity Securities

 

The Company (and its affiliated purchasers) did not repurchase any of its shares during the quarter ended March 31, 2010.

 

Issuer Purchases of Equity Securities

 

 

 

 

The Board of Directors of the Company approved a stock repurchase program, effective January 26, 2009, which permits the Company to purchase up to 1.0 million shares of the Company’s common stock (2009 Program). Concurrent with its approval of this repurchase program, the Board of Directors terminated the repurchase program previously authorized in April 2004 (which authorized the repurchase of up to 1.0 million shares of the Company’s common stock).

 

During fiscal 2010, the Company did not purchase any shares of common stock on the open market. However, during fiscal 2010, the Company repurchased 13,566 shares of common stock with an aggregate value of $223,161 from employees to satisfy tax withholding requirements associated with vested restricted stock. During fiscal 2009, the Company purchased 573,394 shares of common stock on the open market at an aggregate cost of $9,284,297. In addition, during fiscal 2009, the Company repurchased 32,802 shares of common stock with an aggregate value of $564,118 from employees and directors to satisfy tax withholding requirements associated with vested restricted stock. During fiscal 2008, the Company repurchased 493,969 shares of its common stock in the open market at an aggregate cost of $7,148,245.

 

The following table sets forth selected historical financial data for Matrixx for the fiscal years ended March 31, 2010, 2009, and 2008, the three-month transition period ended March 31, 2007 and the previous two years ended December 31, 2006 and 2005. The financial data presented below is derived from Matrixx’s audited consolidated financial statements. We report Matrixx’s, Zicam, LLC’s, Zicam Swab Products, LLC’s, Zicare LLC’s, and Zicam Canada, Inc.’s financial results on a consolidated basis. For additional information, see the financial statements of Matrixx and the notes thereto included elsewhere in Item 15. The following table should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and is qualified by reference thereto and to Matrixx’s financial statements and the notes thereto.

 

 

Fiscal 2010 results include $33.1 million in recall-related charges and goodwill and asset impairments that were associated with the withdrawal of nasal Cold Remedy products. Fiscal 2009 earnings reflect recall related charges of $2.0 million associated with a limited recall of certain oral Cold Remedy product lots. Additionally, earnings for 2005 include $8.5 million of expense related to settling litigation ($12.0 million settlement plus $1.3 million for litigation reserves, less $4.8 million of insurance reimbursement). See Note 9 for additional information.

 

Because of the extreme seasonality of our business, on February 9, 2007, our Board of Directors approved a change in our fiscal year in order to better align our operations and financial results with the entire cold season (our previous fiscal years ended in the middle of the cold season). Due to the change in our fiscal year, results for the three months ended March 31, 2007, are reported as a transition period. Our fiscal year begins April 1 and ends March 31.

 

 

Executive Summary

 

The Company develops, markets and sells innovative, over-the-counter (OTC) healthcare products with an emphasis on those that utilize unique delivery systems. 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.

The following table details our sales by product class, for the periods indicated, with further details below:

 

 

We received a warning letter from the FDA on June 16, 2009 regarding 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 was in violation of FDA regulations by failing to file a new drug application for the products. The FDA also asserted that the products were misbranded under FDA regulations for failing to adequately warn of the risk of smell loss. Although the Company disagreed with the FDA’s allegations (see “Legal Proceedings” in Part I, Item 3 of this Report for more information on the Company’s position with respect to the FDA’s warning letter), the Company cooperated with the FDA and recalled the Cold Remedy Nasal Gel and Cold Remedy Swabs from the market. Following months of informal discussions, 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 FDA’s 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. By letter dated March 4, 2010, the FDA reaffirmed its original position and denied the Company’s request.

 

The FDA warning letter, the recall of Zicam Cold Remedy Nasal Gel and Zicam Cold Remedy Swabs, and the subsequent litigation have had a material adverse impact on our business. The recalled products accounted for approximately 40%, or $42.5 million, of our fiscal 2009 net sales. The recall required us to record a $9.2 million reserve and take impairment charges of $23.9 million. Our focus during fiscal 2010 was to convert consumers that used our nasal Cold Remedy products to our oral Cold Remedy offerings. As a result, our promotional and marketing support during the 2009/2010 cold season primarily focused on Zicam oral Cold Remedy products.

 

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 Company’s 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 with Canadian packaging.

 

Net sales for the fiscal year ended March 31, 2010 decreased to approximately $67.3 million, or 40% below net sales of $111.6 million for the fiscal year ended March 31, 2009. The lower sales comparison is primarily due to the loss of our nasal Cold Remedy products. In addition our cough and multi-symptom product sales declined approximately $4.8 million. However, for the year ended March 31, 2010, sales of our oral Cold Remedy products increased to $44.8 million from $36.6 million in the prior year.

 

The Company incurred a net loss for the year ended March 31, 2010 of approximately $23.6 million, or $(2.56) per diluted share, compared to net income of $13.9 million, or $1.46 per diluted share, for the year ended March 31, 2009. This $37.4 million income decline includes pre-tax charges associated with the FDA warning letter and recall of our nasal Cold Remedy products. The charges include $9.2 million to reserve for recall related costs and $23.9 million for goodwill and other asset impairments. Net income in the prior year included a $2.0 million reserve for recall-related charges associated with the recall of certain lots of Zicam oral Cold Remedy products. In addition,

legal expense for litigation and regulatory matters was $7.2 million for the year ended March 31, 2010, compared to approximately $2.6 million in the year ended March 31, 2009.

 

We expect net income (loss) in future periods to be significantly affected by the 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 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 earnings will continue to vary along with the seasonality of sales and the level of marketing and research and development expense. As in prior years, we expect to report a loss in the quarter ending June 30 (our fiscal first quarter).

 

The Company’s management reviews several key indicators in evaluating overall performance:

 

1) We compare our sales and net income performance against our annual goal for each. Due to the FDA action and subsequent recall of our nasal Cold Remedy products, the Company’s sales and net income were significantly adversely affected. Fiscal 2010 operating results include recall-related charges as well as goodwill and asset impairments of $33.1 million. In addition, the Company increased its marketing investment, as a percent of net sales, to spur increased consumption of our oral Cold Remedy products.

 

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 52 weeks ended March 21, 2010, 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 12% over the comparable period in the previous year, while the entire cough and cold category was relatively unchanged.

 

3) We measure our ability to maintain strong gross margins on our products. During the year ended March 31, 2010, we realized an average gross margin of 69%, compared to the 71% average gross margin achieved in the prior year. Gross margins on our existing products vary between 55% and 80%. Gross margins were affected by increased in-store promotion and higher levels of product returns.

 

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. Due to the inability to sell our nasal Cold Remedy products, our operating expense as a percentage of sales increased in fiscal 2010.

 

5) We review the distribution and mix of our products by key national retailers. Our 15 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. The number of store brand products has significantly increased. Store brand products are generally sold at a substantial discount to branded products. Store brand versions of our products adversely affect our mix of products at retail as well as our sales levels.

 

Seasonality and Quarterly Results

 

The products we currently market are seasonal in nature, and sales at retail generally increase as the level of population suffering from colds rises. The Company records sales when we ship products from our warehouse facilities. During the second fiscal quarter, the Company usually realizes increased sales volume as retailers stock our products and order displays to prepare for the upcoming cough and cold season. Additional sales (reorders) to retailers are highly dependent upon the incidence of illness within the population. Retail consumption of our products is highest during the cough and cold season, which usually runs from October through March. The Company begins extensive advertising campaigns to coincide with the cough and cold season and generally realizes higher advertising expense in the October through March timeframe. The fiscal first quarter (ending June 30) of

each year generally accounts for only 7% to 8% of annual sales and, historically, we have incurred a loss in that quarter. In addition, the Company records the expense for annual bonus awards when goal attainment for the bonus is probable or has been achieved. 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.

 

Certain information is set forth below for fiscal operations (expressed in $000’s and as a percentage of net sales) on a quarterly basis for the years ended March 31, for the periods indicated.

 

Quarterly Results:

 

 

 

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, management’s 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 adjustments (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 fiscal 2009 annual valuation of goodwill (as of September 1, 2008) was completed in January 2009 and no impairment was identified. In connection with the Company’s 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 market’s perception of the value of the Company’s 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 goodwill and asset impairments in our Consolidated Statements of Operations for the year ended March 31, 2010. In addition, due to our inability to commercialize our oral care product developed to reduce tartar, we recorded a charge of $420,000 to write down the value of patents and certain other assets associated with the development of that product. We do not anticipate launching this product on our own and determined the assets associated with the product’s 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 associated with tax loss carrybacks and carryforwards. These deferred tax asset amounts increased during fiscal 2010 as a result of the Company’s 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 Company’s 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 Company’s 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 Adjustments.  The Company routinely enters into arrangements with its retail customers to support sales programs that increase sales of our products to consumers. Such programs are based primarily on customer purchases and other factors such as sales to consumers. The programs include sales incentives, promotional allowances, coupons, rebates, and slotting fees. We record reserves for these programs as sales adjustments that offset revenue in the period the related revenue is recognized. Sales adjustments for such programs totaled $13.3 million, $11.4 million, and $9.3 million during fiscal 2010, 2009 and 2008, respectively.

 

The programs involve fixed amounts or percentages of sales to customers. Reserves for such programs are calculated based on an assessment of purchases and performance under the programs and any other specified factors. While the majority of sales adjustment amounts are readily determinable at period end and do not require

estimates, certain of the sales adjustments require management to make estimates. In making these estimates, management considers all available information, including the overall business environment, historical trends and information from customers. Management believes that the reserves recorded for customer programs at March 31, 2010 are adequate and proper.

 

The estimate for product returns reflects our historical experience of sales to retailers and is reviewed regularly to reflect estimated product returns. During fiscal 2010, we recorded 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. During the year ended March 31, 2010 we recorded a $3.0 million increase to our return reserve, in excess of the customary 3.5% of gross sales, for actual and anticipated returns. We determined that, due to the loss of our nasal Cold Remedy products and the level of returns associated with our non-Cold Remedy products, our returns provision should be increased to 4.5% of gross sales for all of our products in fiscal 2011. Should the actual level of product returns vary significantly from our estimates, our operating and financial results would be materially affected.

 

Accounts Receivable and Allowance for Doubtful Accounts.  The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. The Company recorded an allowance for doubtful accounts of 0.02% of gross sales in fiscal 2010. 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. In recent years, the retail channel has experienced shifts in market share among competitors, causing some retailers to experience liquidity problems. Certain of Matrixx’s customers filed for bankruptcy and the recent global economic crisis has adversely affected the financial position of other retailers. There is a risk that customers will not pay, or that payment may be delayed, because of bankruptcy or other factors beyond the Company’s control. Due to these recent market trends, we increased the allowance for doubtful accounts from 0.02% of gross sales to 0.05% of gross sales for fiscal 2011.

 

Legal Contingencies.  We are subject to lawsuits, investigations and claims arising out of the normal conduct of our business. See Part I, Item 3 — “Legal Proceedings” 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 March 31, 2010, compared to $785,000 at March 31, 2009. The decline in the reserve balance was due to settlements of certain claims. However, following the Company’s receipt of the FDA’s 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 and adjust the litigation reserve in the future when we can reasonably estimate changes in the amounts and likelihood of resolving the claims.

 

Product Recalls.  The Company establishes a reserve for product recalls and withdrawals on a product-specific basis when circumstances giving rise to the recall or withdrawal become known. Facts and circumstances related to the recall or withdrawal, including where the product affected by the recall or withdrawal is located (in inventory or at retail customers), and cost estimates for shipping and handling for returns are considered when establishing a product recall or withdrawal reserve. These factors are updated and reevaluated each period and the related reserves are adjusted when these factors indicate that the recall or withdrawal reserve is either not sufficient to cover or exceeds the estimated product recall or withdrawal expenses.

 

For the year ended March 31, 2010, the Company recorded a $9.2 million reserve for estimated costs to recall the Cold Remedy Nasal Gel and Cold Remedy Swabs. The Company recorded approximately $1.6 million to reserve for withdrawal charges and fees associated with the withdrawal of eight products from the Canadian marketplace. Additionally, for the fiscal year ended March 31, 2009, the Company incurred and reserved for recall-related expenses of approximately $2.0 million associated with the recall of certain oral Cold Remedy product lots. The reserve charges are recorded in selling, general and administrative expense in the accompanying statements of operations.

Results Of Operations For The Fiscal Year Ended March 31, 2010 Compared To The Fiscal Year Ended March 31, 2009

 

Certain information is set forth below for our operations expressed in $000’s and as a percentage of net sales for the periods indicated:

 

 

Net Sales

 

Net sales for fiscal 2010 were approximately $67.3 million, or 40% below net sales of $111.6 million for fiscal 2009. The decrease in net sales is primarily associated with the June 2009 recall of our nasal Cold Remedy products. Nasal Cold Remedy products accounted for approximately 40%, or $42.5 million, of fiscal 2009 sales. Partially offsetting the lost nasal Cold Remedy sales was an $8.2 million increase in oral Cold Remedy net sales. Additionally, sales of cough and multi-symptom products declined $4.8 million and we withdrew our Canadian products, which accounted for $1.0 million of sales in fiscal 2009. The average net selling price per unit, for the year ended March 31, 2010, decreased approximately 6% due to increased in-store promotions and a higher level of product returns.

 

Cost of Sales

 

For the year ended March 31, 2010, our cost of sales decreased to approximately $20.7 million, compared to $32.9 million for the year ended March 31, 2009. The decrease was due to the lower level of unit sales achieved in fiscal 2010 versus 2009.

 

Gross Profit

 

Gross profit for the year ended March 31, 2010 was approximately $46.6 million, compared to gross profit of approximately $78.8 million for year ended March 31, 2009. The decline in gross profit is due to the lower level of sales during the period, compared to the prior year, and due to increased in-store promotions and a higher level of product returns, a lower average sales price per unit. Gross margin for fiscal 2010 was 69%, compared to 71% gross margin for fiscal 2009. Gross margin was negatively affected by the previously mentioned increased reserve for returns as well as increased in-store promotional programs. Gross margins on our existing products vary between 55% and 80%. Gross margin will continue to be affected by the relative mix of products sold and changes in product sales price and costs.

Selling, General & Administrative (SG&A)

 

SG&A expense for 2010 increased approximately $5.5 million to $58.7 million from approximately $53.2 million in fiscal 2009.

 

The higher SG&A expense is due to approximately $9.2 million recorded to account for costs and charges related to the recall of nasal Cold Remedy products. In addition, SG&A expenses associated with Canada increased approximately $800,000 due to the $1.6 million recorded for the withdrawal of products in Canada. Due to the reduced level of sales after the recall of nasal Cold Remedy products, our non-labor marketing expense decreased $5.9 million. We expect SG&A expenses in future periods will vary largely in relation to the level of our advertising and legal expenditures. Advertising expense is heaviest during the cold season, which is generally October through March.

 

Legal expense for litigation and regulatory matters was $7.2 million for the year ended March 31, 2010, compared to approximately $2.6 million in the year ended March 31, 2009 (see Part I, Item 3 — “Legal Proceedings”). We anticipate future legal expense will be between $1.5 million and $2.0 million per quarter.

 

Research and Development

 

Research and development expense was approximately $2.4 million in fiscal 2010, approximately $839,000 less than the $3.2 million of expense incurred in fiscal 2009. Due to our inability to commercialize our oral care product developed to reduce tartar, we recorded a charge of $420,000 during the year ended March 31, 2010 to write down the value of patents and certain other assets associated with the development of that product. The timing of research and development spending can vary throughout the year and is not generally associated with our seasonal sales patterns.

 

Goodwill and Asset Impairments

 

In connection with the Company’s 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 market’s perception of the value of the Company’s 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 $3.9 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.

 

Interest & Other Income

 

Interest and other income was approximately $147,000 in the year ended March 31, 2010, versus approximately $287,000 in the fiscal year ended March 31, 2009. There was no interest expense related to outstanding debt in fiscal 2010 or 2009. Interest income in future periods will vary based on our level of cash and interest rate levels.

 

Income (Loss) Before Income Taxes

 

Loss before income tax for fiscal 2010 was approximately $38.2 million, compared to income before income taxes of $22.6 million for fiscal 2009. The decline is principally due to the lower gross profit combined with increased SG&A expense and goodwill and asset impairments discussed above. We expect that income (loss) in future periods will be significantly impacted by sales levels of our products, product introductions in new categories, and annual changes in our advertising, research and development, and legal expenses. We anticipate quarterly earnings will continue to vary along with the seasonality of sales.

Provision (Benefit) for Income Tax Expense

 

We record income tax benefits and expense at our combined estimated annual effective tax rate and adjusted for the tax effects of certain transactions including research and development tax credits. Due to our operating loss in fiscal 2010, we recognized a benefit for income tax expense of approximately $14.6 million, versus income tax expense of $8.7 million for fiscal 2009. We anticipate the income tax benefit being realized in reassessments of prior years’ tax exposures as well as expected future income.

 

Net Income (Loss)

 

Net loss was approximately $23.6 million in fiscal 2010, compared to net income of $13.9 million for the year ended March 31, 2009.

 

Results Of Operations For The Fiscal Year Ended March 31, 2009 Compared To The Fiscal Year Ended March 31, 2008

 

Certain information is set forth below for our operations expressed in $000’s and as a percentage of net sales for the periods indicated:

 

 

Net Sales

 

Net sales for fiscal 2009 were approximately $111.6 million, or 11% above net sales of $101.0 million for the year ended March 31, 2008. The increase in fiscal 2009 net sales was attributable to higher unit sales and new product introductions ($12 million), a price increase for Cold Remedy and Allergy/Sinus ($4 million), lower product return charges ($2.4 million) and initial sales in Canada ($1.0 million). Partially offsetting those increases was an $8.7 million decline in sales of cough, multi-symptom, Nasal Comfort, and Xcid products. The average net selling price per unit for the year ended March 31, 2009, increased approximately 9% due to the mix of products sold and the price increase on Cold Remedy and Allergy/Sinus products. The price increase was 5% for Cold Remedy products and 8% on Allergy/Sinus products and was initiated during the quarter ended September 30, 2008.

 

Cost of Sales

 

For the year ended March 31, 2009, our cost of sales decreased approximately $1.7 million to approximately $32.9 million, compared to the cost of sales for the year ended March 31, 2008 of approximately $34.5 million. The decrease was due to cost reductions achieved on several of our products and the mix of products sold.

Gross Profit

 

Gross profit for the year ended March 31, 2009 was approximately $78.8 million, compared to gross profit of approximately $66.4 million for year ended March 31, 2008. The increased gross profit was due to the higher level of sales during the period (compared to the prior year) and lower cost of goods sold. Gross margin for fiscal 2009 was 71%, compared to the 66% gross margin for the year ended March 31, 2008.

 

Gross margin was positively affected by the previously mentioned price increases on certain products that became effective in the fiscal second quarter, the mix of higher margin products sold during fiscal 2009, lower returns charges, as well as cost improvements on certain products. In addition, inventory reserve charges, that are recorded to account for expiring products and obsolete components, declined approximately $540,000 in fiscal 2009 compared to the prior year.

 

Selling, General & Administrative (SG&A)

 

SG&A expense for 2009 increased approximately $6.7 million to $53.2 million from approximately $46.5 million in fiscal 2008.

 

The higher SG&A expense was due to approximately $2.0 million recorded to account for costs and charges related to the recall of certain oral cold remedy product lots. Labor expense increased approximately $2.5 million, of which $1.6 million was related to annual incentive compensation. In addition, we incurred approximately $1.0 million of expense associated with senior management retirement and replacement recruitment. Non-labor marketing expense increased approximately $1.3 million, primarily related to test marketing of Xcid antacid.

 

Litigation expense related to the product liability lawsuits was approximately $2.2 million in fiscal 2009, compared to approximately $2.5 million (net of approximately $560,000 for insurance reimbursements) in fiscal 2008. We also incurred legal expense in connection with our lawsuit filed to recover recall-related costs .

 

Research and Development

 

Research and development expense was approximately $3.2 million in fiscal 2009, approximately $873,000 less than the level incurred in fiscal 2008. The research and development spending reflects scale-up costs related to new products, including our new Cold Sore and Healthy Z-ssentials products. 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 $287,000 in the year ended March 31, 2009, versus approximately $653,000 in the fiscal year ended March 31, 2008. Despite higher cash balances, interest income decreased due to lower interest rates. There was no interest expense in fiscal 2009 or 2008.

 

Income Before Income Taxes

 

Income before income tax for fiscal 2009 was approximately $22.6 million, compared to approximately $16.5 million for fiscal 2008. The increased pre-tax income was primarily due to the increased gross profit partially offset by the increased SG&A expenses discussed above.

 

Provision for Income Tax Expense

 

We recorded income tax expense at our combined estimated annual effective tax rate of approximately 39% and adjusted for the tax effects of certain transactions including research and development tax credits and charitable donations. We recognized income tax expense of approximately $8.7 million during fiscal 2009, versus approximately $6.0 million for fiscal 2008. The lower effective tax rate in the year ended March 31, 2008 period was associated with research and development tax credits.

Net Income

 

Net income was approximately $13.9 million in fiscal 2009, compared to $10.4 million for the year ended March 31, 2008.

 

Liquidity and Capital Resources

 

As of March 31, 2010, our cash, cash equivalents, and certificates of deposit balance was $30.2 million, $9.8 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 $44.4 million as of March 31, 2010, compared to $52.1 million at March 31, 2009. During the year ended March 31, 2010, trade receivables decreased to $5.4 million from $14.8 million at March 31, 2009. The decrease in accounts receivable reflects the timing of orders, the loss of nasal Cold Remedy product sales and a lower level of sales in the fourth quarter. The Company’s 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 on a monthly basis. We believe our allowance as of March 31, 2010 is adequate. As a result of the Company’s fiscal 2010 operating loss, 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 Company’s cash position in future periods.

 

The change in accounts receivable, inventory, accounts payable and accrued expenses largely reflects the seasonal nature of the Company’s 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. We do have working capital requirements arising from the increase of inventory and accounts receivable in excess of the increase in accounts payable, but these vary throughout the year reflecting the seasonal nature of our business.

 

The Company is involved in various product liability claims and other legal proceedings. The Company’s 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.

 

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 amortize over the term of the 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 commissioned the building of a second manufacturing line to produce swab products at the end of fiscal 2009. 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 Company’s 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. The Company did not 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.

 

As discussed in more detail in Part II, Item 5, “Issuer Purchases of Equity Securities” of this Report, the Board of Directors of the Company approved a stock repurchase program, effective January 26, 2009, which permits the Company to purchase up to 1 million shares of the Company’s common stock. Concurrent with its approval of this repurchase program, the Board of Directors terminated the repurchase program previously authorized in April 2004.

 

Contractual Obligations

 

We have entered into certain long-term contractual obligations that will require various payments over future periods as follows:

 

 

Recently Issued Authoritative Guidance

 

In April 2010 we adopted the FASB’s guidance on 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 entity’s economic performance; and to require enhanced disclosures that will provide users of financial statements with more transparent information about an enterprise’s involvement in a variable interest entity. The adoption of this guidance did not impact our consolidated financial statements.

 

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 was effective for interim or annual reporting periods ending after June 15, 2009, and is applied prospectively. We adopted this guidance effective for the quarter ending June 30, 2009. The adoption of this guidance did not impact our consolidated financial statements as of March 31, 2010.

 

In October 2009, the FASB issued Accounting Standards Update (“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. The adoption of this guidance will not impact our consolidated financial statements.

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

Forward Looking Statements

 

This Report on Form 10-K, 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:

 

 

 

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-K, including those set forth in the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” 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 enforcement actions, including product recalls, that could restrict our ability to market our products; (v) changing or modified regulatory or enforcement 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-K speak only as of the date of this Report 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 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.

 

 

Our line of credit with Comerica Bank expired in July 2009 and we did not 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.

 

As of March 31, 2010 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.

 

 

The Report of Independent Registered Public Accounting Firm and Consolidated Financial Statements of Matrixx, including the Notes to those statements, are included in Part IV, Item 15 of this Annual Report on Form 10-K.

 

 

None.

 

 

 

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 as of the end of the period covered by this Report. Based on such evaluation, such officer has concluded that our disclosure controls and procedures were effective as of March 31, 2010 in alerting him on a timely basis to material information relating to us (including our consolidated subsidiaries) required to be included in our filings under the Exchange Act.

 

 

Management of the Company, including our President and Chief Executive Officer, is responsible for establishing and maintaining adequate internal control over financial reporting as defined by rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of

financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that:

 

(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;

 

(ii) provide reasonable assurance that the transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with the authorizations of management and directors of the Company; and

 

(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of the Company’s internal control over financial reporting as of March 31, 2010. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.

 

Management’s assessment included an evaluation of the design of our internal control over financial reporting and testing the operational effectiveness of our internal control over financial reporting. Management reviewed the results of the assessment with the Audit Committee of the Board of Directors. Based on such assessment, management determined that, at March 31, 2010, we maintained effective internal control over financial reporting.

 

Mayer Hoffman McCann P.C., the independent registered public accounting firm that audited the consolidated financial statements of the Company included in this Annual Report on Form 10-K, has issued a report on the Company’s internal control over financial reporting as of March 31, 2010. The report is included below in this Item under the heading “Report on Internal Control over Financial Reporting of Independent Registered Public Accounting Firm.”

REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of Matrixx Initiatives, Inc.

 

We have audited the internal control over financial reporting of Matrixx Initiatives, Inc. and subsidiaries (the “Company”) based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2010, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended March 31, 2010 of the Company and our report dated June 5, 2010 expressed an unqualified opinion on those consolidated financial statements.

 

 

MAYER HOFFMAN MCCANN P.C.

 

Phoenix, Arizona

June 5, 2010

 

None.

 

 

The information required by this Item for our executive officers is set forth in Part I of this Form 10-K under the heading “Executive Officers of Matrixx.” Other information required by this Item is set forth in our Proxy Statement relating to our 2010 annual meeting of stockholders to be held on August 25, 2010 (the “2010 Proxy Statement”), under the headings, “Information Concerning Directors,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Additional Information — How do we submit shareholder proposals and director nominations for the next Annual Meeting?” and “Information about our Board, Its Committees and our Corporate Governance — What are the responsibilities of the Audit Committee?” and is incorporated herein by this reference as if set forth in full.

 

We have adopted a Code of Ethics that applies to our board of directors, our principal executive officer, our principal financial officer and our controller, as well as to all of our other employees. A copy of the Code of Ethics was attached as an exhibit to our Annual Report on Form 10-K for the period ended December 31, 2003 and is available on our website (www.matrixxinc.com). We will make a copy of the Code of Ethics available to any person without charge, upon request, by writing to Matrixx Initiatives, Inc., 8515 E. Anderson Dr., Scottsdale, AZ 85255, Attn: Corporate Secretary. If we make any substantive amendment to the Code of Ethics or grant any waiver, including any implicit waiver, we will disclose the nature of such amendment or waiver in a Report on Form 8-K within four business days after such amendment is made or such waiver is given.

 

 

The information required by this Item is set forth in the 2010 Proxy Statement, under the headings, “Executive Compensation,” “Director Compensation,” and “Compensation Committee Interlocks and Insider Participation” and “Compensation Committee Report” and is incorporated herein by this reference as if set forth in full.

 

 

The information required by this Item for certain of our beneficial owners is set forth in the 2010 Proxy Statement, under the heading, “Security Ownership of Certain Beneficial Owners and Management,” and is incorporated herein by this reference as if set forth in full.

 

Securities Authorized for Issuance Under Equity Compensation Plans

 

The following table sets forth information as of March 31, 2010 with respect to our compensation plans and individual compensation arrangements under which our equity securities were authorized for issuance to directors, officers, employees, consultants and certain other persons and entities in exchange for the provision to us of goods or services.

 

 

The information required by this Item is set forth in the 2010 Proxy Statement, under the headings, “Information About our Board, Its Committees and our Corporate Governance,” “What are our processes and procedures for considering and determining executive compensation? — The Compensation Committee” and “Related Party Transactions” and is incorporated herein by this reference as if set forth in full.

 

 

The information required by this Item is set forth in the 2010 Proxy Statement, under the heading, “Audit Matters” and is incorporated herein by this reference as if set forth in full. The information set forth in the 2010 Proxy Statement under the heading “Report of the Audit Committee” is not incorporated herein by reference.

 

 

(a)1. Financial Statements

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

To the Board of Directors and Stockholders of Matrixx Initiatives, Inc.

 

We have audited the accompanying consolidated balance sheets of Matrixx Initiatives, Inc. and subsidiaries (the “Company”) as of March 31, 2010 and 2009 and the related consolidated statements of operations, changes in stockholders’ equity and cash flows for the years ended March 31, 2010, 2009 and 2008. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of March 31, 2010 and 2009, and the results of their operations and their cash flows for the years ended March 31, 2010, 2009, and 2008 in conformity with U.S. generally accepted accounting principles.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of March 31, 2010, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated June 5, 2010 expressed an unqualified opinion on the Company’s internal control over financial reporting.

 

 

MAYER HOFFMAN MCCANN P.C.

 

Phoenix, Arizona

June 5, 2010

MATRIXX INITIATIVES, INC. AND SUBSIDIARIES

 

 

The accompanying notes are an integral part of these consolidated financial statements.

MATRIXX INITIATIVES, INC. AND SUBSIDIARIES