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EX-31.1 - EX-31.1 - MATRIXX INITIATIVES INC | p18012exv31w1.htm |
EX-32.1 - EX-32.1 - MATRIXX INITIATIVES INC | p18012exv32w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
(Mark One)
þ | Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarter ended June 30, 2010
or
o | Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Commission File number 001-31404
Matrixx Initiatives, Inc.
(Name of registrant as specified in its charter)
Delaware | 87-0482806 | |
(State or other jurisdiction | (I.R.S. Employer | |
of incorporation or organization) | Identification Number) |
8515 E. Anderson Drive
Scottsdale, AZ 85255
(Address of principal executive offices)
Scottsdale, AZ 85255
(Address of principal executive offices)
(602) 385-8888
(Issuers telephone number)
(Issuers telephone number)
Indicate by check mark whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES þ NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required to submit and post such files). Yes o
No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the
Exchange Act.
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule
12b-2). YES o NO þ
There were 9,399,987 shares of the registrants common stock, $.001 par value, outstanding as of
July 30, 2010.
MATRIXX INITIATIVES, INC.
FORM 10-Q
INDEX
FORM 10-Q
INDEX
Unless otherwise indicated in this quarterly report, Matrixx, us, we, our, the Company
and similar terms refer to Matrixx Initiatives, Inc. and its subsidiaries. Zicam is a registered
trademark of our subsidiary, Zicam, LLC, and the Matrixx name and logo are trademarks of the
Company.
2
Table of Contents
MATRIXX
INITIATIVES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Unaudited)
June 30, | March 31, | |||||||
2010 | 2010 | |||||||
ASSETS |
||||||||
Current Assets: |
||||||||
Cash and cash equivalents |
$ | 28,267,218 | $ | 26,482,499 | ||||
Certificates of deposit |
| 3,736,525 | ||||||
Accounts receivable: |
||||||||
Trade, net of allowance for doubtful accounts of $168,139 and $169,720 |
1,617,155 | 5,386,044 | ||||||
Insurance receivable |
2,204,000 | | ||||||
Inventories |
7,007,681 | 6,166,809 | ||||||
Prepaid expenses |
1,269,465 | 2,230,116 | ||||||
Interest receivable |
820 | 3,443 | ||||||
Income tax receivable |
7,220,293 | 5,661,554 | ||||||
Current deferred tax asset |
5,265,820 | 5,071,475 | ||||||
Total Current Assets |
52,852,452 | 54,738,465 | ||||||
Property and Equipment, at cost: |
||||||||
Office furniture and computer equipment |
1,575,947 | 1,722,176 | ||||||
Machine tooling and manufacturing equipment |
4,415,352 | 4,415,352 | ||||||
Laboratory furniture and equipment |
370,355 | 486,459 | ||||||
Leasehold improvements |
415,452 | 562,738 | ||||||
6,777,106 | 7,186,725 | |||||||
Less accumulated depreciation |
(3,808,981 | ) | (3,865,302 | ) | ||||
Net Property and Equipment |
2,968,125 | 3,321,423 | ||||||
Other Assets: |
||||||||
Deposits |
636,924 | 636,924 | ||||||
Other assets |
40,043 | 40,043 | ||||||
Patents, net of accumulated amortization of $330,260 and $311,209 |
774,756 | 793,807 | ||||||
Non-current deferred tax asset |
1,845,871 | 1,934,686 | ||||||
Total Other Assets |
3,297,594 | 3,405,460 | ||||||
Total Assets |
$ | 59,118,171 | $ | 61,465,348 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current Liabilities: |
||||||||
Accounts payable |
$ | 2,472,919 | $ | 1,007,886 | ||||
Accrued expenses |
5,233,572 | 7,026,708 | ||||||
Sales commissions |
79,857 | 188,433 | ||||||
Sales returns and allowances |
1,847,338 | 1,420,600 | ||||||
Legal liability |
740,000 | 740,000 | ||||||
Total Current Liabilities |
10,373,686 | 10,383,627 | ||||||
Total Liabilities |
10,373,686 | 10,383,627 | ||||||
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, 9,399,987 and 9,455,620 shares issued
and outstanding |
9,400 | 9,455 | ||||||
Additional paid-in capital |
38,753,271 | 38,657,444 | ||||||
Retained earnings |
9,981,814 | 12,414,822 | ||||||
Total Stockholders Equity |
48,744,485 | 51,081,721 | ||||||
Total Liabilities and Stockholders Equity |
$ | 59,118,171 | $ | 61,465,348 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
3
Table of Contents
MATRIXX
INITIATIVES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2010 AND 2009
FOR THE THREE MONTHS ENDED JUNE 30, 2010 AND 2009
(Unaudited)
2010 | 2009 | |||||||
Net sales |
$ | 3,207,398 | $ | 6,916,237 | ||||
Cost of sales |
1,332,578 | 2,793,062 | ||||||
Gross Profit |
1,874,820 | 4,123,175 | ||||||
Selling, general and administrative expenses |
5,313,898 | 16,488,637 | ||||||
Research and development |
530,228 | 934,393 | ||||||
Goodwill impairment |
| 15,039,836 | ||||||
Asset impairments |
| 8,827,322 | ||||||
Loss From Operations |
(3,969,306 | ) | (37,167,013 | ) | ||||
Interest and other income |
16,398 | 47,280 | ||||||
Loss Before Income Taxes |
(3,952,908 | ) | (37,119,733 | ) | ||||
Income taxes |
(1,519,900 | ) | (14,287,481 | ) | ||||
Net Loss |
$ | (2,433,008 | ) | $ | (22,832,252 | ) | ||
Net Loss Per Share of Common Stock: |
||||||||
Basic and Diluted: |
||||||||
Weighted Average Number of Common Shares
Outstanding |
9,287,580 | 9,169,829 | ||||||
Net Loss Per Share of Common Stock |
$ | (0.26 | ) | $ | (2.49 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
4
Table of Contents
MATRIXX
INITIATIVES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JUNE 30, 2010 AND 2009
FOR THE THREE MONTHS ENDED JUNE 30, 2010 AND 2009
(Unaudited)
2010 | 2009 | |||||||
Cash Flows From Operating Activities |
||||||||
Net loss |
$ | (2,433,008 | ) | $ | (22,832,252 | ) | ||
Adjustments to reconcile net loss to net cash used by operating activities: |
||||||||
Depreciation |
370,664 | 256,016 | ||||||
Amortization |
19,051 | 37,621 | ||||||
Deferred income taxes |
(105,530 | ) | (14,597,763 | ) | ||||
Common stock issued for compensation |
249,592 | 1,015,979 | ||||||
Asset impairments and abandonments |
| 24,287,130 | ||||||
Changes in assets and liabilities: |
||||||||
Accounts receivable |
3,768,889 | 8,511,844 | ||||||
Insurance receivable |
(2,204,000 | ) | (49,486 | ) | ||||
Interest and other receivables |
2,623 | (57,850 | ) | |||||
Income tax receivable |
(1,558,739 | ) | (265,479 | ) | ||||
Inventories |
(840,872 | ) | (2,744,968 | ) | ||||
Prepaid expenses and other |
960,651 | 372,806 | ||||||
Accounts payable |
1,465,033 | 840,699 | ||||||
Accrued expenses |
(1,901,712 | ) | 4,313,905 | |||||
Legal liability |
| (20,000 | ) | |||||
Sales returns and allowances |
426,738 | 399,262 | ||||||
Net Cash Used By Operating Activities |
(1,780,620 | ) | (532,536 | ) | ||||
Cash Flows From Investing Activities |
||||||||
Purchases of certificates of deposit |
| (3,736,525 | ) | |||||
Maturities of certificates of deposit |
3,736,525 | 3,621,548 | ||||||
Capital expenditures |
(17,366 | ) | (22,612 | ) | ||||
Deposits and other |
| (2,232,250 | ) | |||||
Net Cash Provided (Used) By Investing Activities |
3,719,159 | (2,369,839 | ) | |||||
Cash Flows From Financing Activities: |
||||||||
Issuance of common stock |
| 1,362,219 | ||||||
Purchase of treasury stock |
(153,820 | ) | (1,187,906 | ) | ||||
Net Cash Provided (Used) By Financing Activities |
(153,820 | ) | 174,313 | |||||
Net Increase (Decrease) in Cash and Cash Equivalents |
1,784,719 | (2,728,062 | ) | |||||
Cash and Cash Equivalents at Beginning of Period |
26,482,499 | 25,144,088 | ||||||
Cash and Cash Equivalents at End of Period |
$ | 28,267,218 | $ | 22,416,026 | ||||
Supplemental Disclosure of Cash Flow Information: |
||||||||
Cash paid for income taxes |
$ | | $ | 8,000 | ||||
Supplemental Disclosure of Noncash Financing Activities: |
||||||||
Retirement of treasury stock |
$ | 153,820 | $ | 1,187,906 |
The accompanying notes are an integral part of these consolidated financial statements.
5
Table of Contents
MATRIXX INITIATIVES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Description of Business and Basis of Presentation
Matrixx Initiatives, Inc. markets and sells over the counter products with an emphasis on
those that utilize unique or novel delivery systems. Through our subsidiaries, we market and sell
products under the Zicam® brand.
The accompanying condensed consolidated balance sheet as of March 31, 2010, which has been
derived from audited consolidated financial statements, and the unaudited interim condensed
consolidated financial statements of Matrixx Initiatives, Inc. as of and for the three months ended
June 30, 2010 have been prepared in accordance with the rules prescribed for filing condensed
interim financial statements and, accordingly, do not include all disclosures that may be necessary
for complete financial statements prepared in accordance with U.S. generally accepted accounting
principles (GAAP). The disclosures presented are sufficient, in managements opinion, to make the
interim information presented not misleading. All adjustments, consisting of normal recurring
adjustments that are necessary so as to make the interim information not misleading, have been
made. All references made in this Report to Note or Notes refer to these Notes to the Condensed
Consolidated Financial Statements (Financial Statements). Results of operations for the three
months ended June 30, 2010 are not necessarily indicative of results of operations that may be
expected for the fiscal year ending March 31, 2011. The products we market are seasonal in nature.
We record sales when products are shipped from our warehouse facilities to customers. Generally,
the Company realizes fluctuations in sales volume as retailers stock our products and order
displays to prepare for the cough and cold season, which usually runs from October through March.
Consumer purchases of our products at retail are highest during the cough and cold season. It is
recommended that this financial information be read in conjunction with the complete financial
statements included in Matrixxs Annual Report on Form 10-K for the fiscal year ended March 31,
2010 previously filed with the Securities and Exchange Commission (SEC).
2. 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.
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. 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 Financial Statements.
6
Table of Contents
MATRIXX INITIATIVES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Stock-Based Compensation
The Company measures the cost of services received in exchange for equity instruments based on
the grant-date fair value of the award and recognizes that cost in expense over the requisite
service period. The Company uses the Black-Scholes option-pricing model in valuing option grants.
The Company did not recognize any compensation expense for option awards during the three
months ended June 30, 2010 or 2009. There were no options exercised in the three months ended June
30, 2010; however, 144,700 options were exercised in the three months ended June 30, 2009. No
options were granted during the three months ended June 30, 2010 or 2009.
The Company has granted restricted stock to directors, officers, and employees as part of its
overall compensation plan. Compensation expense is based on the closing stock price on the grant
date, and is amortized on a straight-line basis over the requisite service period. Stock-based
compensation expense recognized in the quarter ended June 30, 2010, for restricted stock awards was
approximately $106,000, or $65,000 after tax, compared to approximately $347,000, or $213,000 after
tax, for the quarter ended June 30, 2009.
4. Basic and Diluted Income (Loss) Per Share
Basic earnings (loss) per share are calculated using the weighted average number of common
shares outstanding. Diluted earnings (loss) per share are computed on the basis of the weighted
average number of common shares outstanding plus the effect of dilutive securities. The Companys
stock options and unvested restricted stock are considered dilutive securities and are included in
the computation of diluted earnings (loss) per share using the treasury stock method.
The table below summarizes the elements included in the calculation of basic and diluted net
income (loss) per common share for the three months ended June 30, 2010 and 2009. Unvested
restricted stock and options to purchase 310,762 and 285,225 shares of common stock for the three
months ended June 30, 2010 and 2009, respectively, were not included in the computation of diluted
loss per share because their effect would be anti-dilutive due to the loss reported in the
quarters.
Three Months Ended | ||||||||
June 30, | ||||||||
2010 | 2009 | |||||||
Net loss applicable to common shareholders |
$ | (2,433,008 | ) | $ | (22,832,252 | ) | ||
Weighted average common shares outstanding Basic |
9,287,580 | 9,169,829 | ||||||
Dilutive Securities: |
||||||||
Options |
| | ||||||
Restricted Stock |
| | ||||||
Weighted average common shares outstanding Diluted |
9,287,580 | 9,169,829 | ||||||
Net loss per common share: |
||||||||
Basic |
$ | (0.26 | ) | $ | (2.49 | ) | ||
Diluted |
$ | (0.26 | ) | $ | (2.49 | ) |
7
Table of Contents
MATRIXX INITIATIVES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. Inventories
Inventories are stated at the lower of cost or market. The Company uses first-in, first-out
method to value inventory. Inventories consisted of the following at June 30, 2010 and March 31,
2010:
June 30, | March 31, | |||||||
2010 | 2010 | |||||||
Raw materials and packaging |
$ | 552,238 | $ | 623,808 | ||||
Finished goods |
6,455,443 | 5,543,001 | ||||||
Total |
$ | 7,007,681 | $ | 6,166,809 | ||||
6. Product Recalls and Withdrawals
Zicam Cold Remedy Nasal Gel and Cold Remedy Gel Swabs Recall
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) 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
the factors indicate that the recall or withdrawal reserve is either not sufficient to cover or
exceeds the estimated product recall or withdrawal expenses.
The Company received a warning letter from the Food and Drug Administration (the FDA) in the
first quarter of fiscal 2010, dated June 16, 2009, regarding Zicam Cold Remedy Nasal Gel and Zicam
Cold Remedy Gel 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 Note 7 Legal
Proceedings 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 Zicam Cold Remedy Nasal
Gel and Cold Remedy Swabs from the market.
In the quarter ended June 30, 2009, the Company recorded a $9.0 million reserve for estimated
costs to recall these products. The reserve charge was recorded in selling, general and
administrative expense in the accompanying statement of operations for the three months ended June
30, 2009. As of June 30, 2010, the recall reserve has been exhausted and we do not anticipate
recording any additional recall charges for the withdrawal of nasal Cold Remedy products that
occurred in June 2009.
7. Legal Proceedings
The Company is involved in various product liability claims and other legal proceedings. The
Companys legal expense for these lawsuits continues to have a significant impact on the results of
operations as the Company defends itself against the various claims.
Among the principal matters pending to which the Company is a party are the following:
8
Table of Contents
MATRIXX INITIATIVES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Product Liability Matters
General. Since 2003, a number of lawsuits have been filed against us alleging that our
Zicam Cold Remedy nasal gel products have caused the permanent loss or diminishment of the sense of
smell or smell and taste. Prior to the Companys receipt of the FDAs June 16, 2009 warning
letter (see Note 6 Product Recalls and Withdrawals), the number of lawsuits filed against the
Company was steadily declining; in fact, the numbers of pending lawsuits, plaintiffs, new lawsuits
and potential claimants were at their lowest levels since early 2004.
Since the Companys receipt of the FDA warning letter, numerous product liability lawsuits
have been filed against the Company, many of which cite the FDA warning letter as support for their
claims. The lawsuits principally fall into two categories of product liability claims: (i) those
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.
9
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MATRIXX INITIATIVES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Product Effectiveness. Our claims and advertising are subject to the requirements of the
Federal Trade Commission Act (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, 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 August 1, 2010,
the Company is aware of 231 pending product liability lawsuits
against the Company, involving 794 plaintiffs. Of those cases,
174 are pending in Federal court and 57 are pending in State court.
Cases
since March 31, 2010 (Pending in Federal Courts): The Company is aware of the following
pending federal court cases, covering 56 named plaintiffs, which were filed against and/or served
on the Company between March 31, 2010 and August 1, 2010.
Personal Injury:
Date Filed | United States District Court | Named Plaintiff | ||
4/1/2010
|
Northern District, Texas | McRae, S. | ||
4/5/2010 | New Jersey | Martinez, M. | ||
4/7/2010 | Central District, California | Shapiro, R. | ||
4/9/2010 | Arizona | Gardner, C. | ||
4/9/2010 | Western District, Missouri | Smith, R.C. | ||
4/22/2010 | Southern District, Mississippi | Rochelle, C. | ||
4/27/2010 | Puerto Rico | Quinones-Rodriguez, L. | ||
5/6/2010 | South Carolina | Spradley, D. | ||
5/20/2010 | Eastern District, Tennessee | Lyons, M. | ||
5/21/2010 | Western District, Michigan | Alisea, I. | ||
5/26/2010 | Central District, California | Coggins, E | ||
5/28/2010 | Western District, Missouri | Beatty, D. | ||
5/28/2010 | Western District, Missouri | Bowers, B. | ||
5/28/2010 | Western District, Missouri | Wadkins, J. | ||
6/3/2010 | Eastern District, Missouri | Schwartz, J. | ||
6/9/2010 | Western District, Tennessee | Terhune, G. | ||
6/9/2010 | Western District, Tennessee | Childress, J. | ||
6/9/2010 | Western District, Tennessee | Bell, V. | ||
6/14/2010 | Western District, Missouri | Goble, K. | ||
6/14/2010 | Western District, Missouri | Vance, C. | ||
6/14/2010 | Western District, Missouri | Morgan, S. | ||
6/14/2010 | Western District, Louisiana | Boozman, M. | ||
6/15/2010 | Western District, Kentucky | Stokes, S. | ||
6/15/2010 | Arizona | Johnson, R. | ||
6/15/2010 | Arizona | Vincent, M. | ||
6/15/2010 | Arizona | Swindell, J. | ||
6/15/2010 | Arizona | Tio, R. | ||
6/30/2010 | Western District, Missouri | Conti, A. | ||
6/30/2010 | Massachusetts | Surette, R. | ||
6/30/2010 | Arizona | Kirsch, C. |
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Date Filed | United States District Court | Named Plaintiff | ||
7/1/2010 | Southern District, Ohio | Warrington, J. | ||
7/14/2010 | Arizona | Barton, J. | ||
7/15/2010 | Arizona | Holloway, S. | ||
7/15/2010 | Arizona | Wilhite, J. | ||
7/15/2010 | Arizona | Ponthieux, S. | ||
7/15/2010 | Arizona | Murter, J. | ||
7/20/2010 | Maryland | Carter, C. | ||
7/20/2010 | Maryland | Davis, L. | ||
7/20/2010 | Maryland | Floyd, R. | ||
7/20/2010 | Maryland | Foley, L. | ||
7/20/2010 | Maryland | Hamilton, A. | ||
7/20/2010 | Maryland | Jackson, A. | ||
7/20/2010 | Maryland | Jackson, R. | ||
7/20/2010 | Maryland | Lipscomb, D. | ||
7/20/2010 | Maryland | Moore, B. | ||
7/20/2010 | Maryland | Pilkenton, L. | ||
7/20/2010 | Maryland | Rentch, B. | ||
7/20/2010 | Maryland | Saur, M. | ||
7/20/2010 | Maryland | Short, J. | ||
7/27/2010 | Arizona | Cochren, M. |
Putative Class Actions for Economic Injury: None.
Multi-District Litigation Matters. As previously disclosed, 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.
Cases
since March 31, 2010 (Pending in State Courts). The Company is aware of the following
state court cases, covering 135 named plaintiffs, which were filed against and/or served on the
Company between March 31, 2010 and August 1, 2010:
Personal Injury:
Date Filed | Court | Named Plaintiff | ||
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. | ||
5/11/2010 | Maricopa County, AZ | Brooks, D. | ||
5/13/2010 | San Francisco County, CA | Parson, J. | ||
6/14/2010 | Maricopa County, AZ | Dubois, S. | ||
6/18/2010 | Maricopa County, AZ | Krupp, D. | ||
6/18/2010 | Maricopa County, AZ | Harrison, L. | ||
6/18/2010 | Maricopa County, AZ | Goad, S. | ||
6/22/2010 | Maricopa County, AZ | Lewotsky, L. | ||
6/22/2010 | Maricopa County, AZ | McCloy, M. | ||
7/8/2010 | Maricopa County, AZ | Michaels, A. | ||
7/9/2010 | St. Clair County, IL | MacDonald, C. | ||
7/21/2010 | Kootenai County, ID | Richmond, J. | ||
7/23/2010 | Jerome County, ID | Huettig, L. | ||
7/26/2010 | Maricopa County, AZ | Allen, R. | ||
7/28/2010 | Asotin County, WA | Hill, S. |
11
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Putative Class Actions for Economic Injury: None.
Settlement with Certain Claimants. In July 2010, the Company entered into settlement
agreements with approximately 46 claimants who had previously threatened to file lawsuits against
the Company. The individual settlement amounts were $5,000 or less per claimant and were charged to
our litigation reserves (see Product Liability Litigation Reserves below). The settlement
documents for all claimants acknowledge that Matrixx denies any liability to them. Those who are
eligible and elect to participate in the settlement program dismiss their claims with prejudice and
provide written releases of their claims against the Company in return for their participation.
Each of the claimants alleged use of the Companys single hole Cold Remedy nasal gel product, which
was last sold in 2005. To date, the Company has never settled claims relating to nasal gel
products other than the single hold product.
Potential Claimants. Approximately 500 potential claimants have advised the Company by means
of a written notice that they are considering filing a lawsuit against, or are interested in
pursuing settlement negotiations with, the Company. The Company is in the process of determining
the nature or basis of their purported claims and when or if these potential claimants will
ultimately file one or more lawsuits against the Company.
Plaintiffs law firms may continue to solicit potential claimants and, as a result, additional
lawsuits may be filed against us. We cannot predict the outcome of the litigation, but we will
defend ourselves vigorously. If any liability were to result from one or more of these or future
lawsuits, we believe our financial results could be materially impacted. Our financial results also
could be materially impacted by the adverse publicity that may result from the lawsuits.
Litigation Reserves. As of December 31, 2005, the Company established a reserve of
$1.3 million for any future payment of settlement or losses related to the Cold Remedy litigation.
This reserve was based on certain assumptions, some of which are described below, and was the
amount, excluding defense costs, the Company believed it could reasonably estimate would be spent
to resolve the remaining cases that had been filed or to resolve matters with the potential
claimants. Some of the significant factors that were considered in the establishment of the reserve
were as follows: the actual costs incurred by the Company up to that time in resolving several
claims; the development of the Companys legal defense strategy; settlements; and the number of
cases that remained pending against the Company. There are events, such as the dismissal of any of
the cases, the filing of new lawsuits, threatened claims, the outcome of a trial, rulings on
pending evidentiary motions, or adverse publicity that may have an impact on the Companys
conclusions as to the adequacy of the reserve for the pending product liability lawsuits. The
Company maintained a $740,000 reserve balance as of June 30, 2010, equal to the $740,000 reserve at
March 31, 2010. The settlement with 46 potential claimants for $222,500, mentioned above, was paid
from the reserve in July 2010. 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.
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MATRIXX INITIATIVES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 and on October 28, 2009, the Ninth Circuit Court reversed the decision of
the United States District Court, District of Arizona. On June 14, 2010, the United States Supreme
Court granted certiorari review and will hear the case during the Courts 2010-2011 term.
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 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.
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MATRIXX INITIATIVES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 and spouses 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.
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MATRIXX INITIATIVES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Legal Expense
The Company is incurring significant legal expense for the lawsuits referenced above. As
previously disclosed, the Company had a limited amount of product liability insurance to cover
litigation expense, losses and/or settlements associated with claims that our Cold Remedy products
caused a loss of smell. The insurer has determined the ultimate defense costs and claims associated
with the anosmia allegations will likely exceed the policy limit of $5 million. To avoid ongoing
administrative costs, in July 2010, the Company and its product liability insurer reached agreement
that the insurer would pay the full amount of the $5.0 million policy to the Company. Based on this
agreement, the Company recorded $2.2 million, in the quarter ended June 30, 2010, as reimbursement
of legal expenses for defending claims previously made against that policy. This resulted in a net
credit of $337,000 for product liability and regulatory related legal expense ($1.9 million prior
to insurance reimbursement) in the quarter ended June 30, 2010, which compares to legal expense of
$577,000 in the quarter ended June 30, 2009. The remaining $2.8 million, to be received from the
insurer, will be applied against ongoing future legal expense. We expect to continue to incur legal
expense of $1.3 million to $1.8 million per quarter before allocation of insurance proceeds.
8. Goodwill and Asset Impairment Charges
Intangibles consist of goodwill (which is the excess of purchase price over the net assets of
businesses acquired), intellectual property, and trademarks. Goodwill is not amortized but
finite-lived intangibles are amortized using the straight-line method. The Companys $15.0 million
in goodwill was related to the Companys acquisition of the 40% Zicam, LLC interest acquired from
Zensano, Inc. in 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. Following the June 16, 2009 FDA warning letter
and subsequent recall of our Zicam Cold Remedy Nasal Gel and Zicam Cold Remedy Swabs, 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 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.
The assessment resulted in the Company recording charges of $23.9 million ($14.6 million
after-tax) in the quarter ended June 30, 2009, to reduce the carrying amounts of goodwill and
other tangible and intangible assets to fair value. 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 built to produce our
nasal swab product; and $616,000 for the unamortized amount of our Cold Remedy nasal gel patent.
The charge was included in Goodwill Impairment and Asset Impairments in the accompanying
statement of operations for the quarter ended June 30, 2009.
15
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MATRIXX INITIATIVES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 quarter ended June 30, 2009:
Level 1: Quoted prices in active markets for identical assets or liabilities.
Level 2: Significant other observable inputs.
Level 3: Significant unobservable inputs.
Level 2: Significant other observable inputs.
Level 3: Significant unobservable inputs.
Total Gains | ||||||||||||||||
Level 1 | Level 2 | Level 3 | (Losses) | |||||||||||||
$000s |
||||||||||||||||
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, in the quarter ended June 30, 2009, we recorded a charge of $420,000 to write down the value
of patents and certain other assets associated with the development of an oral care product
developed to reduce tartar. We do not anticipate launching this product on our own and determined
the assets associated with the products development were impaired. This charge was recorded in
research and development expense in the accompanying Financial Statements for the fiscal first
quarter ended June 30, 2009.
9. Financial Instruments Fair Value
The Company follows the FASB guidance that defines fair value, establishes a framework for
measuring fair value, and expands disclosures about fair value measurements for all financial
assets and liabilities.
Cash, cash equivalents, accounts payable and accounts receivable: Carrying amounts approximate
fair value because of the short maturity of those instruments.
Certificates of Deposit: The Company occasionally purchases certificates of deposit from
FDIC-insured institutions at or below the FDIC-insured limits and all certificates of deposit have
maturities of one year or less. The purchase price of each certificate of deposit is treated as its
fair market value on the purchase date. We account for these certificates of deposit at amortized
costs and they are held to maturity.
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
Overview
The Company develops, markets and sells innovative, over-the-counter (OTC) healthcare
products with an emphasis on those that utilize unique 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.
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The products we market are seasonal in nature, and sales at retail generally increase as
the incidence of colds and flu rises. We record sales when products are shipped from our warehouse
facilities to customers. During the July through September quarter, the Companys sales volume is
primarily affected by retailers stocking our products and ordering displays to prepare for the
upcoming cough and cold season. Additional sales (re-orders) to retailers are highly dependent upon
the incidence of illness within the population. Retail sales of our products are highest during the
cough and cold season, which usually runs from October through March. We increase our advertising
campaigns to coincide with the cough and cold season and generally realize higher advertising
expense in the October through March time periods. Because of the seasonality of our business,
results for any single quarter are not necessarily indicative of the results that may be achieved
for the full fiscal year.
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, the Company cooperated
with the FDA and recalled the Cold Remedy Nasal Gel and Cold Remedy Swabs from the market.
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 and, prior
to the recall, accounted for approximately $2.0 million of net sales in the quarter ended June 30,
2009. Our primary focus since the withdrawal of our nasal gel products has been the conversion of
consumers that used our nasal Cold Remedy products to our oral Cold Remedy offerings. As a result,
our promotional and marketing support primarily focuses on Zicam oral Cold Remedy products.
The Companys fiscal first quarter, which ends June 30, is historically the lowest performing
quarter in the fiscal year.
Certain information is set forth below for our operations, expressed in thousands of dollars
and as a percentage of net sales, for the periods indicated:
3 Months Ended June 30, | ||||||||||||||||
$000s | 2010 | % NS | 2009 | % NS | ||||||||||||
Net Sales |
$ | 3,208 | 100 | % | $ | 6,916 | 100 | % | ||||||||
Marketing |
$ | 2,594 | 81 | % | $ | 3,312 | 48 | % | ||||||||
Sales |
$ | 544 | 17 | % | $ | 617 | 9 | % | ||||||||
General & Administrative |
$ | 2,513 | 78 | % | $ | 12,273 | 177 | % | ||||||||
Legal -Product Liability
& Regulatory |
$ | (337 | ) | (11 | )% | $ | 287 | 4 | % | |||||||
Total Selling, General,
and Administrative |
$ | 5,314 | 165 | % | $ | 16,489 | 238 | % | ||||||||
Research & Development |
$ | 530 | 17 | % | $ | 934 | 14 | % | ||||||||
Goodwill & Asset
Impairments |
$ | 0 | 0 | % | $ | 23,867 | 345 | % | ||||||||
Net sales for the fiscal first quarter ended June 30, 2010 decreased to $3.2 million, compared
to $6.9 million for the quarter ended June 30, 2009. The lower sales comparison is due to the loss
of our nasal Cold Remedy products which, prior to their withdrawal, accounted for $2.0 million of
net sales in the quarter ended June 30, 2009. In addition, sales of our congestion, allergy, and
symptom relief products declined $1.3 million compared to sales in the quarter ended June 30, 2009.
However, recent consumer consumption data comparing 4-week year-over-year trends following last
years withdrawal of nasal Cold Remedy products, to the same period this year, shows growth of 5%
for oral Cold Remedy and 7% for allergy/congestion products.
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The Company incurred a net loss for the fiscal first quarter ended June 30, 2010 of
approximately $2.4 million, or $(0.26) per diluted share, compared to a net loss of $22.8 million,
or $(2.49) per diluted share, for the quarter ended June 30, 2009. Results for the quarter ended
June 30, 2009 included pretax charges of $9.0 million to reserve for recall-related costs and $23.9
million for goodwill and other asset impairments.
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.
The Companys management reviews several key indicators in evaluating overall performance:
1) | We review our sales and net income performance against our annual goal for each. In fiscal 2011, the Company will focus on growing sales in our core Cold Remedy and Allergy/Sinus franchise and offsetting declines in our symptom relief and other cough/cold products. For fiscal 2011, the Company anticipates revenue increasing 3% to 5% above the $67.3 million achieved in fiscal 2010. We anticipate expense for litigation will be between $1.3 million and $1.8 million per quarter (prior to insurance reimbursement) in fiscal 2011. In addition, we expect to report net income between $2.0 and $3.0. | ||
2) | We monitor sales of our products at retail because increased consumer purchases of our products are an indicator of growth. For the rolling 52 weeks ended June 13, 2010, retail unit sales (as measured by three outlet syndicated scanner data, not including our largest customer, Wal-Mart and excluding nasal Cold Remedy) of our oral Cold Remedy products increased approximately 10% while sales of our allergy and congestion products declined approximately 13% over the comparable period in the previous year, while the entire cough and cold category was relatively unchanged. Recent consumer consumption data comparing 4-week year-over-year trends following last years withdrawal of nasal Cold Remedy products to the same period of this year, shows growth of 5% for oral Cold Remedy and 7% for allergy/congestion products. | ||
3) | We measure our ability to maintain strong gross margins on our products. During the quarter ended June, 2010, we realized an average gross margin of 58%, compared to the 60% average gross margin achieved in the prior year. Gross margins on our existing products generally vary between 65% and 80%. Due to the level of in-store promotional activity, relative to the low level of unit sales that occurred in the quarter, our average selling price per unit declined 5% in the quarter ended June 30, 2010, compared to the quarter ended June 30, 2009. This decline in average sales price affected gross margin for the quarter. | ||
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. We anticipate fiscal 2011 operating expenses will decline as a percentage of sales compared to the prior fiscal year. | ||
5) | We review the distribution and mix of our products by key national retailers. Our ten largest retail customers account for a substantial majority of our annual sales, and we encourage our largest customers to carry a mix of our highest-selling products. Retailers generally reset their cough and cold sections during the third calendar quarter of each year, at which time they add or discontinue products. We expect our ten largest retailers to have a net increase in Zicam oral Cold Remedy products on shelf during this years cold season. Although retailers are increasing the number of our products they sell, they are also increasing the number of store brand products that directly compete with our Zicam offerings. Store brand products are generally sold at a substantial discount to branded products. Store brand versions of our products may adversely affect our mix of products at retail as well as our sales levels. |
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Critical Accounting Policies and Estimates
Our consolidated financial statements and accompanying notes have been prepared in accordance
with 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.
Legal Contingencies. We are subject to lawsuits, investigations and claims arising out of the
normal conduct of our business (see Note 7 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 June 30, 2010 and March 31, 2010. 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. In July 2010, the Company entered into
settlement agreements with approximately 46 claimants who had previously threatened to file
lawsuits against the Company. The individual settlement amounts were $5,000 or less per claimant
and were charged to our litigation reserves in July 2010. 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.
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 charges to reduce the book
value of goodwill and other intangible assets.
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 Financial Statements for the quarter ended June 30, 2009.
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 in the quarter ended June 30, 2009. We do
not
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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 due to the Companys fiscal 2010 operating loss. 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 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. The programs involve
fixed amounts or percentages of sales to customers. Reserves for such programs are calculated based
on an assessment of purchases and performance under the programs and any other specified factors.
While the majority of sales adjustment amounts are readily determinable at period end and do not
require estimates, certain of the sales adjustments require management to make estimates. In making
these estimates, management considers all available information, including the overall business
environment, historical trends and information from customers.
The estimate for product returns is based on our historical experience of sales to retailers
and is reviewed regularly to reflect estimated product returns. 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.
We record reserves for sales programs and returns as sales adjustments that offset revenue in
the period the related revenue is recognized. Sales adjustments totaled $2.1 million and $3.6
million for the three months ended June 30, 2010 and 2009, respectively. Management believes that
the reserves recorded for customer programs at June 30, 2010 are adequate and proper.
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. In recent years, the retail channel has experienced shifts in market share
among competitors, causing some retailers to experience liquidity problems. 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. We increased the allowance for doubtful accounts from 0.02% of gross
sales to 0.05% of gross sales for fiscal 2011. We review the allowance for doubtful accounts at
least monthly and adjust the allowance amounts if actual or probable losses differ materially from
our reserve percentage.
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
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and reevaluated each period and the related reserves are adjusted when the 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 quarter ended June 30, 2009, the Company recorded a $9.0 million reserve for estimated
costs to recall the Cold Remedy Nasal Gel and Cold Remedy Swabs. The reserve charges were recorded
in selling, general and administrative expense in the accompanying Financial Statements.
Results of Operations for the Three Months Ended June 30, 2010 Compared to the Three Months
Ended June 30, 2009
Certain information is set forth below for our operations expressed in $000s and as a
percentage of net sales for the periods indicated:
Three Months Ended June 30, | ||||||||||||||||
2010 | 2009 | |||||||||||||||
Net sales |
$ | 3,208 | 100 | % | $ | 6,916 | 100 | % | ||||||||
Cost of sales |
1,333 | 42 | 2,793 | 40 | ||||||||||||
Gross profit |
1,875 | 58 | 4,123 | 60 | ||||||||||||
Selling, general and administrative |
5,314 | 166 | 16,489 | 238 | ||||||||||||
Research & development |
530 | 17 | 934 | 14 | ||||||||||||
Goodwill Impairment |
0 | | 15,040 | 217 | ||||||||||||
Asset Impairments |
0 | | 8,827 | 127 | ||||||||||||
Loss from
operations |
(3,969 | ) | (124 | ) | (37,167 | ) | (537 | ) | ||||||||
Interest and other income |
16 | 1 | 47 | 1 | ||||||||||||
Interest expense |
| | | | ||||||||||||
Loss before income taxes |
(3,953 | ) | (123 | ) | (37,120 | ) | (537 | ) | ||||||||
Income taxes |
(1,520 | ) | (47 | ) | (14,287 | ) | (207 | ) | ||||||||
Net Loss |
$ | (2,433 | ) | (76 | )% | $ | (22,832 | ) | (330 | )% | ||||||
Net Sales
Net sales for the three months ended June 30, 2010 were $3.2 million, versus net sales of $6.9
million for the quarter ended June 30, 2009. The decrease in net sales, for the quarter ended June
30, 2010 versus 2009, reflects the June 2009 withdrawal of nasal Cold Remedy products, which
accounted for $2.0 million of net sales in the quarter ended June 30, 2009. In addition, sales of
our congestion, allergy, and symptom relief products declined $1.3 million compared to sales in the
quarter ended June 30, 2009. Our average selling price per unit declined 5% in the quarter ended
June 30, 2010, compared to the quarter ended June 30, 2009. The decline in average sales price was
primarily due to the level of in-store promotional activity, relative to the low level of unit
sales that occurred in the quarter.
Since the June 2009 recall of our nasal Cold Remedy products, our primary focus has been to
convert consumers that used our nasal Cold Remedy products to our oral Cold Remedy offerings and to
support our allergy/congestion business. Recent consumer consumption data comparing 4-week
year-over-year trends following last years withdrawal of nasal Cold Remedy products, to the same
period this year, shows growth of 5% for our oral Cold Remedy products and 7% for our
allergy/congestion products.
Cost of Sales
For the quarter ended June 30, 2010, our cost of sales decreased to $1.3 million, compared to
$2.8 million for the quarter ended June 30, 2009. The decrease was primarily due to the lower
number of units sold.
Gross Profit
Gross profit for the three months ended June 30, 2010 was approximately $1.9 million, compared
to gross profit of approximately $4.1 million for the quarter ended June 30, 2009. The decreased
gross profit is primarily attributable to the lower net sales recorded during the quarter, compared
to the prior year. Gross margin for the quarter ended June 30, 2010 was 58%, compared to 60% in the
comparable quarter
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ended June 30, 2009. The gross margin decline is attributable to the lower average net unit
sales price realized in the quarter. Gross margin is affected by the relative mix of products sold,
promotional activity, and changes in product sales prices and costs.
Selling, General & Administrative (SG&A)
SG&A expense for the quarter ended June 30, 2010 was approximately $5.3 million, compared to
approximately $16.5 million in the quarter ended June 30, 2009. The decreased SG&A expense is
primarily attributable to $9.0 million that was recorded in the quarter ended June 30, 2009 to
reserve for recall-related charges associated with the withdrawal of nasal Cold Remedy products. In
addition, marketing expense declined $719,000 in the quarter ended June 30, 2010, compared to the
prior year. The higher level of marketing expense in the quarter ended June 30, 2009 reflects the
high level of public relations activities that occurred in June 2009 responding to inquiries
surrounding the FDA warning letter and subsequent recall of nasal Cold Remedy products.
In addition, legal expense associated with litigation and regulatory activities was affected
by the recording of $2.2 million of insurance reimbursement, which resulted in a net credit of
$337,000 for legal expense in the quarter ended June 30, 2010, versus legal expense of $577,000 in
the quarter ended June 30, 2009 (see Note 7 Legal Proceedings Legal Expense, for more
information regarding insurance reimbursement).
Research and Development
Research and development expense was approximately $530,000 in the quarter ended June 30,
2010, versus $934,000 in the quarter ended June 30, 2009. 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 the prior years fiscal first quarter and 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 built to produce our nasal swab product; and $616,000 for the
unamortized amount of our Cold Remedy nasal gel patent. There were no impairment charges recorded
in the quarter ended June 30, 2010.
Interest & Other Income
Interest and other income was approximately $16,000 in the quarter ended June 30, 2010 versus
approximately $47,000 in the quarter ended June 30, 2009. The decline in interest income reflects
lower interest rates and lower levels of cash. There was no interest expense in the quarters ended
June 30, 2010, or 2009.
Income (Loss) Before Income Taxes
Loss before income tax benefits for the three months ended June 30, 2010 was approximately
$4.0 million, compared to a loss of approximately $37.1 million for the quarter ended June 30,
2009. The lower loss in the quarter ended June 30, 2010, reflects the $32.9 million of recall
charges and goodwill and asset impairments recorded in the quarter ended June 30, 2009 (discussed
above). We expect that income (loss) in future periods will be significantly impacted by the sales
levels of our products, product introductions, and changes in our advertising, research and
development, and legal expenses. We anticipate quarterly operating results will continue to vary
along with the seasonality of sales and expenses.
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Income Taxes
We recorded a benefit for income taxes at our combined estimated annual effective tax rate of
approximately 38.5%. Due to the loss from operations incurred in the quarter ended June 30, 2010,
we recognized an income tax benefit of approximately $1.5 million, compared to a benefit of $14.3
million in the quarter ended June 30, 2009.
Net Income (Loss)
Net loss was approximately $2.4 million in the quarter ended June 30, 2010, compared to a net
loss of approximately $22.8 million in the quarter ended June 30, 2009.
Liquidity and Capital Resources
As of June 30, 2010, our cash, cash equivalents, and certificates of deposit balance was
$28.3 million, compared to $30.2 million at March 31, 2010. 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 $42.5 million as of June 30, 2010, compared to $44.4 million at March
31, 2010. During the quarter ended June 30, 2010, trade receivables decreased to $1.6 million from
$5.4 million at March 31, 2010. The decrease in accounts receivable reflects the timing of orders
and a lower level of sales in the first 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 June 30, 2010 is adequate. As a result of the
Companys fiscal 2010 operating loss, the Company recorded income tax receivables and deferred tax
assets associated with tax loss carrybacks and tax credit carryforwards. We anticipate receiving
tax refunds of approximately $5.5 million during fiscal 2011. Differences between anticipated and
actual outcomes of these tax assets could have a material impact on the Companys cash position in
future periods.
The changes 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. 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. Generally, to the extent our
operations are profitable, our business is cash flow positive.
The Company is involved in various product liability claims and other legal proceedings. The
Companys legal expense for these lawsuits continues to have a material impact on the results of
operations and requires a significant use of cash as the Company defends itself against the various
claims. Litigation is inherently unpredictable and excessive verdicts do occur. Although we believe
we have defenses in these matters, we could, in the future, incur judgments or enter into
settlements of claims that could have a material adverse effect on our cash position in any
particular period. To avoid ongoing administrative costs, the Company and its insurer reached an
agreement in July 2010 that the insurer would pay to the Company, the full amount of the $5.0
million policy. Based on this agreement, the Company recorded $2.2 million, in the quarter ended
June 30, 2010, as reimbursement of legal expenses incurred to date for defending claims made
against that policy. The remaining $2.8 million will be applied to future legal expenses and/or
settlements.
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
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corporate office and R&D space in March 2008 and invested approximately $650,000 in capital
and tenant improvements, 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.
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 2. 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. The Company does not
anticipate repurchasing shares of its common stock on the open market for the foreseeable future.
However, during the quarter ended June 30, 2010, the Company repurchased 31,204 shares of common
stock, with an aggregate value of $153,820 from employees in satisfaction of their 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.
Off-Balance Sheet Arrangements
As of June 30, 2010, we did not have any off-balance sheet arrangements.
Contractual Obligations
We have entered into certain long-term contractual obligations that will require various
payments over future periods as follows:
Contractual Cash Obligations | ||||||||||||||||||||
(In thousands of dollars) | ||||||||||||||||||||
Payments due by Period as of June 30, 2010 | ||||||||||||||||||||
Less than | After | |||||||||||||||||||
Total | 1 year | 1-3 years | 3-5 years | 5 years | ||||||||||||||||
Long-Term Debt Obligations |
$ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||||
Capital Lease Obligations |
0 | 0 | 0 | 0 | 0 | |||||||||||||||
Operating Lease Obligations |
1,348 | 436 | 912 | 0 | 0 | |||||||||||||||
Purchase Obligations |
1,727 | 1,727 | 0 | 0 | 0 | |||||||||||||||
Other Long-Term Liabilities Reflected on the
Companys Balance Sheet under GAAP |
0 | 0 | 0 | 0 | 0 | |||||||||||||||
Total |
$ | 3,075 | $ | 2,163 | $ | 912 | $ | 0 | $ | 0 | ||||||||||
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Forward Looking Statements
This Report on Form 10-Q, including documents incorporated herein by reference, contains
forward-looking statements within the meaning of the Private Securities Litigation Reform Act of
1995. The words believe, expect, estimate, anticipate, intend, may, might, will,
would, could, project and predict, or similar words and phrases generally identify
forward-looking statements. Forward looking statements contained herein and in documents
incorporated by reference herein include, but are not limited to statements regarding:
| our belief that we will not record additional recall charges; | ||
| our belief that reserves for customer programs are adequate and proper; | ||
| our expectation regarding continued expansion of the Zicam line of products; | ||
| our expectation of achieving fiscal 2011 revenue in the $69.3 million to $70.7 million range; | ||
| our expectation of achieving fiscal 2011 net income in the $2.0 million to $3.0 million range; | ||
| our belief that our allowance for uncollectible accounts is adequate; | ||
| our expectation that ongoing legal expense will be between $1.3 million and $1.8 million per quarter; | ||
| our expectation that any federal consumer fraud and personal injury matter filed in the future will be transferred and consolidated pursuant to the MDL transfer process, subject to the plaintiffs opportunity to object; | ||
| our intention to vigorously defend the Zicam Cold Remedy product liability and securities litigation claims, our expectation that additional product liability lawsuits may be filed against us, and our belief that any liability resulting from these or other lawsuits, including any adverse publicity, could materially impact our financial results; | ||
| our expectations regarding litigation reserves; | ||
| our expectation of utilizing deferred tax assets; | ||
| our expectation that sales in future periods will be affected by the recall of our nasal Cold Remedy products; | ||
| our expectations regarding the effect of accounting standard updates; | ||
| our expectation that retailers will add new or different Zicam products; | ||
| our expectations regarding store brand competition; | ||
| our intention to review our product return reserve provision regularly and adjust the reserve amounts if actual product returns differ materially from our reserve estimates; | ||
| our expectation of making income tax payments at our statutory rates in future years; | ||
| our expectation that operating expenses in fiscal 2011 will decline as a percentage of sales compared to fiscal 2010; |
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| our expectation that the average unit cost of goods sold and gross margin will continue to be affected by the relative mix of products sold; | ||
| our expectation that our net income and operating expenses in future periods will vary largely with the seasonality of our sales, the severity of the cold season, the revenues and expenses associated with new products, and the timing and amount of advertising, research and development, and legal expenses; | ||
| our expectations regarding derivative instruments; | ||
| our belief that we will not repurchase shares of common stock in the open market; | ||
| our expectations regarding the amount of advertising expense and that advertising expense will be highest in our third and fourth fiscal quarters; | ||
| our intention of focusing promotional and marketing support on Zicam oral Cold Remedy and nasal congestion products during the 2010/2011 cold season; | ||
| our belief that focusing on consumer consumption of our oral Cold Remedy products will allow us to grow the Zicam brand; | ||
| our belief that our existing capital resources are sufficient to fund our operations and capital requirements for the next 12 months; | ||
| our expectations regarding our manufacturers ability to timely produce inventory adequate for sales of products through the 2010/2011 cough and cold season; | ||
| our belief that moderate interest rate increases and current uncertainties regarding the availability of credit will not have a material adverse impact on our results of operations or financial position in the foreseeable future and that we are not subject in any material way to other forms of market risk. |
We may make additional written or oral forward-looking statements from time to time in filings
with the Securities and Exchange Commission or in public news releases. Such additional statements
may include, but not be limited to, projections of revenues, income or loss, capital expenditures,
acquisitions, plans for future operations, financing needs or plans, the impact of inflation and
plans relating to our products or services, as well as assumptions relating to the foregoing.
Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot
be predicted or quantified. Future events and actual results could differ materially from those set
forth in, contemplated by, or underlying our forward-looking statements.
Statements in this Report on Form 10-Q, including those set forth in the sections entitled
Managements Discussion and Analysis of Financial Condition and Results of Operations, and Risk
Factors, describe factors that could contribute to or cause actual results to differ materially
from our expectations. Other such factors include (i) the possibility that future sales of our
products will not be as strong as expected; (ii) a weak cough and cold season; (iii) lack of market
acceptance for or uncertainties concerning the efficacy or safety of our products; (iv) regulatory
or 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-Q speak only as of the date of
this Report on Form 10-Q or, in the case of any document incorporated by reference, the date of
that document.
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We do not undertake, and we specifically disclaim any obligation, to publicly update or revise
any forward-looking statement contained in this Report on Form 10-Q or in any document incorporated
herein by reference to reflect changed assumptions, the occurrence of unanticipated events or
changes to future operating results over time.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We believe that our existing capital resources will be sufficient to fund our operations
and capital requirements for at least the next 12 months. 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 June 30, 2010 and March 31, 2010, we did not participate in any financial-market
risk-sensitive commodity instruments for which fair value disclosure would be required. We believe
that we are not subject in any material way to other forms of market risk, such as foreign currency
exchange risk or foreign customer purchases or commodity price risk.
Item 4. Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of our
President and Chief Executive Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures pursuant to Rules 13a-15 and 15d-15 of the Securities Exchange
Act of 1934. Based upon that evaluation, our President and Chief Executive Officer concluded that,
as of the end of the period covered by this report, our disclosure controls and procedures were
effective to ensure that information required to be disclosed in reports filed under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the required time
periods and is accumulated and communicated to our management, including our President and Chief
Executive Officer, as appropriate to allow timely decisions regarding required disclosure. There
have been no changes in our internal controls over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) that occurred during the fiscal quarter ended June 30, 2010 that
have materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
PART II
OTHER INFORMATION
OTHER INFORMATION
Item 1. Legal Proceedings
See Note 7 Legal Proceedings for a discussion of the principal legal proceedings to
which the Company is a party.
Item 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully
consider the risk factors disclosed in Part I, Item 1A. Risk Factors of our Annual Report on Form
10-K for the period ended March 31, 2010, each of which could materially affect the business,
financial condition or future results of the Company. The risks described in such Form 10-K, and
this Form 10-Q are not the only risks facing the Company. Additional risks and uncertainties not
currently known to us or that we currently deem to be immaterial in the future, also may materially
adversely affect the business, financial condition and/or operating results of the Company.
Item 2. Unregistered Sales of Securities and Use of Proceeds
The following table provides information about purchases by the Company during the
quarter ended June 30, 2010 of equity securities that are registered by the Company pursuant to
Section 12 of the Exchange Act.
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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 | ||||||||
4/01/10-4/30/10 |
8,531 | $ | 5.07 | 0 | 931,624 | |||||||
5/01/10-5/31/10 |
22,673 | $ | 4.88 | 0 | 931,624 | |||||||
6/1/10-6/30/10 |
0 | | 0 | 931,624 | ||||||||
Total |
31,204 | $ | 4.93 | 0 | 931,624 |
(1) | The Company repurchased 31,204 shares of common stock, with an aggregate value of $153,820 from employees in satisfaction of their 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 new stock repurchase program, effective
January 26, 2009, which permits the Company to purchase up to 1.0 million shares of the Companys
common stock (the 2009 Program). Concurrently with its approval of the 2009 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 the
quarter ended June 30, 2010, we did not repurchase any shares of our common stock pursuant to the
2009 Program. The Company does not anticipate repurchasing shares of its common stock on the open
market for the foreseeable future.
Item 6. Exhibits
Exhibit No. | Title | |
3.01
|
Articles of Incorporation and Amendments thereto of the registrant (1) | |
3.02
|
Bylaws of the registrant (2) | |
4.01
|
Rights Agreement dated as of July 22, 2002 by and between the registrant and Corporate Stock Transfer, Inc. (3) | |
31.1*
|
Certification of CEO and CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1*
|
Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350 |
* | Filed with this Report on Form 10-Q. | |
** | Indicates management compensatory contract, plan or arrangement. | |
(1) | Incorporated by reference to the Registrants Amendment No. 1 to Form 8-A, filed June 18, 2002, file number 000-27646. | |
(2) | Incorporated by reference to the Registrants Report on Form 8-K, filed July 25, 2006, file number 001-31404. | |
(3) | Incorporated by reference to the Registrants Registration Statement on Form 8-A, filed July 23, 2002, file number 001-31404. |
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Table of Contents
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Matrixx Initiatives, Inc. |
||||
/s/ William J. Hemelt | ||||
William Hemelt | ||||
Chief Executive Officer and Principal Financial Officer August 4, 2010 |
29