UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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þ
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
March 31,
2010
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or
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FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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Commission File
No. 001-31404
Matrixx Initiatives, Inc.
(Exact Name of
Registrant as Specified in Its Charter)
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Delaware
(State or Other Jurisdiction
of Incorporation or Organization)
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87-0482806
(I.R.S. Employer
Identification No.)
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8515 E. Anderson Drive
Scottsdale, AZ 85255
602-385-8888
(Address of principal
executive offices, Registrants Telephone Number, including
area code)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, $.001 par value
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Nasdaq Global Select Market
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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 registrants 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.
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Large accelerated
filer o
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Accelerated
filer þ
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Non-accelerated
filer o
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Smaller reporting
company o
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(Do not check if a smaller
reporting company)
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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
registrants common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrants definitive proxy statement
prepared in connection with the Registrants 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.
PART I
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 FDAs allegations (see Legal Proceedings in
Part I, Item 3 of this Report for more information on
the Companys position with respect to the FDAs
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 FDAs warning letter. In its
response, the Company reiterated its position that there is no
valid scientific evidence that Zicam nasal Cold Remedy products
are unsafe and requested the FDA to withdraw the warning letter.
By letter dated March 4, 2010, the FDA reaffirmed its
original position and denied the Companys 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 Companys website is not part of this
report.
3
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
$5.0 billion annually in retail sales in the United States,
includes a wide variety of tablets, liquids, gels, sprays, and
syrups that remedy
and/or
provide relief to cold, allergy and sinus congestion sufferers.
The largest
sub-segment
of the cough and cold category includes products formulated to
relieve symptoms associated with the common cold or allergies.
Our Cold Remedy and Allergy/Sinus products are our core
offerings. The following table details our sales by product
class for the periods indicated, with further details below:
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Year Ended:
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Product Class
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March 31, 2010
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%
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March 31, 2009
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%
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March 31, 2008
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%
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Cold Remedy Nasal
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$
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1,977,909
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3
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%
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$
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42,477,144
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38
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%
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$
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32,958,814
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33
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%
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Cold Remedy Oral
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44,752,918
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66
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%
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35,563,524
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33
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%
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35,266,694
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35
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%
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Allergy/Sinus
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16,257,433
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24
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%
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21,889,668
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20
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%
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17,325,720
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17
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Cough & Multi-Symptom
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2,512,814
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4
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%
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7,306,827
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6
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%
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15,068,495
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15
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%
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Other Cough/Cold
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1,667,936
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3
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%
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2,192,124
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2
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%
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0
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0
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%
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Canada
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148,229
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0
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%
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1,053,546
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1
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%
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0
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0
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%
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Antacid
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0
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0
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%
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147,356
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0
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%
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352,661
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0
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%
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Total Net Sales
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$
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67,317,239
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100
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%
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$
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111,630,188
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100
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%
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$
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100,972,384
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100
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%
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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.
4
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-ssentialstm
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 years 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
5
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 FDAs 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.
6
Trademarks,
Trade Names, and Proprietary Rights
We have been issued two United States patents for Gel
Swabtm
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
Swabtm
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
Swabtm
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
Chewablestm,
Zicam®
Cold Remedy Oral
Misttm,
Gel
Swabstm,
Zicam®
Multi-Symptom Cold & Flu,
Zicam®
Cough
Maxtm
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®,
Dont 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 Companys intellectual property
from a competitors actions or that the Companys
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.
7
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,
8
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.
9
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:
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we may experience unanticipated or otherwise negative research
and development results;
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existing or proposed products may be found to be ineffective or
unsafe, or may otherwise fail to receive required regulatory
clearances or approvals;
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we may find that existing or proposed products, while safe and
effective, are uneconomical to commercialize or market;
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we may be unable to produce sufficient product to meet customer
demand;
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we may experience adverse publicity from product liability
lawsuits that could materially impact consumer demand; or
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existing or proposed products do not achieve or maintain broad
distribution or market acceptance.
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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
10
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 managements attention. If
we are not able to successfully integrate an acquisition, we may
incur substantial charges that could adversely affect our
results of operations.
11
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:
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voting rights, including the right to vote as a class on
particular matters;
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preferences as to dividends and liquidation rights;
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conversion rights;
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anti-dilution protections; and
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redemption rights.
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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.
12
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.
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ITEM 1B.
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UNRESOLVED
STAFF COMMENTS
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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.
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ITEM 3.
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LEGAL
PROCEEDINGS
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The Company is involved in various product liability claims and
other legal proceedings. The Companys legal expense for
these lawsuits continues to have a significant impact on the
results of operations as the Company defends itself against the
various claims.
Among the principal matters pending to which the Company is a
party are the following:
Product
Liability Matters
General. Since 2003, many lawsuits have been
filed against us alleging that our Zicam Cold Remedy nasal gel
products have caused the permanent loss or diminishment of the
sense of smell or smell and taste. Prior to the Companys
receipt of the FDAs June 16, 2009 warning letter (see
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
13
Company was steadily declining; in fact, the numbers of pending
lawsuits, plaintiffs, new lawsuits and potential claimants were
at their lowest levels since early 2004.
Since the Companys receipt of the FDA warning letter,
numerous product liability lawsuits have been filed against the
Company, many of which cite the FDA warning letter as support
for their claims. The lawsuits principally fall into two
categories of product liability claims: (i) those 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 FDAs
allegations that Zicam Cold Remedy nasal gel products may be
unsafe and that they were unlawfully marketed. The
Companys position is supported by the cumulative science,
a multi-disciplinary panel of scientists, and the decisions of
10 separate federal judges in 10 different cases in multiple
jurisdictions. In October 2009, in response to the
Companys 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 FDAs warning letter.
In its response, the Company reiterated its position that there
is no valid scientific evidence that Zicam nasal Cold Remedy
products are unsafe and requested the FDA to withdraw the
warning letter. By letter dated March 4, 2010, the FDA
reaffirmed its original position and denied the Companys
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
Companys favor on all ten motions. Each court has ruled
that the theory that Zicam Cold Remedy nasal gel causes smell
loss, as promoted by the plaintiffs experts, has no
reliable scientific support and was reached without application
of proper scientific standards and procedures. Federal courts
have made such rulings against the three most prominent causal
experts that plaintiffs have hired to date as well as various
other expert witnesses.
In addition, on April 3, 2008, jurors in a California case
unanimously found that Zicam was not the cause of
plaintiffs smell loss.
Product Effectiveness. Our claims and
advertising are subject to the requirements of the Federal Trade
Commission Act, which is enforced by the FTC. On March 21,
2006, the FTCs East Central Region (Cleveland, Ohio
office), initiated a detailed inquiry to determine whether the
Company engaged in unfair or deceptive acts or practices in
violation of the Federal Trade Commission Act in connection with
the Companys advertising and promotional activities for
several of the Companys nasal and oral cold remedy
products, including Zicam Cold Remedy Nasal Gel and Zicam Cold
Remedy Swabs the products that are the subject of
the FDA warning letter. As part of the inquiry, the FTC
requested and received, among other things, the Companys
documentation regarding product safety, including side effects,
adverse events and consumer complaints, and efficacy, including
the scientific proof establishing the efficacy claims made by
the Company. Following a nearly year-long process,
14
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.
15
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:
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Date Filed
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Court
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Named Plaintiff
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4/14/2004
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Broward County, FL
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Hood, M.
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11/3/2006
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Maricopa County, AZ
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Poole, D.
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10/31/2007
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Maricopa County, AZ
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Medel, D.
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9/19/2008
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Maricopa County, AZ
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Brooks, J.
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11/14/2008
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Maricopa County, AZ
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McGill, C.
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2/10/2009
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Cook County, IL
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Coleman, S.
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5/13/2009
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Maricopa County, AZ
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Howes, G.
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6/22/2009
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Broward County, FL
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Schaffer, F.
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7/2/2009
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Macon County, IL
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Rohr, B.
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7/22/2009
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San Francisco County, CA
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Richardson, N.
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7/31/2009
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McClean County, IL
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Wood, C.
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8/10/2009
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San Francisco County, CA
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Lane, V.
|
9/24/2009
|
|
San Francisco County, CA
|
|
DeRosier, M.
|
9/30/2009
|
|
Maricopa County, AZ
|
|
Hoffman, D.
|
10/5/2009
|
|
San Francisco County, CA
|
|
Nissim, S.
|
10/7/2009
|
|
Lahaina County, HI
|
|
Welsch, M.
|
10/19/2009
|
|
Broward County, FL
|
|
Bunin, S.
|
10/20/2009
|
|
King County, WA
|
|
Touhey, W.
|
10/30/2009
|
|
Maricopa County, AZ
|
|
Glasser, M.
|
10/30/2009
|
|
Maricopa County, AZ
|
|
Ambrose, R.
|
12/23/2009
|
|
Maricopa County, AZ
|
|
Kimball, D.
|
12/24/2009
|
|
San Francisco County, CA
|
|
Bradley, L.
|
12/29/2009
|
|
Maricopa County, AZ
|
|
Johnson, K.
|
1/19/2010
|
|
Maricopa County, AZ
|
|
Remming, C.
|
1/19/2010
|
|
Maricopa County, AZ
|
|
Baietty, J.
|
1/19/2010
|
|
Maricopa County, AZ
|
|
Colello, M.
|
1/20/2010
|
|
Maricopa County, AZ
|
|
Marshall, C.
|
1/20/2010
|
|
Maricopa County, AZ
|
|
Alex, R.
|
1/25/2010
|
|
Maricopa County, AZ
|
|
Viviani, D.
|
1/29/2010
|
|
Maricopa County, AZ
|
|
Turner, B.
|
2/3/2010
|
|
Maricopa County, AZ
|
|
Druien, C.
|
2/3/2010
|
|
Maricopa County, AZ
|
|
Cramer, H.
|
2/8/2010
|
|
Maricopa County, AZ
|
|
Shannon, L.
|
2/11/2010
|
|
Maricopa County, AZ
|
|
Jacobs, M.
|
2/24/2010
|
|
Erie County, NY
|
|
Gollwitzer, L.
|
3/1/2010
|
|
King County, WA
|
|
Waddleton, V.
|
3/1/2010
|
|
Maricopa County, AZ
|
|
Allen, D.
|
3/5/2010
|
|
San Francisco County, CA
|
|
Elbaum, J.
|
3/19/2010
|
|
Maricopa County, AZ
|
|
Hurley, E.
|
3/29/2010
|
|
Maricopa County, AZ
|
|
Daley, S.
|
4/1/2010
|
|
Maricopa County, AZ
|
|
Alston, B.
|
4/19/2010
|
|
Maricopa County, AZ
|
|
Miller, R.
|
4/19/2010
|
|
Maricopa County, AZ
|
|
Maxfield, W.
|
4/19/2010
|
|
Maricopa County, AZ
|
|
Colbert, D.
|
5/4/2010
|
|
Maricopa County, AZ
|
|
Maaskant, P.
|
5/6/2010
|
|
Lexington County, SC
|
|
Spradley, D.
|
5/11/2010
|
|
Maricopa County, AZ
|
|
Brooks, D.
|
5/13/2010
|
|
San Francisco County, CA
|
|
Parson, J.
|
16
Putative Class Action for Economic injury:
|
|
|
|
|
Date Filed
|
|
Court
|
|
Named Plaintiff
|
|
6/30/2009
|
|
St. Louis County, MO
|
|
West, G.
|
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:
|
|
|
|
|
|
|
Date Filed
|
|
Court
|
|
Named Plaintiff
|
|
Date Dismissed
|
|
10/16/2009
|
|
San Francisco County, CA
|
|
Bobrink
|
|
1/29/2010
|
8/20/2009
|
|
Whatcom County, WA
|
|
Adams
|
|
3/11/2010
|
11/20/2009
|
|
Providence County, Rhode Island
|
|
Dugas
|
|
3/29/2010
|
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 Companys
legal defense strategy; settlements; and the number of cases
that remained pending against the Company. There are events,
such as the dismissal of any of the cases, the filing of new
lawsuits, threatened claims, the outcome of a trial, rulings on
pending evidentiary motions, or adverse publicity that may have
an impact on the Companys conclusions as to the adequacy
of the reserve for the pending product liability lawsuits. The
Company maintained a $740,000 reserve balance as of
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 Companys receipt
of the FDAs warning letter and the resulting increase in
the number of product liability lawsuits being filed, the
amounts that may be spent to resolve matters with actual and
potential claimants could be higher than our reserve. The
Company will continue to review the product liability situation
and will adjust the litigation reserve in the future when we can
reasonably estimate changes in the amounts and likelihood of
resolving the claims. Litigation is inherently unpredictable and
excessive verdicts do occur. Although we believe we have
substantial defenses in these matters, we could, in the future,
incur judgments or enter into settlements of claims that could
have a material adverse effect on our results of operations in
any particular period.
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
17
been made aware of the Companys patents relating to Zicam
Cold Remedy Swabs (Swab Patents), and that the
Company acted in bad faith in informing the retailer of the Swab
Patents. GMP sought to have the court determine that GMPs
product did not infringe the Swab Patents and to have the
Companys Swab Patents declared invalid. In addition, GMP
sought damages for its losses related to the retailers
cancellation of the private label product following the
Companys providing notice to the retailer of the Swab
Patents. The Company 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 Companys petition for rehearing. On
January 15, 2010, the Ninth Circuit granted Matrixxs
request to stay the issuance of a mandate while the Company
petitions the United States Supreme Court for certiorari review.
A separate putative class action was filed on July 17, 2009
against the Company; William J. Hemelt, our President and Chief
Executive Officer; Samuel C. Cowley, our 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
Companys compliance with FDA regulations. The motion for
lead plaintiff and approval of lead counsel is pending. The
Company believes these allegations are without merit and intends
to vigorously defend the lawsuit.
In accordance with and subject to the provisions of the
Companys Certificate of Incorporation,
Messrs. Hemelt, Cowley, Clarot and Johnson will be
indemnified by the Company for their expenses incurred in
defending each of these lawsuits and for any other losses which
they may suffer as a result of these lawsuits. The Company has
submitted each of these matters to its insurance carriers. If
any liability were to result from these lawsuits that is not
covered by insurance, we believe our financial results could be
materially impacted.
Shareholder
Derivative Lawsuits
On September 11, 2009, a shareholder derivative lawsuit was
filed by Timothy Hall, on behalf of the Company, against all of
the Companys current directors and the following current
and former officers of the Company: 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 Companys compliance with
FDA regulations. Timothy Hall v. William J. Hemelt, et al.,
United States District Court, District of Arizona.
18
On September 18, 2009, a shareholder derivative lawsuit was
filed by Theodore C. Klatt, on behalf of the Company, against
all of the Companys current directors and the following
current and former officers of the Company: 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 Companys compliance with FDA
regulations (Theodore C. Klatt v. William J. Hemelt, et
al., United States District Court, District of Arizona).
On October 14, 2009, the parties filed a stipulation to
transfer the Klatt action and consolidate it with the Hall
action. On November 4, 2009, the stipulation was granted.
On January 19, 2010, the Company moved for a stay of the
consolidated derivative action pending the outcome of the
Shapiro action (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 Companys current directors and certain of their
spouses, and the following current and former officers and
directors of the Company and certain of their spouses: Carl
Johnson, Timothy Clarot, Timothy Connors, 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 Companys 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
Companys Certificate of Incorporation, each of the named
directors and current and former officers will be indemnified by
the Company for their expenses incurred in defending each of
these lawsuits and for any other losses that they may suffer as
a result of these lawsuits.
Related
Legal Matters Informal Inquiries
The Company has received an inquiry from several county district
attorneys in one state regarding enforcement of certain consumer
protection statutes involving our product packaging size. The
Company is cooperating fully, but is unsure about what actions
may be taken. The matter could result in fines or litigation
over the Companys alleged non-compliance with the
applicable package size statutes. Based on information available
to the Company, the Company does not believe this matter would
have a material adverse impact on its operations, liquidity or
cash flow.
Legal
Expense
The Company is incurring significant legal expense for the
lawsuits referenced above. For the 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 Companys receipt of the
FDAs warning letter.
Executive
Officers of Matrixx
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.
19
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, Arizonas 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 Swifts 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. Cowleys 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 Matrixxs
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 Companys 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.
20
PART II
|
|
ITEM 5.
|
MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
|
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market Price
|
|
|
Quarter Ended
|
|
High
|
|
Low
|
|
Fiscal Year 2009
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
June 30, 2008
|
|
$
|
17.20
|
|
|
$
|
13.22
|
|
Second Quarter
|
|
September 30, 2008
|
|
$
|
18.98
|
|
|
$
|
14.61
|
|
Third Quarter
|
|
December 31, 2008
|
|
$
|
18.38
|
|
|
$
|
14.01
|
|
Fourth Quarter
|
|
March 31, 2009
|
|
$
|
19.50
|
|
|
$
|
13.35
|
|
Fiscal Year 2010
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
June 30, 2009
|
|
$
|
19.74
|
|
|
$
|
4.39
|
|
Second Quarter
|
|
September 30, 2009
|
|
$
|
7.74
|
|
|
$
|
4.82
|
|
Third Quarter
|
|
December 31, 2009
|
|
$
|
6.10
|
|
|
$
|
3.61
|
|
Fourth Quarter
|
|
March 31, 2010
|
|
$
|
5.57
|
|
|
$
|
4.15
|
|
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.
21
PERFORMANCE
TABLE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date
|
|
|
Matrixx
|
|
|
Nasdaq
|
|
|
Russell 2000 Growth
|
3/31/2005
|
|
|
|
100.00
|
|
|
|
|
100.00
|
|
|
|
|
100.00
|
|
3/31/2006
|
|
|
|
205.80
|
|
|
|
|
117.94
|
|
|
|
|
127.84
|
|
3/31/2007
|
|
|
|
142.92
|
|
|
|
|
122.29
|
|
|
|
|
129.84
|
|
3/31/2008
|
|
|
|
128.76
|
|
|
|
|
114.07
|
|
|
|
|
118.23
|
|
3/31/2009
|
|
|
|
144.24
|
|
|
|
|
61.83
|
|
|
|
|
75.24
|
|
3/31/2010
|
|
|
|
44.59
|
|
|
|
|
96.99
|
|
|
|
|
120.62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
|
|
|
|
|
|
Shares Purchased as
|
|
Maximum Number of
|
|
|
Total Number
|
|
|
|
Part of Publicly
|
|
Shares that May yet be
|
|
|
of Shares
|
|
Average Price
|
|
Announced Plans or
|
|
Purchased Under the
|
Period
|
|
Purchased(1)
|
|
Paid per Share
|
|
Programs
|
|
Plans or Programs
|
|
1/01/10-1/31/10
|
|
|
0
|
|
|
$
|
0
|
|
|
|
0
|
|
|
|
931,624
|
|
2/01/10-2/28/10
|
|
|
0
|
|
|
$
|
0
|
|
|
|
0
|
|
|
|
931,624
|
|
3/1/10-3/31/10
|
|
|
0
|
|
|
$
|
0
|
|
|
|
0
|
|
|
|
931,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
0
|
|
|
$
|
0
|
|
|
|
0
|
|
|
|
931,624
|
|
|
|
|
(1) |
|
Employees may surrender shares as payment of applicable tax
withholding obligations on the vesting of restricted stock
awards. Shares so surrendered are repurchased pursuant to the
applicable award agreements and not pursuant to publicly
announced share repurchase programs. |
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 Companys 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 Companys 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.
22
|
|
ITEM 6.
|
SELECTED
FINANCIAL DATA
|
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 Matrixxs audited consolidated
financial statements. We report Matrixxs, Zicam,
LLCs, Zicam Swab Products, LLCs, Zicare LLCs,
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, Managements Discussion
and Analysis of Financial Condition and Results of
Operations and is qualified by reference thereto and to
Matrixxs financial statements and the notes thereto.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transition Period
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
Three Months
|
|
Fiscal Years Ended
|
|
|
March 31,
|
|
Ended March 31,
|
|
December 31,
|
|
|
2010
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
|
(000s, except share data)
|
|
Net sales
|
|
$
|
67,317
|
|
|
$
|
111,630
|
|
|
$
|
100,972
|
|
|
$
|
19,046
|
|
|
$
|
96,231
|
|
|
$
|
90,461
|
|
Net income (loss)
|
|
$
|
(23,576
|
)
|
|
$
|
13,864
|
|
|
$
|
10,428
|
|
|
$
|
1,709
|
|
|
$
|
4,927
|
|
|
$
|
3,078
|
|
Net income (loss) per share of common stock basic
|
|
$
|
(2.56
|
)
|
|
$
|
1.50
|
|
|
$
|
1.07
|
|
|
$
|
0.18
|
|
|
$
|
0.51
|
|
|
$
|
0.32
|
|
Net income (loss) per share of common stock diluted
|
|
$
|
(2.56
|
)
|
|
$
|
1.46
|
|
|
$
|
1.04
|
|
|
$
|
0.17
|
|
|
$
|
0.49
|
|
|
$
|
0.32
|
|
Dividends per share
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Shares outstanding at period end
|
|
|
9,455
|
|
|
|
9,274
|
|
|
|
10,175
|
|
|
|
10,079
|
|
|
|
9,948
|
|
|
|
9,600
|
|
Total assets
|
|
$
|
61,465
|
|
|
$
|
91,360
|
|
|
$
|
78,149
|
|
|
$
|
71,151
|
|
|
$
|
85,107
|
|
|
$
|
86,442
|
|
Long term obligations
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Stockholders equity
|
|
$
|
51,082
|
|
|
$
|
73,077
|
|
|
$
|
65,552
|
|
|
$
|
60,435
|
|
|
$
|
58,087
|
|
|
$
|
48,110
|
|
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.
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
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.
23
The following table details our sales by product class, for the
periods indicated, with further details below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended:
|
|
Product Class
|
|
March 31, 2010
|
|
|
%
|
|
|
March 31, 2009
|
|
|
%
|
|
|
March 31, 2008
|
|
|
%
|
|
|
Cold Remedy Nasal
|
|
$
|
1,977,909
|
|
|
|
3
|
%
|
|
$
|
42,477,144
|
|
|
|
38
|
%
|
|
$
|
32,958,814
|
|
|
|
33
|
%
|
Cold Remedy Oral
|
|
|
44,752,918
|
|
|
|
66
|
%
|
|
|
35,563,524
|
|
|
|
33
|
%
|
|
|
35,266,694
|
|
|
|
35
|
%
|
Allergy/Sinus
|
|
|
16,257,433
|
|
|
|
24
|
%
|
|
|
21,889,668
|
|
|
|
20
|
%
|
|
|
17,325,720
|
|
|
|
17
|
%
|
Cough & Multi-Symptom
|
|
|
2,512,814
|
|
|
|
4
|
%
|
|
|
7,306,827
|
|
|
|
6
|
%
|
|
|
15,068,495
|
|
|
|
15
|
%
|
Other Cough/Cold
|
|
|
1,667,936
|
|
|
|
3
|
%
|
|
|
2,192,124
|
|
|
|
2
|
%
|
|
|
0
|
|
|
|
0
|
%
|
Canada
|
|
|
148,229
|
|
|
|
0
|
%
|
|
|
1,053,546
|
|
|
|
1
|
%
|
|
|
0
|
|
|
|
0
|
%
|
Antacid
|
|
|
0
|
|
|
|
0
|
%
|
|
|
147,356
|
|
|
|
0
|
%
|
|
|
352,661
|
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Net Sales
|
|
$
|
67,317,239
|
|
|
|
100
|
%
|
|
$
|
111,630,188
|
|
|
|
100
|
%
|
|
$
|
100,972,384
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 FDAs
allegations (see Legal Proceedings in Part I,
Item 3 of this Report for more information on the
Companys position with respect to the FDAs 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 FDAs warning letter. In its response, the
Company reiterated its position that there is no valid
scientific evidence that Zicam nasal Cold Remedy products are
unsafe and requested the FDA to withdraw the warning letter. By
letter dated March 4, 2010, the FDA reaffirmed its original
position and denied the Companys 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
Companys marketing efforts wholly on U.S. sales. The
withdrawal was initiated during the quarter ended
September 30, 2009, and the Company recorded approximately
$1.6 million to reserve for withdrawal charges and fees.
The $1.6 million reserve was based on estimates of product
at retail and costs to return the items to our distribution
partner. In addition, the Company recorded a charge of $423,000
to write-down the inventory of products 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,
24
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 Companys 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 Companys
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
25
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 $000s and as a percentage of net sales) on a
quarterly basis for the years ended March 31, for the
periods indicated.
Quarterly
Results:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2010 Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve
|
|
|
|
|
March 31, 2010
|
|
Q1
|
|
|
% NS
|
|
|
Q2
|
|
|
% NS
|
|
|
Q3
|
|
|
% NS
|
|
|
Q4
|
|
|
% NS
|
|
|
Months
|
|
|
% NS
|
|
|
|
$000s
|
|
|
Net Sales
|
|
$
|
6,916
|
|
|
|
100
|
%
|
|
$
|
25,627
|
|
|
|
100
|
%
|
|
$
|
28,463
|
|
|
|
100
|
%
|
|
$
|
6,312
|
|
|
|
100
|
%
|
|
$
|
67,317
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing
|
|
$
|
3,312
|
|
|
|
48
|
%
|
|
$
|
2,518
|
|
|
|
10
|
%
|
|
$
|
8,643
|
|
|
|
30
|
%
|
|
$
|
10,969
|
|
|
|
174
|
%
|
|
$
|
25,442
|
|
|
|
38
|
%
|
Sales
|
|
$
|
617
|
|
|
|
9
|
%
|
|
$
|
856
|
|
|
|
3
|
%
|
|
$
|
1,374
|
|
|
|
5
|
%
|
|
$
|
851
|
|
|
|
13
|
%
|
|
$
|
3,698
|
|
|
|
5
|
%
|
General & Administrative
|
|
$
|
11,982
|
|
|
|
173
|
%
|
|
$
|
4,385
|
|
|
|
17
|
%
|
|
$
|
2,293
|
|
|
|
8
|
%
|
|
$
|
3,678
|
|
|
|
58
|
%
|
|
$
|
22,338
|
|
|
|
33
|
%
|
Legal Product Liability & Regulatory
|
|
$
|
577
|
|
|
|
8
|
%
|
|
$
|
2,391
|
|
|
|
9
|
%
|
|
$
|
1,758
|
|
|
|
6
|
%
|
|
$
|
2,473
|
|
|
|
39
|
%
|
|
$
|
7,199
|
|
|
|
11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total SG&A Expenses
|
|
$
|
16,489
|
|
|
|
238
|
%
|
|
$
|
10,150
|
|
|
|
40
|
%
|
|
$
|
14,068
|
|
|
|
49
|
%
|
|
$
|
17,971
|
|
|
|
285
|
%
|
|
$
|
58,677
|
|
|
|
87
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
R&D
|
|
$
|
934
|
|
|
|
14
|
%
|
|
$
|
419
|
|
|
|
2
|
%
|
|
$
|
543
|
|
|
|
2
|
%
|
|
$
|
499
|
|
|
|
8
|
%
|
|
$
|
2,395
|
|
|
|
4
|
%
|
Goodwill & Asset impairments
|
|
$
|
23,867
|
|
|
|
345
|
%
|
|
$
|
0
|
|
|
|
0
|
%
|
|
$
|
0
|
|
|
|
0
|
%
|
|
$
|
0
|
|
|
|
0
|
%
|
|
$
|
23,867
|
|
|
|
35
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2009 Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve
|
|
|
|
|
March 31, 2009
|
|
Q1
|
|
|
% NS
|
|
|
Q2
|
|
|
% NS
|
|
|
Q3
|
|
|
% NS
|
|
|
Q4
|
|
|
% NS
|
|
|
Months
|
|
|
% NS
|
|
|
|
$000s
|
|
|
Net Sales
|
|
$
|
8,508
|
|
|
|
100
|
%
|
|
$
|
33,632
|
|
|
|
100
|
%
|
|
$
|
38,702
|
|
|
|
100
|
%
|
|
$
|
30,788
|
|
|
|
100
|
%
|
|
$
|
111,630
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing
|
|
$
|
2,922
|
|
|
|
34
|
%
|
|
$
|
3,709
|
|
|
|
11
|
%
|
|
$
|
13,209
|
|
|
|
34
|
%
|
|
$
|
11,420
|
|
|
|
37
|
%
|
|
$
|
31,260
|
|
|
|
28
|
%
|
Sales
|
|
$
|
650
|
|
|
|
8
|
%
|
|
$
|
1,238
|
|
|
|
4
|
%
|
|
$
|
1,025
|
|
|
|
3
|
%
|
|
$
|
1,512
|
|
|
|
5
|
%
|
|
$
|
4,423
|
|
|
|
4
|
%
|
General & Administrative
|
|
$
|
4,147
|
|
|
|
49
|
%
|
|
$
|
3,131
|
|
|
|
9
|
%
|
|
$
|
4,197
|
|
|
|
11
|
%
|
|
$
|
3,469
|
|
|
|
11
|
%
|
|
$
|
14,944
|
|
|
|
13
|
%
|
Legal Product Liability & Regulatory
|
|
$
|
743
|
|
|
|
9
|
%
|
|
$
|
759
|
|
|
|
2
|
%
|
|
$
|
439
|
|
|
|
1
|
%
|
|
$
|
636
|
|
|
|
2
|
%
|
|
$
|
2,577
|
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total SG&A Expenses
|
|
$
|
8,462
|
|
|
|
99
|
%
|
|
$
|
8,837
|
|
|
|
26
|
%
|
|
$
|
18,870
|
|
|
|
49
|
%
|
|
$
|
17,037
|
|
|
|
55
|
%
|
|
$
|
53,205
|
|
|
|
48
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
R&D
|
|
$
|
610
|
|
|
|
7
|
%
|
|
$
|
1,143
|
|
|
|
3
|
%
|
|
$
|
797
|
|
|
|
2
|
%
|
|
$
|
684
|
|
|
|
2
|
%
|
|
$
|
3,235
|
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Critical
Accounting Policies and Estimates
Our consolidated financial statements and accompanying notes
have been prepared in accordance with U.S. Generally
Accepted Accounting Principles (GAAP) applied on a
consistent basis. The preparation of financial statements in
conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent liabilities at the
date of the financial statements and the reported amounts of
revenues and expenses during the reporting periods.
We regularly evaluate the accounting policies and estimates that
we use to prepare our consolidated financial statements. In
general, managements estimates are based on historical
experience, information from third party professionals, and
various other assumptions that are believed to be reasonable
under the facts and circumstances. Actual results could differ
from those estimates made by management.
We believe that our critical accounting policies and estimates
include the accounting for intangible assets and goodwill,
accounting for income taxes, revenue recognition, accounting for
sales adjustments (returns and allowances), accounts receivable
and allowance for doubtful accounts, accounting for legal
contingencies, and accounting for product recalls.
26
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
Companys receipt of the FDA warning letter and the
resulting recall of our Cold Remedy Nasal Gel and Cold Remedy
Swabs, as well as the associated negative publicity, impact on
the markets perception of the value of the Companys
stock, higher legal activity, and the expected decline of Zicam
product sales, the Company performed an impairment assessment as
of June 30, 2009, which resulted in the Company recording a
charge of $15.0 million to reduce the book value of
goodwill.
The determination of fair value requires the use of significant
judgment and estimates about assumptions that management
believes were appropriate in the circumstances, although it is
reasonably possible that actual performance will differ from
these assumptions. The most significant assumptions included
those relating to our ability to sell nasal gel Cold Remedy
products in the future, our ability to introduce new nasal
products, sales expectations of our other swab products, and
market trading multiples for the Company. These charges include:
a non-cash impairment charge of $15.0 million related to
the goodwill associated with the acquisition of zincum gluconium
nasal gel products and $616,000 for the unamortized amount of
our Cold Remedy nasal gel patent. These charges were recorded in
the quarter ended June 30, 2009 and are reflected in
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 products development were
impaired. This charge was recorded in research and development
expense.
Income Taxes. The provision for, or benefit
from, income taxes is calculated using the asset and liability
method, under which deferred tax assets and liabilities are
recorded based on the difference between the financial statement
and tax basis of assets and liabilities using enacted tax rates
in effect for the year in which the differences are expected to
reverse. The Company has recorded deferred tax assets associated
with tax loss carrybacks and carryforwards. These deferred tax
asset amounts increased during fiscal 2010 as a result of the
Companys current operating loss position. Deferred tax
assets are evaluated on a quarterly basis to determine whether a
valuation allowance is required. The Company assesses whether a
valuation allowance should be established based on its
determination of whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized.
The ultimate realization of deferred tax assets depends
primarily on the generation of future taxable income during the
periods in which those temporary differences become deductible.
Judgment is required in determining the future tax consequences
of events that have been recognized in the Companys
consolidated financial statements
and/or tax
returns. Differences between anticipated and actual outcomes of
these future tax consequences could have a material impact on
the Companys consolidated financial position or results of
operations.
Revenue Recognition. The Company recognizes
revenue from product sales when the risks and rewards of
ownership have transferred to the customer, which is considered
to have occurred upon shipment of the finished product to
retailers. Sales incentives, promotional allowances, and returns
are estimated and recognized at the date of shipment based upon
historical activity and current agreements with customers. The
Company evaluates these estimates on a monthly basis and revises
them as necessary.
Sales 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
27
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 Companys best estimate of the amount of probable
credit losses in the Companys 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 Matrixxs 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
Companys 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 Companys receipt of the FDAs warning
letter and the resulting increase in the number of product
liability lawsuits being filed, the amounts that may be spent to
resolve matters with actual and potential claimants could be
higher than our reserve. The Company will continue to review 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.
28
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 $000s and as a percentage of net sales for
the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Net sales
|
|
$
|
67,317
|
|
|
|
100
|
%
|
|
$
|
111,630
|
|
|
|
100
|
%
|
Cost of sales
|
|
|
20,685
|
|
|
|
31
|
|
|
|
32,876
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
46,632
|
|
|
|
69
|
|
|
|
78,754
|
|
|
|
71
|
|
Selling, general and administrative
|
|
|
58,677
|
|
|
|
87
|
|
|
|
53,205
|
|
|
|
48
|
|
Research & development
|
|
|
2,396
|
|
|
|
4
|
|
|
|
3,235
|
|
|
|
3
|
|
Goodwill Impairment
|
|
|
15,040
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
Asset Impairments
|
|
|
8,827
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from operations
|
|
|
(38,308
|
)
|
|
|
(57
|
)
|
|
|
22,314
|
|
|
|
20
|
|
Interest and other income
|
|
|
147
|
|
|
|
|
|
|
|
287
|
|
|
|
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) before income taxes
|
|
|
(38,161
|
)
|
|
|
(57
|
)
|
|
|
22,601
|
|
|
|
20
|
|
Provision (Benefit) for income taxes
|
|
|
(14,586
|
)
|
|
|
(22
|
)
|
|
|
8,737
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (Loss)
|
|
$
|
(23,576
|
)
|
|
|
(35
|
)%
|
|
$
|
13,864
|
|
|
|
12
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
29
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 Companys receipt of the FDA warning
letter and the resulting recall of our Cold Remedy Nasal Gel and
Cold Remedy Swabs, the Company performed an impairment
assessment as of June 30, 2009, in which it evaluated,
among other things, the impact of the foregoing events on the
markets perception of the value of the Companys
stock, the expected increase in legal activity, and the expected
decline of total product sales. The assessment resulted in the
Company recording a charge of $23.9 million to reduce the
carrying amounts of goodwill and other tangible and intangible
assets to fair value. This charge includes a non-cash impairment
charge of $15.0 million related to the goodwill associated
with the acquisition of the zincum gluconium nasal gel products;
a non-cash impairment charge of $3.9 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.
30
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 $000s and as a percentage of net sales for
the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Net sales
|
|
$
|
111,630
|
|
|
|
100
|
%
|
|
$
|
100,972
|
|
|
|
100
|
%
|
Cost of sales
|
|
|
32,876
|
|
|
|
29
|
|
|
|
34,532
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
78,754
|
|
|
|
71
|
|
|
|
66,440
|
|
|
|
66
|
|
Selling, general and administrative
|
|
|
53,205
|
|
|
|
48
|
|
|
|
46,520
|
|
|
|
46
|
|
Research & development
|
|
|
3,235
|
|
|
|
3
|
|
|
|
4,108
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
22,314
|
|
|
|
20
|
|
|
|
15,812
|
|
|
|
16
|
|
Interest and other income
|
|
|
287
|
|
|
|
|
|
|
|
653
|
|
|
|
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
22,601
|
|
|
|
20
|
|
|
|
16,465
|
|
|
|
16
|
|
Provision for income taxes
|
|
|
8,737
|
|
|
|
8
|
|
|
|
6,037
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
13,864
|
|
|
|
12
|
%
|
|
$
|
10,428
|
|
|
|
10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
31
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.
32
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 Companys principal source of liquidity is cash
generated from sales of our products to retailers and
distributors. The majority of sales are given 30 day credit
terms; however, payment terms are occasionally extended, as
retailers begin to increase inventory of our products prior to
the onset of the cough and cold season. The Company records an
estimated allowance for potentially uncollectible accounts,
which is reviewed on a monthly basis. We believe our allowance
as of March 31, 2010 is adequate. As a result of the
Companys 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 Companys cash position in future
periods.
The change in accounts receivable, inventory, accounts payable
and accrued expenses largely reflects the seasonal nature of the
Companys business. Our working capital requirements
fluctuate with the seasonality of our sales and are generally
highest in the July through September quarter. The Company
records the bulk of its sales, which is reflected in higher
accounts receivable, in the second, third, and fourth fiscal
quarters; generally builds inventory during the first through
third fiscal quarter periods; and advertises its products, which
is generally the largest component of accrued expenses,
primarily in the third and fourth fiscal quarters. Although
affected by the
build-up of
inventory, accounts payable and accrued expenses are more
significantly affected by advertising spending. Generally, to
the extent our operations are profitable, our business is cash
flow positive. 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 Companys legal expense for
these lawsuits continues to have a material impact on the
results of operations and requires a significant use of cash as
the Company defends itself against the various claims.
Litigation is inherently unpredictable and excessive verdicts do
occur. Although we believe we have defenses in these matters, we
could, in the future, incur judgments or enter into settlements
of claims that could have a material adverse effect on our cash
position in any particular period.
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.
33
In July 2009, the Companys credit facility with Comerica
Bank expired in accordance with its terms. The credit facility
allowed for borrowings of up to $8.0 million but the
Company had not made any borrowings under the facility since it
was last renewed in July 2007. 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 Companys 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual Cash Obligations
|
|
|
|
Payments Due by Period as of March 31, 2010
|
|
|
|
|
|
|
Less Than
|
|
|
|
|
|
|
|
|
After
|
|
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
|
(In thousands of dollars)
|
|
|
Long-Term Debt Obligations
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Capital Lease Obligations
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Operating Lease Obligations
|
|
|
1,462
|
|
|
|
433
|
|
|
|
913
|
|
|
|
116
|
|
|
|
0
|
|
Purchase Obligations
|
|
|
620
|
|
|
|
620
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Other Long-Term Liabilities Reflected on the Companys
Balance Sheet under GAAP
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,082
|
|
|
$
|
1,053
|
|
|
$
|
913
|
|
|
$
|
116
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recently
Issued Authoritative Guidance
In April 2010 we adopted the FASBs 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
entitys economic performance; and to require enhanced
disclosures that will provide users of financial statements with
more transparent information about an enterprises
involvement in a variable interest entity. The 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
34
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:
|
|
|
|
|
our expectations regarding the costs of the product recall and
our belief that the reserve for recall costs will be sufficient;
|
|
|
|
our expectations regarding returns of discontinued products and
declining sales of non-core products;
|
|
|
|
our expectation regarding continued expansion of the Zicam line
of products;
|
|
|
|
our expectation of introducing new products in the future;
|
|
|
|
our expectation regarding sales of other cough/cold products;
|
|
|
|
our expectations regarding equity compensation;
|
|
|
|
our belief that our bad debt allowance is sufficient;
|
|
|
|
our anticipation that we will incur approximately
$1.5 million to $2.0 million in legal expense each
quarter as a result of the litigation in which we are engaged;
|
|
|
|
our expectation of reviewing the adequacy of the reserve for
litigation losses on a quarterly basis;
|
|
|
|
our intention to vigorously defend the Zicam Cold Remedy product
liability and securities related litigation claims, our belief
that the claims made in these lawsuits are scientifically
unfounded and misleading, our expectation that additional
product liability lawsuits may be filed against us, and our
belief that any liability resulting from these or other
lawsuits, including any adverse publicity, could materially
impact our financial results;
|
|
|
|
our expectations regarding the impact of any non-compliance in
applicable package size statutes;
|
|
|
|
our expectation that we will continue to file for patent
protection and trademark protection for products that we develop
and introduce in the future;
|
35
|
|
|
|
|
our expectations regarding the effect of recently issued
accounting guidance;
|
|
|
|
our anticipation of the variability of quarterly earnings;
|
|
|
|
our expectations regarding environmental expenses;
|
|
|
|
our expectations that sales and marketing efforts will increase
market penetration of our products, build brand awareness, trial
and sales of our products;
|
|
|
|
our expectation of a loss in the quarter ending June 30;
|
|
|
|
our belief regarding our critical accounting policies and
estimates;
|
|
|
|
our intention to review our product return reserve provision
monthly and adjust the reserve amounts as actual product return
experience continues to develop;
|
|
|
|
our expectations regarding the realization of deferred tax
assets;
|
|
|
|
our expectation that SG&A expenses will vary largely in
relation to the level of our advertising and legal expenditures;
|
|
|
|
our expectation that the average unit cost of goods sold and
gross margin will continue to be affected by the relative mix of
products sold and changes in product sales price and costs that
may occur;
|
|
|
|
our expectation that our net income and operating expenses in
future periods will vary largely in connection with the level of
our sales, product introductions in new categories, advertising,
research and development, and legal expenses;
|
|
|
|
our expectation that research and development spending will be
approximately 3% to 4% of annual net sales in subsequent years;
|
|
|
|
our expectation that earnings in future periods will be
significantly impacted by the seasonality of our sales, the
revenues and expenses associated with new products, and the
timing and amount of advertising, research and development, and
legal expenses;
|
|
|
|
our expectation that advertising expense will be highest in our
third and fourth fiscal quarters;
|
|
|
|
our belief that our existing capital resources will be
sufficient to fund our operations and capital requirements for
the next 12 months;
|
|
|
|
our expectations regarding our manufacturers ability to
timely produce inventory adequate for sales of products;
|
|
|
|
our expectations regarding the impact of the recall on demand
for Zicam products;
|
|
|
|
our expectations regarding dividends; and
|
|
|
|
our belief that moderate interest rate increases and the current
economic uncertainties regarding available credit will not have
a material adverse impact on our results of operations or
financial position in the foreseeable future.
|
We may make additional written or oral forward-looking
statements from time to time in filings with the Securities and
Exchange Commission or in public news releases. Such additional
statements may include, but not be limited to, projections of
revenues, income or loss, capital expenditures, acquisitions,
plans for future operations, financing needs or plans, the
impact of inflation and plans relating to our products or
services, as well as assumptions relating to the foregoing.
Forward-looking statements are inherently subject to risks and
uncertainties, some of which cannot be predicted or quantified.
Future events and actual results could differ materially from
those set forth in, contemplated by, or underlying our
forward-looking statements.
Statements in this Report on
Form 10-K,
including those set forth in the sections entitled Risk
Factors and Managements 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
36
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.
|
|
ITEM 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
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.
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
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.
|
|
ITEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
None.
|
|
ITEM 9A.
|
CONTROLS
AND PROCEDURES
|
|
|
a)
|
Evaluation
of Disclosure Controls and Procedures
|
We carried out an evaluation, under the supervision and with the
participation of our President and Chief Executive Officer, of
the effectiveness of the design and operation of our disclosure
controls and procedures pursuant to
Rules 13a-15
and 15d-15
of the Securities Exchange Act of 1934 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.
|
|
b)
|
Managements
Annual Report on Internal Control Over Financial
Reporting
|
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 Companys
internal control over financial reporting is designed to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of
37
financial statements for external purposes in accordance with
generally accepted accounting principles. The Companys
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 Companys 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 Companys
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.
Managements 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 Companys 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.
38
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 Companys 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
Managements Annual Report on Internal Control Over
Financial Reporting. Our responsibility is to express an opinion
on the effectiveness of the Companys 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 companys 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 companys
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
companys 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.
/s/ Mayer
Hoffman McCann P.C.
MAYER HOFFMAN MCCANN P.C.
Phoenix, Arizona
June 5, 2010
39
|
|
ITEM 9B.
|
OTHER
INFORMATION
|
None.
PART III
|
|
ITEM 10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
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.
|
|
ITEM 11.
|
EXECUTIVE
COMPENSATION
|
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.
|
|
ITEM 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
|
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
|
|
|
|
Remaining Available for
|
|
|
Number of Securities
|
|
Weighted-Average
|
|
Future Issuance Under
|
|
|
to be Issued Upon
|
|
Exercise Price of
|
|
Equity
|
|
|
Exercise of
|
|
Outstanding
|
|
Compensation Plans
|
|
|
Outstanding Options,
|
|
Options, Warrants,
|
|
(Excluding Securities
|
Plan Category
|
|
Warrants, and Rights
|
|
and Rights
|
|
Reflected in Column (a))
|
|
|
(a)
|
|
(b)
|
|
(c)
|
|
Equity compensation plans approved by security holders
|
|
|
212,700
|
|
|
$
|
14.06
|
|
|
|
911,469
|
|
Equity compensation plans not approved by security holders
|
|
|
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Total
|
|
|
212,700
|
|
|
$
|
14.06
|
|
|
|
911,469
|
|
40
|
|
ITEM 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
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.
|
|
ITEM 14.
|
PRINCIPAL
ACCOUNTING FEES AND SERVICES
|
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.
41
PART IV
|
|
ITEM 15.
|
EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES
|
(a)1.
Financial Statements
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
Financial Statements
|
|
Page
|
|
|
|
|
43
|
|
|
|
|
44
|
|
|
|
|
45
|
|
|
|
|
46
|
|
|
|
|
47
|
|
|
|
|
48
|
|
42
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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 Companys
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
Companys 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 Companys internal control over
financial reporting.
/s/ Mayer
Hoffman McCann P.C.
MAYER HOFFMAN MCCANN P.C.
Phoenix, Arizona
June 5, 2010
43
MATRIXX
INITIATIVES, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
MARCH 31, 2010 AND 2009
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
ASSETS
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
26,482,499
|
|
|
$
|
25,144,088
|
|
Certificates of deposit
|
|
|
3,736,525
|
|
|
|
14,870,717
|
|
Accounts receivable:
|
|
|
|
|
|
|
|
|
Trade, net of allowance for doubtful accounts of $169,720 and
$226,180
|
|
|
5,386,044
|
|
|
|
14,769,485
|
|
Insurance receivable
|
|
|
|
|
|
|
25,514
|
|
Inventories
|
|
|
6,166,809
|
|
|
|
7,740,343
|
|
Prepaid expenses
|
|
|
2,230,116
|
|
|
|
2,035,628
|
|
Interest receivable
|
|
|
3,443
|
|
|
|
13,867
|
|
Income tax receivable
|
|
|
5,661,554
|
|
|
|
1,316,102
|
|
Current deferred tax asset
|
|
|
5,071,475
|
|
|
|
1,636,707
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
54,738,465
|
|
|
|
67,552,451
|
|
|
|
|
|
|
|
|
|
|
Property and Equipment, at cost:
|
|
|
|
|
|
|
|
|
Office furniture and computer equipment
|
|
|
1,722,176
|
|
|
|
1,738,727
|
|
Machine tooling and manufacturing equipment
|
|
|
4,415,352
|
|
|
|
4,581,866
|
|
Laboratory furniture and equipment
|
|
|
486,459
|
|
|
|
484,215
|
|
Leasehold improvements
|
|
|
562,738
|
|
|
|
544,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,186,725
|
|
|
|
7,349,019
|
|
Less accumulated depreciation
|
|
|
(3,865,302
|
)
|
|
|
(3,219,081
|
)
|
|
|
|
|
|
|
|
|
|
Net Property and Equipment
|
|
|
3,321,423
|
|
|
|
4,129,938
|
|
|
|
|
|
|
|
|
|
|
Other Assets:
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
636,924
|
|
|
|
2,913,855
|
|
Other assets
|
|
|
40,043
|
|
|
|
30,789
|
|
Restricted cash
|
|
|
|
|
|
|
|
|
Debt issuance costs, net of accumulated amortization of $14,395
and $12,596
|
|
|
|
|
|
|
1,799
|
|
Patents, net of accumulated amortization of $311,209 and $725,956
|
|
|
793,807
|
|
|
|
1,691,505
|
|
Non-current deferred tax asset
|
|
|
1,934,686
|
|
|
|
|
|
Goodwill
|
|
|
|
|
|
|
15,039,836
|
|
|
|
|
|
|
|
|
|
|
Total Other Assets
|
|
|
3,405,460
|
|
|
|
19,677,784
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
61,465,348
|
|
|
$
|
91,360,173
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,007,886
|
|
|
$
|
3,010,728
|
|
Accrued expenses
|
|
|
7,026,708
|
|
|
|
9,665,310
|
|
Sales commissions
|
|
|
188,433
|
|
|
|
404,899
|
|
Sales returns and allowances
|
|
|
1,420,600
|
|
|
|
1,611,052
|
|
Legal liability
|
|
|
740,000
|
|
|
|
785,000
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
10,383,627
|
|
|
|
15,476,989
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liability
|
|
|
|
|
|
|
2,806,001
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
10,383,627
|
|
|
|
18,282,990
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
Stockholders Equity:
|
|
|
|
|
|
|
|
|
Preferred stock: $.001 par value, 2,000,000 shares
authorized, none issued or outstanding
|
|
|
|
|
|
|
|
|
Common stock: $.001 par value, 30,000,000 shares
authorized, 9,455,620 and 9,273,949 shares issued
|
|
|
9,455
|
|
|
|
9,274
|
|
Additional paid-in capital
|
|
|
38,657,444
|
|
|
|
37,077,316
|
|
Retained earnings
|
|
|
12,414,822
|
|
|
|
35,990,593
|
|
|
|
|
|
|
|
|
|
|
Total Stockholders Equity
|
|
|
51,081,721
|
|
|
|
73,077,183
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity
|
|
$
|
61,465,348
|
|
|
$
|
91,360,173
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
44
MATRIXX
INITIATIVES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 2010, 2009 AND
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Net sales
|
|
$
|
67,317,239
|
|
|
$
|
111,630,188
|
|
|
$
|
100,972,384
|
|
Cost of sales
|
|
|
20,685,187
|
|
|
|
32,875,667
|
|
|
|
34,532,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
46,632,052
|
|
|
|
78,754,521
|
|
|
|
66,440,285
|
|
Selling, general and administrative expenses
|
|
|
58,677,206
|
|
|
|
53,205,196
|
|
|
|
46,520,327
|
|
Research and development
|
|
|
2,395,540
|
|
|
|
3,234,874
|
|
|
|
4,108,354
|
|
Goodwill impairment
|
|
|
15,039,836
|
|
|
|
|
|
|
|
|
|
Asset impairments
|
|
|
8,827,322
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) From Operations
|
|
|
(38,307,852
|
)
|
|
|
22,314,451
|
|
|
|
15,811,604
|
|
Interest and other income
|
|
|
146,546
|
|
|
|
287,110
|
|
|
|
653,422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) Before Income Taxes
|
|
|
(38,161,306
|
)
|
|
|
22,601,561
|
|
|
|
16,465,026
|
|
Income taxes
|
|
|
(14,585,535
|
)
|
|
|
8,737,342
|
|
|
|
6,037,487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
(23,575,771
|
)
|
|
$
|
13,864,219
|
|
|
$
|
10,427,539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) Per Share of Common Stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Number of Common Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
9,222,597
|
|
|
|
9,268,471
|
|
|
|
9,704,579
|
|
Net Income (Loss) Per Share of Common Stock
|
|
$
|
(2.56
|
)
|
|
$
|
1.50
|
|
|
$
|
1.07
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Number of Common Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
9,222,597
|
|
|
|
9,505,360
|
|
|
|
10,001,307
|
|
Net Income (Loss) Per Share of Common Stock
|
|
$
|
(2.56
|
)
|
|
$
|
1.46
|
|
|
$
|
1.04
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
45
MATRIXX
INITIATIVES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
FOR THE YEARS ENDED MARCH 31, 2010, 2009 AND
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Paid In
|
|
|
Treasury
|
|
|
Retained
|
|
|
Stockholders
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Stock
|
|
|
Earnings
|
|
|
Equity
|
|
|
|
|
|
Balance at March 31, 2007
|
|
|
|
|
|
$
|
|
|
|
|
10,079,317
|
|
|
$
|
10,079
|
|
|
$
|
49,122,216
|
|
|
$
|
(396,304
|
)
|
|
$
|
11,698,835
|
|
|
$
|
60,434,826
|
|
|
|
|
|
Issuance of common stock upon exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
59,767
|
|
|
|
60
|
|
|
|
611,083
|
|
|
|
|
|
|
|
|
|
|
|
611,143
|
|
|
|
|
|
Issuance of restricted stock pursuant to the Companys
restricted stock program
|
|
|
|
|
|
|
|
|
|
|
58,760
|
|
|
|
58
|
|
|
|
1,294,506
|
|
|
|
|
|
|
|
|
|
|
|
1,294,564
|
|
|
|
|
|
Purchase of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,463,393
|
)
|
|
|
|
|
|
|
(7,463,393
|
)
|
|
|
|
|
Retirement of treasury stock
|
|
|
|
|
|
|
|
|
|
|
(22,432
|
)
|
|
|
(22
|
)
|
|
|
(315,127
|
)
|
|
|
315,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit from the exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
231,401
|
|
|
|
|
|
|
|
|
|
|
|
231,401
|
|
|
|
|
|
Stock option expense pursuant to SFAS 123R
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,141
|
|
|
|
|
|
|
|
|
|
|
|
16,141
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,427,539
|
|
|
|
10,427,539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2008
|
|
|
|
|
|
$
|
|
|
|
|
10,175,412
|
|
|
$
|
10,175
|
|
|
$
|
50,960,220
|
|
|
$
|
(7,544,548
|
)
|
|
$
|
22,126,374
|
|
|
$
|
65,552,221
|
|
|
|
|
|
Issuance of common stock upon exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
131,434
|
|
|
|
132
|
|
|
|
1,401,403
|
|
|
|
|
|
|
|
|
|
|
|
1,401,535
|
|
|
|
|
|
Issuance of restricted stock pursuant to the Companys
restricted stock program
|
|
|
|
|
|
|
|
|
|
|
128,236
|
|
|
|
128
|
|
|
|
1,833,928
|
|
|
|
|
|
|
|
|
|
|
|
1,834,056
|
|
|
|
|
|
Purchase of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,953,920
|
)
|
|
|
|
|
|
|
(9,953,920
|
)
|
|
|
|
|
Retirement of treasury stock
|
|
|
|
|
|
|
|
|
|
|
(1,161,133
|
)
|
|
|
(1,161
|
)
|
|
|
(17,497,307
|
)
|
|
|
17,498,468
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit from the exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
379,072
|
|
|
|
|
|
|
|
|
|
|
|
379,072
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,864,219
|
|
|
|
13,864,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2009
|
|
|
|
|
|
$
|
|
|
|
|
9,273,949
|
|
|
$
|
9,274
|
|
|
$
|
37,077,316
|
|
|
$
|
|
|
|
$
|
35,990,593
|
|
|
$
|
73,077,183
|
|
|
|
|
|
Issuance of common stock upon exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
144,700
|
|
|
|
145
|
|
|
|
1,362,074
|
|
|
|
|
|
|
|
|
|
|
|
1,362,219
|
|
|
|
|
|
Issuance of restricted stock pursuant to the Companys
restricted stock program
|
|
|
|
|
|
|
|
|
|
|
101,674
|
|
|
|
101
|
|
|
|
839,553
|
|
|
|
|
|
|
|
|
|
|
|
839,654
|
|
|
|
|
|
Purchase of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,187,906
|
)
|
|
|
|
|
|
|
(1,187,906
|
)
|
|
|
|
|
Retirement of treasury stock
|
|
|
|
|
|
|
|
|
|
|
(64,703
|
)
|
|
|
(65
|
)
|
|
|
(1,187,841
|
)
|
|
|
1,187,906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit from the exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
566,342
|
|
|
|
|
|
|
|
|
|
|
|
566,342
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23,575,771
|
)
|
|
|
(23,575,771
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2010
|
|
|
|
|
|
$
|
|
|
|
|
9,455,620
|
|
|
$
|
9,455
|
|
|
$
|
38,657,444
|
|
|
$
|
|
|
|
$
|
12,414,822
|
|
|
$
|
51,081,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
46
MATRIXX
INITIATIVES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2010, 2009 AND
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Cash Flows From Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(23,575,771
|
)
|
|
$
|
13,864,219
|
|
|
$
|
10,427,539
|
|
Adjustments to reconcile net income (loss) to net cash provided
(used) by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
850,758
|
|
|
|
1,279,457
|
|
|
|
1,057,299
|
|
Amortization
|
|
|
94,775
|
|
|
|
150,484
|
|
|
|
149,130
|
|
Provision for bad debts
|
|
|
(56,460
|
)
|
|
|
16,803
|
|
|
|
(219,654
|
)
|
Deferred income taxes
|
|
|
(8,175,455
|
)
|
|
|
886,357
|
|
|
|
2,484,214
|
|
Common stock issued for compensation
|
|
|
1,405,996
|
|
|
|
2,213,128
|
|
|
|
1,542,106
|
|
Asset impairments and abandonments
|
|
|
24,287,130
|
|
|
|
|
|
|
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
9,439,901
|
|
|
|
(2,734,441
|
)
|
|
|
(3,614,627
|
)
|
Insurance receivable
|
|
|
25,514
|
|
|
|
49,486
|
|
|
|
2,125,000
|
|
Interest receivable
|
|
|
10,424
|
|
|
|
60,037
|
|
|
|
10,287
|
|
Other receivable
|
|
|
|
|
|
|
39,363
|
|
|
|
|
|
Income taxes
|
|
|
(4,345,452
|
)
|
|
|
(1,316,102
|
)
|
|
|
1,370,277
|
|
Inventories
|
|
|
(2,354,227
|
)
|
|
|
3,789,717
|
|
|
|
3,928,868
|
|
Prepaid expenses and other
|
|
|
(203,742
|
)
|
|
|
(212,862
|
)
|
|
|
(1,186,014
|
)
|
Accounts payable
|
|
|
(2,002,842
|
)
|
|
|
1,702,847
|
|
|
|
(1,276,672
|
)
|
Accrued expenses
|
|
|
(2,855,068
|
)
|
|
|
3,175,959
|
|
|
|
3,359,230
|
|
Legal liability
|
|
|
(45,000
|
)
|
|
|
(315,000
|
)
|
|
|
55,000
|
|
Sales returns and allowances
|
|
|
(190,452
|
)
|
|
|
339,261
|
|
|
|
(1,119,499
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided (Used) By Operating Activities
|
|
|
(7,689,971
|
)
|
|
|
22,988,713
|
|
|
|
19,092,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(92,928
|
)
|
|
|
(319,545
|
)
|
|
|
(800,877
|
)
|
Purchases of certificates of deposit
|
|
|
(3,736,525
|
)
|
|
|
(14,870,717
|
)
|
|
|
|
|
Maturities of certificates of deposit
|
|
|
14,870,717
|
|
|
|
|
|
|
|
|
|
Deposits and other
|
|
|
(2,187,195
|
)
|
|
|
(2,534,650
|
)
|
|
|
(436,586
|
)
|
Restricted cash
|
|
|
|
|
|
|
500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided (Used) By Investing Activities
|
|
|
8,854,069
|
|
|
|
(17,224,912
|
)
|
|
|
(1,237,463
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt issuance costs
|
|
|
|
|
|
|
|
|
|
|
(14,288
|
)
|
Issuance of common stock
|
|
|
1,362,219
|
|
|
|
1,401,535
|
|
|
|
611,143
|
|
Purchase of treasury stock
|
|
|
(1,187,906
|
)
|
|
|
(9,953,920
|
)
|
|
|
(7,463,393
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided (Used) By Financing Activities
|
|
|
174,313
|
|
|
|
(8,552,385
|
)
|
|
|
(6,866,538
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Increase (Decrease) in Cash and Cash Equivalents
|
|
|
1,338,411
|
|
|
|
(2,788,544
|
)
|
|
|
10,988,483
|
|
Cash and Cash Equivalents at Beginning of Period
|
|
|
25,144,088
|
|
|
|
27,932,672
|
|
|
|
16,944,189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at End of Period
|
|
$
|
26,482,499
|
|
|
$
|
25,144,088
|
|
|
$
|
27,932,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
8,000
|
|
|
$
|
10,462,000
|
|
|
|
|
|
Supplemental Disclosure of Non-cash Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement of treasury stock
|
|
$
|
1,187,906
|
|
|
$
|
17,498,468
|
|
|
$
|
315,149
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
47
|
|
1.
|
Organization
and Summary of Significant Accounting Policies
|
Organization
Matrixx Initiatives, Inc. (the Company), formerly
Gum Tech International, Inc. was incorporated in Utah on
February 4, 1991. On June 18, 2002, the Company
reincorporated in Delaware. The authorized capital stock of
Matrixx consists of (i) 30,000,000 shares of common
stock, $.001 par value, (common stock), and
(ii) 2,000,000 shares of preferred stock,
$.001 par value.
The Companys sole business segment in the fiscal years
ended March 31, 2010, 2009 and 2008 was developing,
marketing and selling over the counter products with an emphasis
on those that utilize unique or novel delivery systems through
our wholly-owned subsidiaries. Sales of our products in the
United States occur through Zicam, LLC (Zicam). During 2005, we
formed Zicam Swab Products, LLC (ZSP) to purchase the dry handle
swab technology from a third party. During 2006, we formed
Zicare, LLC (Zicare), to pursue development of an
over-the-counter
oral care product. In May 2008, we formed Zicam Canada, Inc. to
commercialize sales of Zicam products in Canada. We discontinued
sales of our products in Canada in fiscal 2010.
Principles
of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries, Zicam, ZSP, Zicam
Canada, Inc., and Zicare. All significant intercompany accounts
and transactions have been eliminated.
On September 30, 2009, Matrixx adopted changes issued by
the Financial Accounting Standards Board (FASB) to
the authoritative hierarchy of GAAP. These changes establish the
FASB Accounting Standards
Codificationtm
(Codification) as the source of authoritative
accounting principles recognized by the FASB to be applied in
the preparation of financial statements in conformity with GAAP.
Rules and interpretive releases of the Securities and Exchange
Commission (SEC) under authority of federal
securities laws are also sources of authoritative GAAP for SEC
registrants. The FASB will no longer issue new standards in the
form of Statements, FASB Staff Positions, or Emerging Issues
Task Force Abstracts; instead, the FASB will issue Accounting
Standards Updates. Accounting Standards Updates will not be
authoritative in their own right, as they will only serve to
update the Codification. These changes and the Codification
itself do not change GAAP. Other than the manner in which new
accounting guidance is referenced, the adoption of these changes
had no impact on our consolidated financial statements.
Cash
and Cash Equivalents
For purposes of the consolidated financial statements, the
Company considers all highly liquid investments with an original
maturity of three months or less at the date of purchase to be
cash equivalents. Cash deposits in each institution are insured
in limited amounts by the Federal Deposit Insurance Corporation
(FDIC).
Certificates
of Deposit
The Company purchases certificates of deposit from FDIC insured
institutions at or below the FDIC insured limits and all
certificates of deposit have maturities of one year or less. The
purchase price of each certificate of deposit is treated as its
fair market value on the purchase date. We account for these
certificates of deposit at amortized costs and they are held to
maturity.
Accounts
Receivable and Allowance for Doubtful Accounts
Accounts receivable are recorded at the invoice amount and do
not bear interest. The allowance for doubtful accounts is the
Companys best estimate of the amount of probable credit
losses in the Companys existing accounts receivable;
however, changes in circumstances relating to accounts
receivable may result in a requirement for
48
MATRIXX
INITIATIVES, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
additional allowances in the future. The Company determines the
allowance based on historical write-off experience, current
market trends and, for larger accounts, the ability to pay
outstanding balances. Past due balances over 90 days and
other higher risk amounts are reviewed individually and
collectively. In addition, the Company maintains a reserve for
all invoices by applying a percentage based on historical
trends. Account balances are charged against the allowance after
all collection efforts have been exhausted and the potential for
recovery is considered remote. During fiscal 2008, we determined
that our allowance for bad debt exceeded the amount of loss that
would likely be incurred and we reduced the allowance amount by
approximately $250,000, which reduced selling, general and
administrative (SG&A) expenses by an equal
amount. The Company recorded an allowance for doubtful accounts
of 0.02% of gross sales in fiscal 2010.
Inventories
Inventories are stated at the lower of cost or market. Cost is
determined using the
first-in,
first-out pricing method.
Property
and Equipment
Depreciation of the primary asset classifications is calculated
based on the following estimated useful lives using the
straight-line method.
|
|
|
|
|
Classification
|
|
Useful Life in Years
|
|
Office furniture and computer equipment
|
|
|
3-5
|
|
Machine tooling and manufacturing equipment
|
|
|
3-7
|
|
Laboratory furniture and equipment
|
|
|
3-5
|
|
Leasehold improvements
|
|
|
2-5
|
|
For the fiscal years ended March 31, 2010, 2009, and 2008
depreciation of property and equipment was $850,758, $1,279,457,
and $1,057,299 respectively.
Long-Lived
and Intangible Assets
When facts and circumstances indicate that the carrying value of
long-lived assets may be impaired, an evaluation of the
recoverability is performed by comparing the carrying value of
the assets to the estimated undiscounted net future cash flows.
A forecast showing lack of long-term profitability, a
significant decline in market share, or a current period
operating or cash flow loss combined with a history of operating
or cash flow losses are conditions, among others, that would
trigger an impairment assessment of the carrying amount of the
asset.
Upon indication that the carrying value of such assets may not
be recoverable, the Company recognizes an impairment loss by a
charge against current operations. If an impairment exists, an
impairment charge would be determined by comparing the carrying
amount of the assets to the applicable estimated future cash
flows, discounted at a risk-adjusted rate or market appraisals.
In addition, the remaining amortization period for the impaired
asset would be reassessed and revised if necessary.
Intangibles consist of goodwill (which is the excess of purchase
price over the net assets of businesses acquired), intellectual
property, and trademarks. Goodwill is not amortized but
finite-lived intangibles are amortized using the straight-line
method. The Companys $15.0 million in goodwill was
related to the Companys acquisition of the 40% Zicam, LLC
interest acquired from Zensano, Inc. in December 2001. The
business of Zicam, LLC at that time was to develop and produce
homeopathic nasal gel products based on a proprietary zincum
gluconium delivery system.
Goodwill and certain other assets must be tested upon a
triggering event to identify potential impairments and the
amount of any impairment loss. The Company received a warning
letter from the Food and Drug Administration
49
MATRIXX
INITIATIVES, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(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 FDAs allegations, the
Company cooperated with the FDA and recalled the Cold Remedy
Nasal Gel and Cold Remedy Swabs from the market. The FDA warning
letter had a material adverse impact on our business. In
connection with the recall of our nasal Cold Remedy products,
the Company concluded a triggering event had occurred and
performed an impairment assessment as of June 30, 2009. The
Company performed an assessment within the accounting fair value
hierarchy, in which it evaluated, among other things, the impact
of the foregoing events on the markets perception of the
value of the Companys stock, the expected increase in
legal activity, and the expected decline of Zicam product sales.
The Company first determined the fair value using two valuation
methodologies: (a) the income approach, which uses
discounted cash flow projections, and (b) the market value
approach, which uses quoted market prices or unobservable inputs
that are corroborated by market data.
The assessment resulted in the Company recording a charge of
$23.9 million in the quarter ended June 30, 2009, to
reduce the carrying amounts of goodwill and other tangible and
intangible assets to fair value.
The determination of fair value requires the use of significant
judgment and estimates about assumptions that management
believes were appropriate in the circumstances, although it is
reasonably possible that actual performance will differ from
these assumptions. The most significant assumptions include
those relating to our ability to sell nasal gel Cold Remedy
products in the future, our ability to introduce new nasal
products, sales expectations of our other swab products, and
market trading multiples for the Company. These charges include:
a non-cash impairment charge of $15.0 million related to
the goodwill associated with the zincum gluconium nasal gel
products; a non-cash impairment charge of $3.9 million to
write-down the inventory value of nasal Cold Remedy products and
other nasal application inventory; an impairment charge of
$4.3 million ($3.4 million of which is non-cash) for a
new swab manufacturing line that was recently built to produce
our nasal swab product; and $616,000 for the unamortized amount
of our Cold Remedy nasal gel patent. The charge totaled
approximately $23.9 million ($14.6 million after-tax)
and was included in Goodwill Impairment and Asset
Impairments in the accompanying statement of operations
for the year ended March 31, 2010.
The following table sets forth the changes, discussed above, in
the Companys carrying amount of goodwill and certain other
assets, measured at fair value on a nonrecurring basis during
the fiscal year ended March 31, 2010:
Level 1: Quoted prices in active markets
for identical assets or liabilities.
Level 2: Significant other observable
inputs.
Level 3: Significant unobservable inputs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total Gains (Losses)
|
|
|
March 31,
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
$000s
|
|
2010
|
|
2009
|
|
|
2010
|
|
2009
|
|
|
2010
|
|
2009
|
|
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
15,040
|
|
|
|
$
|
(15,040
|
)
|
Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,284
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(4,284
|
)
|
Patent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
616
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(616
|
)
|
In addition to the impairment charges associated with our nasal
Cold Remedy products discussed above, we recorded a charge of
$420,000 to write down the value of patents and certain other
assets associated with the development of an oral care product
developed to reduce tartar. We had been in discussions with
potential partners to help commercialize the product but have
been unable to find another entity to launch this product. We do
not anticipate launching this product on our own and determined
the assets associated with the products development were
impaired. This charge was recorded in research and development
expense.
50
MATRIXX
INITIATIVES, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The original Cold Remedy patent was being amortized using the
straight-line method over the remaining term of the patent at
the date of purchase of 16.75 years. Amortization expense
for the Cold Remedy patent was $16,770 in fiscal 2010 and
$67,081 in both fiscal 2009 and 2008. The patent acquired on
October 31, 2005 related to Zicam dry handle swab products
is being amortized using the straight-line method over the
remaining term of the patent, which, at the date of purchase was
14.88 years. The estimated aggregate amortization expense
for the Zicam dry handle swab patent is $76,206 on an annual
basis for each of the next five years. Amortization expense was
$76,206, $76,206 and $69,588 for the years ended March 31,
2010, 2009 and 2008, respectively.
The Company amortized the debt issuance costs associated with
the Companys Comerica Bank credit facility over the term
of the facility. Debt issuance costs of $14,395 were recorded in
fiscal 2008 for the renewal of the credit facility with a term
through June 30, 2009. The Company recorded $1,799, $7,198
and $12,569 in amortization expense during the years ended
March 31, 2010, 2009, and 2008, respectively for
amortization of expenses related to the Companys Comerica
Bank credit facility.
Revenue
Recognition
The Company recognizes revenue from product sales when the risks
and rewards of ownership have transferred to the customer.
Transfer of risks and rewards is considered to have occurred
upon shipment of the finished product to retailers. Sales
incentives, promotional allowances and returns are estimated and
recognized as a reduction from revenue 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.
The estimate for product returns reflects our historical
experience of sales to retailers and is reviewed regularly to
ensure that it reflects potential product returns. We recorded a
returns provision of 3.5% of gross sales for all of our products
in fiscal 2010. We review the return provision at least
quarterly and adjust the reserve amounts if actual product
returns differ materially from our reserve percentage.
Additionally, we adjust the returns provision when a
determination is made that a product will be discontinued,
either in whole or by certain retailers. Should the actual level
of product returns vary significantly from our estimates, our
operating and financial results would be materially affected. In
fiscal 2010, we recorded a $3.0 million adjustment to our
returns provision, in excess of our customary 3.5% of gross
sales, to account for the increased returns and discontinued
products. During the fiscal year ended March 31, 2009, we
recorded a $1.0 million adjustment to our returns
provision, in excess of our customary 3.5% of gross sales, to
account for the increased returns of discontinued products
(which included several of our cough and flu products).
Additionally, during fiscal 2008, we recorded a
$3.1 million adjustment to our returns provision to account
for higher levels of product returns.
Stock-Based
Compensation
The Company measures the cost of services received in exchange
for equity instruments based on the grant-date fair value of the
award and recognizes that cost in expense over the requisite
service period. The Company uses the Black-Scholes
option-pricing model in valuing option grants.
The Company did not recognize any compensation expense for
previously granted option awards during fiscal 2010 or 2009.
During the fiscal year ended March 31, 2008, the Company
recognized pre-tax charges of $16,000, approximately $9,800
after tax, as compensation expense related to unvested options
as of January 1, 2006.
The Company has granted restricted stock to directors, officers,
and management employees as part of its overall compensation
plan. Compensation expense is based on the fair value of the
shares on the date of their grant (as determined by the closing
stock price on the grant date), and is amortized on a
straight-line basis over the requisite service period.
Stock-based compensation expense recognized in the year ended
March 31, 2010, 2009, and 2008, for restricted stock awards
previously granted, was approximately $1.8 million, or
$1.1 million after tax, $1.7 million, or
$1.0 million after tax, and $1.2 million, or $750,000
after tax, respectively. A one-time expense associated with a
stock-based signing bonus accounted for approximately $270,000
or $170,000 after tax, of the
51
MATRIXX
INITIATIVES, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
expense recorded for the year ended March 31, 2009. Also,
during the years ended March 31, 2009 and 2008,
3,442 shares and 4,544 shares, respectively, of
restricted stock were issued to two directors, in lieu of cash,
under the Directors Restricted Stock Purchase Program for
quarterly director compensation.
Comprehensive
Income
Comprehensive income consists of net income (loss) and other
gains and losses affecting stockholders equity that, under
accounting principles generally accepted in the United States of
America, are excluded from net income (loss). Such items consist
primarily of unrealized gains and losses on marketable equity
securities and foreign translation gains and losses. The Company
has not had any such items in the prior three years and,
consequently, net income (loss) and comprehensive income (loss)
are the same.
Shipping
and Handling Costs
Shipping and handling costs are expensed as incurred and
included in cost of sales.
Income
Taxes
Deferred income taxes are provided for temporary differences
between the financial reporting and tax basis of assets and
liabilities using enacted tax laws and rates for the years when
the differences are expected to reverse.
Research
and Development
Research and development costs are expensed as incurred.
Marketing
and Advertising
The Company expenses marketing and advertising costs as
incurred. Marketing expense was $25.4 million,
$31.3 million, and $29.1 million for the years ended
March 31, 2010, 2009, and 2008, respectively.
Net
Income Per Share of Common Stock
Basic earnings per share are calculated using the weighted
average number of common shares outstanding. Diluted earnings
per share are computed on the basis of the weighted average
number of common shares outstanding plus the dilutive effect of
outstanding stock options using the treasury stock method.
52
MATRIXX
INITIATIVES, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The schedule below summarizes the elements included in the
calculation of basic and diluted earnings per common share for
the years ended March 31, 2010, 2009, and 2008. Options to
purchase 253,548, 163,959, and 177,000 shares of common
stock at March 31, 2010, 2009, and 2008, respectively, were
excluded from the computation of diluted earnings per share
because their effect would be anti-dilutive. The shares were
anti-dilutive because the share exercise price exceeded the
average market price of the common stock during the period.
Non-vested restricted stock is included in diluted earnings per
share.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31,
|
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
Net income (loss) applicable to common shareholders
|
|
$
|
(23,575,771
|
)
|
|
$
|
13,864,219
|
|
|
$
|
10,427,539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding Basic
|
|
|
9,222,597
|
|
|
|
9,268,471
|
|
|
|
9,704,579
|
|
Dilutive securities
|
|
|
|
|
|
|
236,889
|
|
|
|
296,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding Diluted
|
|
|
9,222,597
|
|
|
|
9,505,360
|
|
|
|
10,001,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(2.56
|
)
|
|
$
|
1.50
|
|
|
$
|
1.07
|
|
Diluted
|
|
$
|
(2.56
|
)
|
|
$
|
1.46
|
|
|
$
|
1.04
|
|
Estimates
The preparation of the Companys consolidated financial
statements in conformity with accounting principles generally
accepted in the United States of America requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amount of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Product
Recalls and Withdrawals
Matrixx 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), 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.
Recently
Issued Authoritative Guidance
In April 2010 we adopted the FASBs 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
entitys economic performance; and to require enhanced
disclosures that will provide users of financial statements with
more transparent information about an enterprises
involvement in a variable interest entity. The adoption of this
guidance did not impact our financial statements.
53
MATRIXX
INITIATIVES, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
Inventories consist of the following at March 31, 2010 and
2009:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Raw materials and packaging
|
|
$
|
623,808
|
|
|
$
|
2,618,261
|
|
Finished goods
|
|
|
5,543,001
|
|
|
|
5,122,082
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,166,809
|
|
|
$
|
7,740,343
|
|
|
|
|
|
|
|
|
|
|
In July 2009, the Companys credit facility with Comerica
Bank expired in accordance with its terms. The credit facility
allowed for borrowings of up to $8.0 million but the
Company had not made any borrowings under the facility since
during the fiscal years ended March 31, 2010, 2009, and
2008. The Company did not renew the credit line.
54
MATRIXX
INITIATIVES, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following schedules summarize the activity in the reserves
for sales returns and allowances and allowance for doubtful
accounts for the fiscal years ended March 31, 2010, 2009,
and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
|
|
|
|
Balance at
|
|
Charged to
|
|
|
|
Balance at
|
|
|
Beginning of
|
|
Costs and
|
|
|
|
End of
|
Description
|
|
Period
|
|
Expenses
|
|
Deductions
|
|
Period
|
|
Reserves for Sales Returns and Allowances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2008
|
|
$
|
2,391,290
|
|
|
$
|
15,432,925
|
|
|
$
|
16,552,424
|
|
|
$
|
1,271,791
|
|
March 31, 2009
|
|
|
1,271,791
|
|
|
|
15,148,362
|
|
|
|
14,809,101
|
|
|
|
1,611,052
|
|
March 31, 2010
|
|
|
1,611,052
|
|
|
|
16,897,732
|
|
|
|
17,088,184
|
|
|
|
1,420,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
|
|
|
|
Balance at
|
|
Charged to
|
|
|
|
Balance at
|
|
|
Beginning of
|
|
Costs and
|
|
|
|
End of
|
Description
|
|
Period
|
|
Expenses
|
|
Deductions
|
|
Period
|
|
Allowance for Doubtful Accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2008
|
|
$
|
429,031
|
|
|
$
|
20,676
|
|
|
$
|
240,330
|
|
|
$
|
209,377
|
|
March 31, 2009
|
|
|
209,377
|
|
|
|
22,421
|
|
|
|
5,618
|
|
|
|
226,180
|
|
March 31, 2010
|
|
|
226,180
|
|
|
|
14,370
|
|
|
|
70,830
|
|
|
|
169,720
|
|
The components of the provision for income taxes for the years
ended March 31, 2010, 2009, and 2008, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(5,581,976
|
)
|
|
$
|
6,299,911
|
|
|
$
|
2,094,047
|
|
State
|
|
|
93,411
|
|
|
|
1,355,043
|
|
|
|
390,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(5,488,565
|
)
|
|
|
7,654,954
|
|
|
|
2,484,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(6,795,317
|
)
|
|
|
883,745
|
|
|
|
3,013,768
|
|
State
|
|
|
(2,301,653
|
)
|
|
|
198,643
|
|
|
|
539,505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(9,069,970
|
)
|
|
|
1,082,388
|
|
|
|
3,553,273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Provision For Income Taxes
|
|
$
|
(14,585,535
|
)
|
|
$
|
8,737,342
|
|
|
$
|
6,037,487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The provision for income taxes reconciles to the amount computed
by applying the federal statutory rate to income before the
provision for income taxes as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
2010
|
|
2009
|
|
2008
|
|
Federal statutory rate
|
|
|
(34
|
)%
|
|
|
34
|
%
|
|
|
34
|
%
|
State income taxes, net of federal benefits
|
|
|
(5
|
)
|
|
|
5
|
|
|
|
5
|
|
Current period tax credits
|
|
|
|
|
|
|
(1
|
)
|
|
|
(1
|
)
|
Charitable contributions
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
Other
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(38
|
)%
|
|
|
39
|
%
|
|
|
37
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55
MATRIXX
INITIATIVES, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The components of deferred tax assets and liabilities as of
March 31, 2010 and 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Current deferred tax assets
|
|
|
|
|
|
|
|
|
Reserves and accrued expenses
|
|
$
|
2,578,428
|
|
|
$
|
998,107
|
|
Accrued legal liabilities
|
|
|
284,900
|
|
|
|
302,200
|
|
Reserve for bad debts
|
|
|
65,342
|
|
|
|
87,100
|
|
Inventory valuation reserve
|
|
|
1,341,818
|
|
|
|
249,300
|
|
Net operating loss carryforwards
|
|
|
800,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current deferred tax assets
|
|
$
|
5,071,475
|
|
|
$
|
1,636,707
|
|
|
|
|
|
|
|
|
|
|
Non-current deferred tax assets
|
|
|
|
|
|
|
|
|
Restricted stock compensation
|
|
$
|
37,684
|
|
|
$
|
629,200
|
|
Amortization of intangible assets
|
|
|
2,775,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-current deferred tax assets
|
|
|
2,813,046
|
|
|
|
629,200
|
|
Non-current deferred tax liabilities
|
|
|
|
|
|
|
|
|
Amortization of intangible assets
|
|
|
|
|
|
|
(2,847,501
|
)
|
Depreciation
|
|
|
(878,360
|
)
|
|
|
(587,700
|
)
|
|
|
|
|
|
|
|
|
|
Total non-current deferred tax liabilities
|
|
|
(878,360
|
)
|
|
|
(3,435,201
|
)
|
|
|
|
|
|
|
|
|
|
Net non-current deferred tax assets (liabilities)
|
|
$
|
1,934,686
|
|
|
$
|
(2,806,001
|
)
|
|
|
|
|
|
|
|
|
|
The Company records a valuation allowance for certain temporary
differences for which it is more likely than not that it will
not receive future tax benefits. The Company assesses its past
earnings history and trends, sales backlog and projections of
future net income when determining whether it is more likely
than not future tax benefits will be realized. As of
March 31, 2010, 2009 and 2008, the Company did not record a
valuation allowance.
The Companys policy is to classify income tax penalties
and interest as income taxes in its financial statements. During
the years ended March 31, 2010 and 2009, the Company did
not incur any penalties or interest. At March 31, 2010 and
2009, the Company did not have any unrecognized tax benefits.
The tax benefits associated with employee exercises of
non-qualified stock options and disqualifying dispositions of
stock acquired with incentive stock options reduced income taxes
currently payable. The Company has determined that it is more
likely than not that the amounts will be realized and has
recorded benefits charged to additional
paid-in-capital
for the years ended March 31, 2010, 2009, and 2008 of
$566,342, $379,072, and $231,401, respectively.
At December 31, 2006, the Company had a $1.4 million
loss carryforward due to the settlement of the consolidated
Arizona litigation in 2006. The Company exhausted this
carryforward in fiscal 2008.
The authorized preferred stock of the Company consists of
2,000,000 shares, $0.001 par value. The preferred
stock may be issued in separate series from time to time as the
Board of Directors of the Company may determine by resolution,
unless the nature of a particular transaction and applicable
statutes require shareholder approval. The rights, preferences
and limitations of each series of preferred stock may differ,
including without limitation, the rate of dividends, method and
nature of payment of dividends, terms of redemption, amounts
payable on liquidation, sinking fund provisions (if any),
conversion rights (if any), and voting rights.
56
MATRIXX
INITIATIVES, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Stock
Repurchase Plan
In April 2004, the Companys Board of Directors authorized
a Common Stock Repurchase Program for up to 1 million
shares of the Companys common stock. The Board of
Directors of the Company approved a new stock repurchase
program, effective January 26, 2009, which permits the
Company to purchase up to 1 million shares of the
Companys common stock. Concurrent with its approval of
this repurchase program, the Board of Directors terminated the
repurchase program previously authorized in April 2004. During
fiscal 2010, the Company did not purchase any shares of common
stock on the open market. However, during fiscal 2010, the
Company repurchased 22,097 shares of common stock with an
aggregate value of $266,413 from employees to satisfy tax
withholding requirements associated with vested restricted
stock. In fiscal 2009, the Company purchased 573,394 shares
of common stock on the open market at an aggregate cost of
$9,284,297. The Company also repurchased 39,970 shares of
common stock at an aggregate value of $669,623, from employees
and directors to satisfy tax withholding requirements associated
with vested restricted stock. During fiscal 2008, the Company
purchased 493,969 shares of common stock on the open market
at an aggregate cost of $7,148,245. In addition, the Company
repurchased 22,432 shares of common stock at an aggregate
cost of $315,148, from employees and directors to satisfy tax
withholding requirements associated with vested restricted stock
Shareholder
Rights Plan
In July 2002, the Board of Directors of the Company adopted a
shareholder rights plan in the form of a Rights Agreement dated
as of July 22, 2002 by and between the Company and
Corporate Stock Transfer, Inc., as Rights Agent (the
Rights Agreement). On July 12, 2002, the Board
of Directors of the Company declared a dividend of one preferred
share purchase right (a Right) for each outstanding
share of common stock. The dividend was paid on July 22,
2002 to the Companys stockholders of record on that date.
The Rights also apply to, and will be issued in the same
proportion in connection with, all future common stock issuances
until the Distribution Date (defined below) or the expiration or
earlier redemption or exchange of the Rights. Each Right permits
the registered holder thereof to purchase from the Company, at
any time after the Distribution Date, one one-thousandth of a
share of the Companys Series A Junior Participating
Preferred Stock for a purchase price of $50.79 per such one
one-thousandth of a share, subject to certain possible
adjustments provided for in the Rights Agreement. The Board of
Directors of the Company has authorized the issuance of up to
20,000 shares of Series A Junior Participating
Preferred Stock upon the exercise of Rights.
Initially the Rights will be attached to all certificates
representing shares of common stock then outstanding, and no
separate Rights certificates will be distributed. The Rights
will separate from the common stock upon the earlier to occur of
(i) 10 days after the public announcement of a
persons or group of affiliated or associated persons
having acquired beneficial ownership of 15% or more of the
outstanding common stock (such person or group being an
Acquiring Person), or (ii) 10 business days (or
such later date as the Companys Board may determine)
following the commencement of, or announcement of an intention
to make, a tender offer or exchange offer for the common stock,
the consummation of which would result in a person or
groups becoming an Acquiring Person (the earlier of such
dates being the Distribution Date). The Rights are
not exercisable until the Distribution Date. If any person (or
group of persons) becomes an Acquiring Person, except in a
tender or exchange offer which is for all outstanding common
stock at a price and on terms which a majority of the
Companys Board determines to be adequate and in the best
interests of the Company, its shareholders and other relevant
constituencies (other than such Acquiring Person, its affiliates
and associates), each holder of a Right will thereafter be
entitled to acquire, for each Right so held, one share of common
stock for a purchase price equal to 50% of the then current
market price for such share of common stock. All Rights
beneficially owned by an Acquiring Person or any affiliate or
associate thereof will be null and void and not exercisable. The
Rights expire on July 22, 2012 provided that, prior to a
person (or group of persons) becoming an Acquiring Person, the
Company may redeem the Rights for $0.01 per Right. All of the
provisions of the Rights Agreement may be amended before the
Distribution Date by the Board of Directors of
57
MATRIXX
INITIATIVES, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the Company for any reason it deems appropriate. After the
Distribution Date, the provisions of the Rights Agreement may be
amended by the Board in order to cure any ambiguity, defect or
inconsistency, to make changes which do not adversely affect the
interest of Rights (excluding the interest of any Acquiring
Person) or, subject to certain limitations, to shorten or
lengthen any time period under the Rights Agreement.
Directors
Restricted Stock Purchase Program
In 2002, the Company established a Director Restricted Stock
Purchase Program (the Program). Under the Program
the number of shares to which the Director will be entitled is
equal to the cash portion of compensation payable to him/her for
Directors fees by the Company that
he/she
wishes to apply to the purchase of shares under the Program
divided by 80% of the closing price of the Companys stock
price on the date the cash consideration would be paid. Shares
issued under the Program are restricted until the first to occur
of (i) the expiration of three years from the date the
shares are issued, (ii) a change in control of the Company,
and (iii) the Directors death, disability, or
mandatory retirement.
Long-Term
Incentive Plan
In November 2001, the Company adopted the 2001 Long-Term
Incentive Plan (the 2001 Plan). The 2001 Plan
provides for the grant of incentive stock options, non-qualified
options, restricted common stock, performance based awards,
tandem awards and substitute awards. In May 2005, shareholders
approved an amendment to the 2001 Plan increasing the number of
shares authorized for issuance under the Plan from
1,000,000 shares to 1,500,000 shares. In August 2009,
shareholders approved an amendment to the 2001 Plan increasing
the number of shares authorized for issuance under the Plan from
1,500,000 shares to 2,250,000 shares.
The following table contains information on the stock options
under the Companys 2001 Plan for the fiscal year ended
March 31, 2010. The outstanding options expire from October
2008 to July 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
Aggregate Intrinsic
|
|
Options
|
|
Shares
|
|
|
Exercise Price
|
|
|
Term
|
|
|
Value
|
|
|
Options outstanding at March 31, 2009
|
|
|
417,700
|
|
|
$
|
12.78
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(144,700
|
)
|
|
|
9.41
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(60,300
|
)
|
|
|
16.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at March 31, 2010
|
|
|
212,700
|
|
|
$
|
14.06
|
|
|
|
1.17 years
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2010
|
|
|
212,700
|
|
|
$
|
14.06
|
|
|
|
1.17 years
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No options were granted in the years ended March 31, 2010,
2009, or 2008.
The total intrinsic value of options exercised during the years
ended March 31, 2010, 2009 and 2008, was $1.4 million,
$925,000, and $569,000, respectively. No options vested during
the fiscal years ended March 31, 2010, 2009 or 2008.
Cash received from the exercise of options during the fiscal
year ended March 31, 2010 was approximately $1,362,000. The
related tax benefit realized was approximately $566,000.
58
MATRIXX
INITIATIVES, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of the Companys restricted stock awards is
presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average Grant-
|
|
|
Shares
|
|
Date Fair Value
|
|
Nonvested at March 31, 2009
|
|
|
189,761
|
|
|
$
|
14.79
|
|
Granted
|
|
|
101,674
|
|
|
$
|
16.54
|
|
Vested
|
|
|
(90,727
|
)
|
|
$
|
15.16
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at March 31, 2010
|
|
|
200,708
|
|
|
$
|
15.51
|
|
|
|
|
|
|
|
|
|
|
The weighted average fair value of restricted stock awards
granted for the year ended March 31, 2009 and 2008 was
$14.52 and $15.77, respectively.
As of March 31, 2010, the Company had approximately
$1.8 million of unrecognized compensation expense related
to non-vested restricted stock awards that is expected to be
recognized over a weighted-average period of approximately
20 months.
The fair value of the Companys restricted stock awards was
determined using the closing price of the Companys shares
on the respective grant dates.
Other
Stock Option Information
The following table summarizes information about the
Companys outstanding stock options at March 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
Weighted
|
|
Options Exercisable
|
|
|
|
|
Remaining
|
|
Average
|
|
|
|
Weighted
|
Range of
|
|
Number
|
|
Contractual Life
|
|
Exercise
|
|
Number
|
|
Average
|
Exercise Prices
|
|
Outstanding
|
|
in Years
|
|
Price
|
|
Exercisable
|
|
Exercise Price
|
|
$7.00 $9.00
|
|
|
35,000
|
|
|
|
1.04
|
|
|
$
|
8.08
|
|
|
|
35,000
|
|
|
$
|
8.08
|
|
$10.00 $12.00
|
|
|
70,700
|
|
|
|
1.80
|
|
|
$
|
11.17
|
|
|
|
70,700
|
|
|
$
|
11.17
|
|
$17.00 $19.00
|
|
|
107,000
|
|
|
|
.78
|
|
|
$
|
17.93
|
|
|
|
107,000
|
|
|
$
|
17.93
|
|
Compensation
Expense
The Company measures the cost of services received in exchange
for equity instruments based on the grant-date fair value of the
award and recognizes that cost in expense over the requisite
service period. The Company uses the Black-Scholes
option-pricing model in valuing option grants.
The Company did not incur any expense in fiscal 2010 or 2009
related to stock options. For the year ended March 31,
2008, the Company recognized compensation expense for options of
$16,000, approximately $10,000 after tax.
For the fiscal years ended March 31, 2010, 2009, and 2008,
the Company recognized $1,382,949, $899,600 and $664,296,
respectively, in employee compensation expense related to its
restricted stock program.
59
MATRIXX
INITIATIVES, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
9.
|
Commitments
and Contingencies
|
Leases
The Company leases its office facilities under a long-term
leasing arrangement. The following is a schedule of future
minimum lease payments at March 31, 2010 under the
Companys operating leases that have initial or remaining
non-cancelable lease terms in excess of one year:
|
|
|
|
|
Year Ending
|
|
|
|
March 31,
|
|
Leases
|
|
|
2011
|
|
$
|
432,868
|
|
2012
|
|
|
445,854
|
|
2013
|
|
|
459,229
|
|
2014
|
|
|
115,649
|
|
|
|
|
|
|
Total Minimum Lease Payments
|
|
$
|
1,453,600
|
|
|
|
|
|
|
Rental expense charged to operations for the years ended
March 31, 2010, 2009 and 2008 was $548,652, $797,586, and
$329,858 respectively.
Officer
Indemnification
Under its organizational documents, the Companys officers,
employees, and directors are indemnified against certain
liability arising out of the performance of their duties to the
Company. The Company also has an insurance policy for its
directors and officers to insure them against liabilities
arising from the performance of their duties required by their
positions with the Company. The Companys maximum exposure
under these arrangements is unknown as this would involve future
claims that may be made against the Company that have not yet
occurred.
Litigation
The Company is involved in various product liability claims and
other legal proceedings. The Companys legal expense for
these lawsuits continues to have a significant impact on the
results of operations as the Company defends itself against the
various claims. For the year ended March 31, 2010, legal
expense for product liability litigation, responding to the FDA
warning letter, and regulatory matters, as well as litigating
claims with one of its former manufacturers was approximately
$7.2 million, compared to $2.6 in fiscal 2009, and
$2.5 million (net of $560,000 for insurance reimbursement)
in fiscal 2008.
As of December 31, 2005, the Company established a reserve
for any future payment of settlement or losses related to the
Cold Remedy litigation. This reserve was based on certain
assumptions, some of which are described below, and was the
amount, excluding defense costs, the Company believed it could
reasonably estimate would be spent to resolve the remaining
cases that had been filed or to resolve matters with the
potential claimants. Some of the significant factors that were
considered in the establishment of the reserve were as follows:
the actual costs incurred by the Company up to that time in
resolving several claims; the development of the Companys
legal defense strategy; settlements; and the number of cases
that remained pending against the Company. There are events,
such as the dismissal of any of the cases, the filing of new
lawsuits, threatened claims, the outcome of a trial, rulings on
pending evidentiary motions, or adverse publicity that may have
an impact on the Companys conclusions as to the adequacy
of the reserve for the pending product liability lawsuits. The
Company maintained a $740,000 reserve balance as of
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 Companys receipt
of the FDAs warning letter and the resulting increase in
the number of product liability lawsuits being filed, the
amounts that may be spent to resolve matters with actual and
potential claimants could be higher than our reserve. The
Company will continue to review the product liability situation
and will adjust the litigation reserve in the future when we can
reasonably estimate changes in the amounts and likelihood of
resolving the claims. Litigation is inherently
60
MATRIXX
INITIATIVES, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
Third-Party
Manufacturers
The Companys third-party 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 Companys products, product recalls or
withdrawal, fines, seizure of product, as well as withdrawal or
suspension of regulatory approvals.
|
|
10.
|
Employee
Benefit Plan
|
Effective January 1, 2004, the Company adopted a Qualified
401(k) Retirement Account Plan, meeting the Safe Harbor
Provisions of the IRS. The Company makes matching contributions
relative to each employees Salary Reduction Contributions
for the year of up to 4% of the employees compensation for
the Plan year. For the fiscal years ended March 31, 2010,
2009, and 2008, the Company made matching contributions of
$172,896, $151,826, and $107,241, respectively. Each employee is
fully vested at all times in his or her contribution and the
Companys matching contributions.
|
|
11.
|
Concentration
of Credit Risk and Major Customers
|
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of temporary
cash investments and accounts receivable. The Company places its
cash equivalents with high credit quality financial institutions
and limits its credit exposure with any one financial
institution. The Companys cash in its banks exceeds the
federally insured limits. The Company provides credit in the
normal course of business to many of the nations top drug
stores and mass merchandisers. The Companys accounts
receivable are due from customers located throughout the United
States. The Company performs periodic credit evaluations of its
customers financial condition and generally requires no
collateral. The Company maintains reserves for potential credit
losses, and such losses have not exceeded managements
expectations.
The Companys sales are from products marketed under the
Zicam brand name, with a majority of its sales attributable to
its Cold Remedy products, which subjects the Company to
significant financial exposure. If future sales of these
products decrease, and in particular sales of its Cold Remedy
products, the Companys operations could be materially
adversely affected.
Sales to major customers, which comprised 10% or more of net
sales, for the years ended March 31, 2010, 2009, and 2008
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
Year Ended
|
|
Year Ended
|
|
|
March 31, 2010
|
|
March 31, 2009
|
|
March 31, 2008
|
|
Walgreens
|
|
|
20.8
|
%
|
|
|
16.8
|
%
|
|
|
13.3
|
%
|
Wal-Mart
|
|
|
19.9
|
%
|
|
|
21.6
|
%
|
|
|
23.5
|
%
|
CVS
|
|
|
10.1
|
%
|
|
|
11.8
|
%
|
|
|
11.8
|
%
|
|
|
12.
|
Fair
Value of Financial Instruments
|
The Company follows the FASB guidance that defines fair value,
establishes a framework for measuring fair value, and expands
disclosures about fair value measurements for all financial
assets and liabilities.
Cash, cash equivalents, accounts payable and accounts
receivable: Carrying amounts approximate fair value because
of the short maturity of those instruments.
61
MATRIXX
INITIATIVES, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Certificates of Deposit: The Company purchases
certificates of deposit from FDIC insured institutions at or
below the FDIC insured limits and all certificates of deposit
have maturities of one year or less. The purchase price of each
certificate of deposit is treated as its fair market value on
the purchase date. We account for these certificates of deposit
at amortized costs and they are held to maturity.
Disclosures about fair value of the Companys financial
instruments are presented in the table below. The following
table presents a summary of the Companys financial
instruments as of March 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
March 31, 2009
|
|
|
Carrying
|
|
Estimated
|
|
Carrying
|
|
Estimated
|
|
|
Amount
|
|
Fair Value
|
|
Amount
|
|
Fair Value
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
26,482,499
|
|
|
$
|
26,482,499
|
|
|
$
|
25,144,088
|
|
|
$
|
25,144,088
|
|
Certificates of deposit
|
|
$
|
3,736,525
|
|
|
$
|
3,736,525
|
|
|
$
|
14,870,717
|
|
|
$
|
14,870,717
|
|
The carrying amounts for cash and cash equivalents, certificates
of deposit, receivables, accounts payable and accrued expenses
approximate fair value because of the short maturities of these
instruments.
|
|
13.
|
Selected
Quarterly Financial Data (Unaudited)
|
Selected unaudited quarterly financial data for the years ended
March 31, 2010 and 2009 are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2010 Quarters Ended:
|
|
|
June 30, 2009
|
|
Sept. 30, 2009
|
|
Dec. 31, 2009
|
|
March 31, 2010
|
|
Net sales
|
|
$
|
6,916,237
|
|
|
$
|
25,626,789
|
|
|
$
|
28,462,685
|
|
|
$
|
6,311,528
|
|
Gross profit
|
|
|
4,123,175
|
|
|
|
18,796,876
|
|
|
|
20,812,865
|
|
|
|
2,899,136
|
|
Net income (loss) from operations
|
|
|
(37,167,013
|
)
|
|
|
8,227,718
|
|
|
|
6,201,854
|
|
|
|
(15,570,411
|
)
|
Net income (loss) per basic share
|
|
|
(2.49
|
)
|
|
|
0.55
|
|
|
|
0.41
|
|
|
|
(1.04
|
)
|
Net income (loss) per diluted share
|
|
|
(2.49
|
)
|
|
|
0.55
|
|
|
|
0.41
|
|
|
|
(1.04
|
)
|
Net income (loss)
|
|
|
(22,832,252
|
)
|
|
|
5,078,387
|
|
|
|
3,826,383
|
|
|
|
(9,648,289
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2009 Quarters Ended:
|
|
|
June 30, 2008
|
|
Sept. 30, 2008
|
|
Dec. 31, 2008
|
|
March 31, 2009
|
|
Net sales
|
|
$
|
8,508,044
|
|
|
$
|
33,631,906
|
|
|
$
|
38,702,412
|
|
|
$
|
30,787,826
|
|
Gross profit
|
|
|
5,313,761
|
|
|
|
23,252,991
|
|
|
|
27,497,755
|
|
|
|
22,690,014
|
|
Net income (loss) from operations
|
|
|
(3,758,660
|
)
|
|
|
13,272,899
|
|
|
|
7,831,223
|
|
|
|
4,968,989
|
|
Net income (loss) per basic share
|
|
|
(0.24
|
)
|
|
|
0.89
|
|
|
|
0.52
|
|
|
|
0.34
|
|
Net income (loss) per diluted share
|
|
|
(0.24
|
)
|
|
|
0.86
|
|
|
|
0.50
|
|
|
|
0.33
|
|
Net income (loss)
|
|
|
(2,265,857
|
)
|
|
|
8,241,882
|
|
|
|
4,751,445
|
|
|
|
3,136,749
|
|
62
|
|
ITEM 15.
|
EXHIBITS,
FINANCIAL STATEMENT SCHEDULES (cont.)
|
(a)2.
Financial Statement Schedules
Financial statement schedules have been omitted because either
they are not required or are not applicable, or because the
information has been included in the consolidated financial
statements or notes thereto contained in this Annual Report on
Form 10-K.
(a)3.
Exhibits
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Title
|
|
|
3
|
.1
|
|
Certificate of Incorporation and Amendments thereto of the
Registrant(1)
|
|
3
|
.2
|
|
Bylaws of the Registrant(11)
|
|
4
|
.1
|
|
Rights Agreement dated as of July 22, 2002 by and between
the Registrant and Corporate Stock Transfer, Inc.(2)
|
|
10
|
.1
|
|
*2001 Stock Incentive Plan(5)
|
|
10
|
.1.1
|
|
*Form of Matrixx Initiatives, Inc. 2001 Long-Term Incentive Plan
Grant of Incentive Stock Option(7)
|
|
10
|
.1.2
|
|
*Form of Matrixx Initiatives, Inc. 2001 Long-Term Incentive Plan
Restricted Stock Program Agreement(14)
|
|
10
|
.1.3
|
|
*Form of Matrixx Initiatives, Inc. 2001 Long-Term Incentive Plan
Restricted Stock Program Agreement (Directors)(13)
|
|
10
|
.1.4
|
|
*Amended and Restated 2001 Long-Term Incentive Plan Restricted
Stock Program Agreement between the Registrant and Samuel C.
Cowley(16)
|
|
10
|
.2
|
|
*Summary of Matrixx Initiatives, Inc. Director Restricted Stock
Purchase Program(3)
|
|
10
|
.3
|
|
*Form of Executive Retention Agreement(12)
|
|
10
|
.4
|
|
*Executive Retention Agreement Trust(12)
|
|
10
|
.5
|
|
Manufacturing Agreement with BioZone Laboratories(6)
|
|
10
|
.6
|
|
* **Form of Amended and Restated Change of Control Agreement
between Registrant and Registrants Executive Officers
|
|
10
|
.7
|
|
Asset Purchase Agreement dated as of October 31, 2005 by
and among Viridian Packaging Solutions, LLC, Beutlich, L.P.,
Frederic J. Beutlich and Zicam Swab Products, LLC(10)
|
|
10
|
.8
|
|
Separation Agreement dated December 8, 2008 among
Registrant and Carl J. Johnson(17)
|
|
10
|
.9
|
|
Settlement Agreement and Mutual Release dated
December 8,2008 between the Registrant and Carl J.
Johnson(17)
|
|
10
|
.10
|
|
*Insurance Agreement dated October 18, 2006 between the
Registrant and William J. Hemelt(13)
|
|
10
|
.11
|
|
Summary of Chairmans Fee Arrangement, approved
October 21, 2008(16)
|
|
21
|
|
|
**Subsidiaries of the Registrant
|
|
23
|
.1
|
|
**Consent of Mayer Hoffman McCann P.C., independent registered
public accounting firm
|
|
31
|
.1
|
|
**Certification of CEO and CFO Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
|
|
32
|
.1
|
|
***Certification of CEO and CFO pursuant to 18 U.S.C.
Section 1350
|
|
|
|
* |
|
Indicates management compensatory contract, plan or arrangement. |
|
** |
|
Filed with this
Form 10-K. |
|
*** |
|
Furnished with this
Form 10-K. |
|
(1) |
|
Incorporated by reference to the Registrants Amendment
No. 1 to
Form 8-A,
filed June 18, 2002, file number
000-27646. |
|
(2) |
|
Incorporated by reference to the Registrants registration
statement on
Form 8-A,
filed July 23, 2002, file number
000-31404. |
|
(3) |
|
Incorporated by reference to the Registrants Report on
Form 10-Q
for the quarter ended June 30, 2006, file number
001-31404. |
63
|
|
|
(4) |
|
Incorporated by reference to the Registrants Report on
Form 8-K
filed December 14, 2001, file number
000-27646. |
|
(5) |
|
Incorporated by reference to the Registrants definitive
proxy statement on Schedule 14A, filed April 8, 2005,
file number
001-31404. |
|
(6) |
|
Incorporated by reference to the Registrants Report on
Form 8-K
filed October 28, 2004, file number
001-31404. |
|
(7) |
|
Incorporated by reference to the Registrants Report on
Form 8-K
filed February 11, 2005 file number
001-31404. |
|
(9) |
|
Incorporated by reference to the Registrants Report on
Form 8-K
filed November 7, 2005, file number
001-31404. |
|
(10) |
|
Incorporated by reference to the Registrants Report on
Form 8-K
filed November 3, 2005, file number
001-31404. |
|
(11) |
|
Incorporated by reference to the Registrants Report on
Form 8-K
filed July 25, 2006, file number
001-31404. |
|
(12) |
|
Incorporated by reference to the Registrants Report on
Form 10-Q
for the period ended September 30, 2009, file number
001-31404. |
|
(13) |
|
Incorporated by reference to the Registrants Report on
Form 10-Q
for the period ended September 30, 2006, file number
001-31404. |
|
(14) |
|
Incorporated by reference to the Registrants Report on
Form 8-K
filed May 13, 2008, file number
001-31404. |
|
(15) |
|
Incorporated by reference to the Registrants Report on
Form 10-Q
for the period ended June 30, 2007, file number
001-31404. |
|
(16) |
|
Incorporated by reference to the Registrants Report on
Form 10-Q
for the period ended September 30, 2008, file number
001-31404. |
|
(17) |
|
Incorporated by reference to the Registrants Report on
Form 10-Q
for the period ended December 31, 2008, file number
001-31404. |
64
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this Report to be signed on its behalf by the undersigned,
thereunto duly authorized, in Phoenix, Arizona, on June 5,
2010.
MATRIXX INITIATIVES, INC.
William Hemelt
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
dated indicated:
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ William
C. Egan
William
C. Egan
|
|
Chairman of the Board of Directors
|
|
June 5, 2010
|
|
|
|
|
|
/s/ L.
White Matthews, III
L.
White Matthews, III
|
|
Director
|
|
June 5, 2010
|
|
|
|
|
|
/s/ Michael
A. Zeher
Michael
A. Zeher
|
|
Director
|
|
June 5, 2010
|
|
|
|
|
|
/s/ Samuel
C. Cowley
Samuel
C. Cowley
|
|
Director, Executive Vice
President Business Development,
General Counsel & Secretary
|
|
June 5, 2010
|
|
|
|
|
|
/s/ John
M. Clayton
John
M. Clayton
|
|
Director
|
|
June 5, 2010
|
|
|
|
|
|
/s/ Lori
Bush
Lori
Bush
|
|
Director
|
|
June 5, 2010
|
|
|
|
|
|
/s/ William
J. Hemelt
William
J. Hemelt
|
|
President and Chief Executive
Officer (Principal Financial
Officer & Principal Accounting Officer)
|
|
June 5, 2010
|
65