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UNITED STATES 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 September 30, 2006
 or
 o
    
    Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period from  to
 Commission File number 001-31404
 Matrixx Initiatives, Inc.
  Delaware
    
    87-0482806(State or other jurisdiction
    
    (I.R.S. Employerof incorporation or organization)
    
    Identification Number)
 4742 N. 24 th Street, Suite 455
Phoenix, AZ 85016
 (602) 385-8888
 þ o
  Large accelerated filer
    
    Yes o
    
    No þAccelerated filer
    
    Yes þ
    
    No oNon-accelerated filer
    
    Yes o
    
    No
þ
 o þ




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##### 



MATRIXX INITIATIVES, INC.
FORM 10-Q
INDEX
 PagePART I FINANCIAL INFORMATIONItem 1. Condensed Consolidated Balance Sheets as of September 30, 2006 (Unaudited) and December 31, 2005
    
    
    1Condensed Consolidated Statements of Income for the three months ended September 30, 2006 and 2005 (Unaudited)
    
    
    3Condensed Consolidated Statements of Income for the nine months ended September 30, 2006 and 2005 (Unaudited)
    
    
    4Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2006 and 2005 (Unaudited)
    
    
    5Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    25Item 4. Controls and Procedures
    
    
    25PART II OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    25Item 1A. Risk Factors
    
    
    25Item 6. Exhibits
    
    
    26SIGNATURES
    
    
    27EX-10.1EX-10.2EX-10.3EX-10.4EX-10.5EX-31.1EX-31.2EX-32.1EX-32.2




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MATRIXX INITIATIVES, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED
BALANCE SHEETS
 (Unaudited)September 30, 2006
    
    December 31, 2005ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    5,828,489
    
    
    $
    12,266,671Accounts receivable:Trade, net allowance for doubtful
accounts of $402,425 and $642,915
    
    
    26,877,031
    
    
    
    28,719,382Other receivable
    
    
    1,041,206
    
    
    
    1,234,886Insurance receivable
    
    
    1,402,967
    
    
    
    4,800,000Inventories
    
    
    19,420,161
    
    
    
    8,803,135Prepaid expenses
    
    
    1,657,100
    
    
    
    837,877Interest receivable
    
    
    27,699
    
    
    
    124,533Income tax receivable
    
    
    1,167,257
    
    
    
    Deferred tax asset
    
    
    3,116,277
    
    
    
    7,797,299Total Current Assets
    
    
    60,538,187
    
    
    
    64,583,783Property and Equipment, at cost:Office furniture and computer equipment
    
    
    1,321,040
    
    
    
    1,248,427Machine tooling and manufacturing equipment
    
    
    992,815
    
    
    
    616,645Leasehold improvements
    
    
    303,021
    
    
    
    178,7572,616,876
    
    
    
    2,043,829Less accumulated depreciation
    
    
    (1,231,006
    )
    
    
    (803,479
    )Net Property and Equipment
    
    
    1,385,870
    
    
    
    1,240,350Other Assets:Deposits
    
    
    3,688,671
    
    
    
    1,008,309Other assets
    
    
    57,963
    
    
    
    57,963Restricted cash
    
    
    500,000
    
    
    
    5,000,000Debt issuance costs, net of accumulated amortization
of $32,396 and $29,166
    
    
    22,835
    
    
    
    46,262Deferred tax asset
    
    
    14,984
    
    
    
    Patents, net of accumulated amortization of $380,975
and $283,437
    
    
    1,757,142
    
    
    
    1,774,235Goodwill
    
    
    15,039,836
    
    
    
    15,039,836Total Other Assets
    
    
    21,081,431
    
    
    
    22,926,605Total Assets
    
    $
    83,005,488
    
    
    $
    88,750,738
  1




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MATRIXX INITIATIVES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
  LIABILITIES AND STOCKHOLDERS EQUITY
 (Unaudited)September 30, 2006
    
    December 31, 2005Current Liabilities:Accounts payable
    
    $
    11,672,038
    
    
    $
    8,741,651Accrued expenses
    
    
    4,447,043
    
    
    
    7,774,871Sales commissions
    
    
    1,006,536
    
    
    
    2,600,467Sales returns and allowances
    
    
    2,145,667
    
    
    
    3,880,552Legal liability
    
    
    1,186,500
    
    
    
    13,245,000Short term debt
    
    
    4,000,000
    
    
    
    Accrued taxes
    
    
    
    
    
    
    882,611Total Current Liabilities
    
    
    24,457,784
    
    
    
    37,125,152Deferred tax liability
    
    
    2,208,093
    
    
    
    3,515,951Total Liabilities
    
    
    26,665,877
    
    
    
    40,641,103Commitments and ContingenciesStockholders 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, 9,857,106 and 9,599,529 issued and outstanding
    
    
    9,857
    
    
    
    9,599Additional paid in capital
    
    
    47,240,477
    
    
    
    43,433,364Unearned compensation
    
    
    (966,728
    )
    
    
    Retained earnings
    
    
    10,452,309
    
    
    
    5,062,97656,735,915
    
    
    
    48,505,939Less common stock held in treasury, at cost
(53,800 and 53,800 shares)
    
    
    (396,304
    )
    
    
    (396,304
    )Total Stockholders Equity
    
    
    56,339,611
    
    
    
    48,109,635Total Liabilities and
Stockholders Equity
    
    $
    83,005,488
    
    
    $
    88,750,738
  2




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MATRIXX INITIATIVES, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 Three months ended September 30,2006
    
    
    2005Net sales
    
    $
    34,121,356
    
    
    $
    25,202,624Cost of sales
    
    
    11,153,910
    
    
    
    8,153,578Gross Profit
    
    
    22,967,446
    
    
    
    17,049,046Selling, general and administrative expenses
    
    
    9,909,790
    
    
    
    7,007,818Research and development
    
    
    1,149,479
    
    
    
    784,087Income From Operations
    
    
    11,908,177
    
    
    
    9,257,141Other Income (Expense):Interest and other income
    
    
    76,636
    
    
    
    114,514Interest expense
    
    
    (64,222
    )
    
    
    Total Other Income
    
    
    12,414
    
    
    
    114,514Income Before Provision For Income Taxes
    
    
    11,920,591
    
    
    
    9,371,655Provision for income taxes
    
    
    4,770,221
    
    
    
    3,731,740Net Income
    
    $
    7,150,370
    
    
    $
    5,639,915Net Income Per Share of Common Stock:Basic:Weighted Average Number of Common Shares
Outstanding
    
    
    9,671,264
    
    
    
    9,483,174Net Income Per Share of Common Stock
    
    $
    0.74
    
    
    $
    0.59Diluted:Weighted Average Number of Common Shares
Outstanding
    
    
    9,971,383
    
    
    
    9,696,344Net Income Per Share of Common Stock
    
    $
    0.72
    
    
    $
    0.58
  3




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MATRIXX INITIATIVES, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 Nine months ended September 30,2006
    
    
    2005Net sales
    
    $
    60,003,448
    
    
    $
    46,438,883Cost of sales
    
    
    19,423,828
    
    
    
    14,075,832Gross Profit
    
    
    40,579,620
    
    
    
    32,363,051Selling, general and administrative expenses
    
    
    28,180,709
    
    
    
    20,360,853Research and development
    
    
    4,139,514
    
    
    
    2,249,219Income From Operations
    
    
    8,259,397
    
    
    
    9,752,979Other Income (Expense):Interest and other income
    
    
    385,355
    
    
    
    300,927Interest expense
    
    
    (64,222
    )
    
    
    Total Other Income
    
    
    321,133
    
    
    
    300,927Income Before Provision For Income Taxes
    
    
    8,580,530
    
    
    
    10,053,906Provision for income taxes
    
    
    3,191,197
    
    
    
    4,023,076Net Income
    
    $
    5,389,333
    
    
    $
    6,030,830Net Income Per Share of Common Stock:Basic:Weighted Average Number of Common Shares
Outstanding
    
    
    9,632,285
    
    
    
    9,482,262Net Income Per Share of Common Stock
    
    $
    0.56
    
    
    $
    0.64Diluted:Weighted Average Number of Common Shares
Outstanding
    
    
    9,978,170
    
    
    
    9,702,307Net Income Per Share of Common Stock
    
    $
    0.54
    
    
    $
    0.62
  4




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MATRIXX INITIATIVES, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 Nine months ended September 30,2006
    
    
    2005Cash Flows From Operating Activities:Net income
    
    $
    5,389,333
    
    
    $
    6,030,830Adjustments to reconcile net income to net cash
provided (used) by operating activities:Depreciation
    
    
    427,527
    
    
    
    199,116Amortization
    
    
    97,538
    
    
    
    50,310Amortization of debt issuance costs
    
    
    32,808
    
    
    
    14,202Deferred income taxes
    
    
    3,358,180
    
    
    
    3,460,683Common stock issued for compensation
    
    
    1,291,566
    
    
    
    506,884Changes in assets and liabilities:Accounts receivable
    
    
    5,433,064
    
    
    
    (9,634,488
    )Interest receivable
    
    
    96,834
    
    
    
    (13,615
    )Income tax receivable
    
    
    (1,167,257
    )
    
    
    Inventories
    
    
    (10,617,026
    )
    
    
    (3,332,462
    )Prepaid expenses and other
    
    
    (819,223
    )
    
    
    (34,758
    )Accounts payable
    
    
    2,930,387
    
    
    
    (878,614
    )Accrued expenses
    
    
    (5,804,370
    )
    
    
    (1,933,278
    )Legal liability
    
    
    (12,058,500
    )
    
    
    Sales returns and allowances
    
    
    (1,734,885
    )
    
    
    575,828Net Cash (Used) By Operating Activities
    
    
    (13,144,024
    )
    
    
    (4,989,362
    )Cash Flows From Investing Activities:Capital expenditures
    
    
    (653,492
    )
    
    
    (101,331
    )Restricted cash
    
    
    4,500,000
    
    
    
    Deposits and other
    
    
    (2,680,362
    )
    
    
    (285,664
    )Net Cash Provided (Used) By Investing Activities
    
    
    1,166,146
    
    
    
    (386,995
    )Cash Flows From Financing Activities:Debt issuance costs
    
    
    (9,381
    )
    
    
    (25,447
    )Proceeds from borrowing
    
    
    4,000,000
    
    
    
    Issuance of common stock
    
    
    1,549,077
    
    
    
    43,064Net Cash Provided By Financing Activities
    
    
    5,539,696
    
    
    
    17,617Net (Decrease) in Cash and Cash Equivalents
    
    
    (6,438,182
    )
    
    
    (5,358,740
    )Cash and Cash Equivalents at Beginning of Period
    
    
    12,266,671
    
    
    
    12,694,486Cash and Cash Equivalents at End of Period
    
    $
    5,828,489
    
    
    $
    7,335,746Supplemental Disclosure of Cash Flow Information:Cash paid during the period for:Interest
    
    $
    35,889
    
    
    $
    Income taxes
    
    
    1,882,885
    
    
    
    653,954
  5




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MATRIXX INITIATIVES, INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
    Share-Based Payment Accounting for
Stock-Based Compensation, Accounting for Stock Issued to
Employees.
  2005
    
    2004
    
    2003Risk-free interest rate
    
    
    3.66
    %
    
    
    3.25
    %
    
    
    3.12
    %Expected life
    
    5.00 years
    
    4.95 years
    
    4.88 yearsExpected volatility
    
    
    61.40
    %
    
    
    66.44
    %
    
    
    62.96
    %Expected dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
 6




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MATRIXX INITIATIVES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  Three Months Ended
    
    
    Nine Months EndedSeptember 30, 2005
    
    
    September 30, 2005Net income applicable to common shareholders, as
reported
    
    $
    5,639,915
    
    
    $
    6,030,830Add stock-based employee compensation expense included
in net earnings, net of tax
    
    
    
    
    
    
    Less stock based employee compensation expense
determined under fair value based methods for all awards,
net of related tax effects
    
    
    52,306
    
    
    
    1,504,469Proforma net income
    
    $
    5,587,609
    
    
    $
    4,526,362Net income per share of common stock:Basic:As reported
    
    $
    0.59
    
    
    $
    0.64Pro forma
    
    $
    0.59
    
    
    $
    0.48DilutedAs reported
    
    $
    0.58
    
    
    $
    0.62Pro forma
    
    $
    0.58
    
    
    $
    0.47
 ,
  Earnings Per Share
  7




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MATRIXX INITIATIVES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income applicable to common shareholders
    
    $
    7,150,370
    
    
    $
    5,639,915
    
    
    $
    5,389,333
    
    
    $
    6,030,830Weighted average common shares outstanding  Basic
    
    
    9,671,264
    
    
    
    9,483,174
    
    
    
    9,632,285
    
    
    
    9,482,262Dilutive Securities:Options
    
    
    200,661
    
    
    
    145,003
    
    
    
    251,418
    
    
    
    155,877Restricted Stock
    
    
    99,458
    
    
    
    68,167
    
    
    
    94,467
    
    
    
    64,168Weighted average common shares outstanding  Diluted
    
    
    9,971,383
    
    
    
    9,696,344
    
    
    
    9,978,170
    
    
    
    9,702,307Net income per common share:Basic
    
    $
    0.74
    
    
    $
    0.59
    
    
    $
    0.56
    
    
    $
    0.64Diluted
    
    $
    0.72
    
    
    $
    0.58
    
    
    $
    0.54
    
    
    $
    0.62
   September 30,
    
    
    December 31,2006
    
    
    2005Raw materials and packaging
    
    $
    5,644,663
    
    
    $
    3,520,013Finished goods
    
    
    13,996,468
    
    
    
    5,829,699Less reserve for obsolescence
    
    
    (220,970
    )
    
    
    (546,577
    )Total
    
    $
    19,420,161
    
    
    $
    8,803,135
    8




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MATRIXX INITIATIVES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Accounting for Uncertainty in Income
Taxes Accounting for Income Taxes.
 Fair Value Measurements ,
    Litigation
   Product Liability Matters
 General.
 9




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MATRIXX INITIATIVES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
   December 31, 2005
    
    June 30, 2006
    
    October 20, 2006Number of Pending
Lawsuits
    
    
    50
    
    
    
    37
    
    
    
    36Number of Plaintiffs
    
    
    427
    
    
    
    52
    
    
    
    51
  Settlement of Arizona Consolidated Litigation.
 Cases
Dismissed Since June 30, 2006.
 Cases Filed Since June 30, 2006.
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MATRIXX INITIATIVES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
   Companys Position Regarding the Allegations.
  Insurance.
 Litigation Reserves.
 11




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MATRIXX INITIATIVES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Securities Litigation Matters
  Federal Trade Commission Inquiry
 ®
 ®
 12




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Overview
     Quarterly Results:
 3 Months Ended September 30,
    
    
    Nine Months Ended September 30,$000s
    
    2006
    
    % NS
    
    2005
    
    % NS
    
    
    2006
    
    % NS
    
    2005
    
    % NSNet Sales
    
    $
    34,121
    
    
    
    
    
    
    $
    25,203
    
    
    
    
    
    
    
    $
    60,003
    
    
    
    
    
    
    $
    46,439Marketing
    
    $
    4,136
    
    
    
    12
    %
    
    $
    1,981
    
    
    
    8
    %
    
    
    $
    12,627
    
    
    
    21
    %
    
    $
    8,718
    
    
    
    19
    %Sales
    
    $
    1,272
    
    
    
    4
    %
    
    $
    1,233
    
    
    
    5
    %
    
    
    $
    2,176
    
    
    
    4
    %
    
    $
    2,278
    
    
    
    5
    %General & Administrative
    
    $
    2,902
    
    
    
    8
    %
    
    $
    2,294
    
    
    
    9
    %
    
    
    $
    8,560
    
    
    
    14
    %
    
    $
    6,343
    
    
    
    14
    %Product Liability Litigation
    
    $
    1,600
    
    
    
    5
    %
    
    $
    1,500
    
    
    
    6
    %
    
    
    $
    4,817
    
    
    
    8
    %
    
    $
    3,022
    
    
    
    7
    %Total Operating Expenses
    
    $
    9,910
    
    
    
    29
    %
    
    $
    7,008
    
    
    
    28
    %
    
    
    $
    28,180
    
    
    
    47
    %
    
    $
    20,361
    
    
    
    44
    %Research & Development
    
    $
    1,149
    
    
    
    3
    %
    
    $
    784
    
    
    
    3
    %
    
    
    $
    4,140
    
    
    
    7
    %
    
    $
    2,249
    
    
    
    5
    %
  13




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1)
    
    We compare our year to date sales and net income performance against our stated annual
goal for each. For fiscal 2006, our goal is to grow sales 25%-35% over the $90.5 million
recorded in 2005. We expect net income growth of 15%-25% above the $7.6 million level
realized in 2005, which excludes the impact of an $8.5 million (approximately $5 million
net of tax) charge recorded in the fourth quarter of 2005 for settling Arizona product
liability litigation and recording a reserve for the remaining product liability lawsuits
and recording of tax credits of approximately $477,000 in the fourth quarter of 2005. The
foregoing is a non-GAAP financial measure as defined in Item 10(e) of Regulation S-K of
the Exchange Act. We believe our 2005 net income, excluding the settlement, reserve, and
tax credits that were recognized in the fourth quarter of 2005, provides investors with a
useful indicator of our results that is comparable among periods because it excludes the
effects of unusual items that may occur on an irregular basis. Investors should note that
this non-GAAP financial measure involves judgments by management, including whether the
item is classified as an unusual item. We use similar concepts to measure our performance
internally in reports for management.For the nine months ended September 30, 2006, net sales increased 29%, to $60.0 million,
and we recorded net income of approximately $5.4 million compared to net sales of $46.4
million and net income of $6.0 million for the same period in 2005. Net income was
impacted by increased investment in marketing and research and development, as well as
lower gross margins (primarily related to our new flu relief products and a third quarter
adjustment to the returns allowance for Nasal Comfort products). In addition, the Company
incurred higher legal expense during the first nine months of 2006 and did not record any
reimbursement from insurance carriers for legal expense, as it did during the prior year
period, when it recorded $1.7 million in such reimbursements (see Note 6). We began
shipments of our new products, which include Cold Remedy RapidMelts + C, Cold Remedy
ChewCaps, and Cough Melts. Due to the share growth we have achieved and the introduction
of these new items and anticipated cost reductions, we expect to achieve our previously
announced annual guidance of 2006 annual sales increasing 25%-35% over the $90.5 million
recorded in 2005. We also expect net income growth of 15%-25% above the $7.6 million level
realized in 2005, exclusive of the 2005 litigation settlement, reserve, and tax credit
amounts mentioned in the preceding paragraph.2)
    
    We monitor our share of the cough and cold market. Year-to-date (for the period ending
September 10, 2006), retail sales of our products (as measured by three outlet syndicated
scanner data, not including our largest customer, Wal-Mart) increased approximately 15%
over the comparable period in the previous year, while sales within the entire cough and
cold category decreased approximately 3% over the same period. The increased sales of our
products achieved a share of approximately 2.2% of the entire cough and cold market
compared to a share of 1.9% in the comparable period in the previous year.3)
    
    We measure our ability to maintain strong gross margins on our products. We achieved an
average gross margin of 67% for the third quarter of 2006, which is below the average gross
margin of 68% achieved in the third quarter of 2005 (gross margins on our existing
products, exclusive of the cold & flu relief, vary between 60% and 80%). For the first nine
months of 2006, we achieved an average gross margin of 68%, which is below our goal of 70%
and below the 70% gross margin achieved in the first nine months of 2005. The decrease in
gross margins is primarily attributable to the lower gross margins on our cold and flu
relief products and the adjustment to increase our returns allowance related to Nasal
Comfort products, which was recorded during the third quarter of 2006. We expect to reduce
costs on our flu
relief products and realize improved gross margins in the near future. Additionally, we
expect to realize improved margins (see Liquidity and Capital Resources below) on our
redesigned swab products when our new automated equipment is fully implemented.4)
    
    We evaluate our operating performance by reviewing, over time, our ability to decrease
administrative and general costs as a percentage of net sales. For the nine months ended
September 30, 2006, our operating expenses (which exclude research and development expense)
were approximately 47% of our net sales compared to 44% for the first nine months of 2005.
Legal expense continues to negatively impact results. For the nine months ended September
30, 2006, legal expense related to product liability litigation was approximately $4.8
million compared to $3.0 million (net of the $1.7 million of insurance reimbursement
discussed in Note 7) recognized in the comparable period of 2005. We do not expect to
 15




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##### Table of Contents



recognize additional reimbursements from our insurance carriers for legal expenses incurred
in future periods (see Note 6).
 5)
    
    We try to increase the distribution of our products by key national retailers. For the
2006/2007 cold season, our ten largest retail customers (food/drug/mass), which are
responsible for approximately 70% of our annual sales, will carry, on average, 15 of our 21
products, compared to 14 of our 23 products during the 2005/2006 cold season.
 Critical Accounting Policies and Estimates
    Intangible Assets and Goodwill:
 Income Taxes:
 Revenue Recognition:
 Customer Sales Returns and Allowances:
 16




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##### Table of Contents



Insurance Reimbursements:
 Legal Contingencies:
 Results of Operations for the Three Months Ended September 30, 2006 Compared to the Three
Months Ended September 30, 2005
  Three Months Ended September 30,2006
    
    
    2005Net sales
    
    $
    34,121,356
    
    
    
    100
    %
    
    $
    25,202,624
    
    
    
    100
    %Cost of sales
    
    
    11,153,910
    
    
    
    33
    
    
    
    8,153,578
    
    
    
    32Gross profit
    
    
    22,967,446
    
    
    
    67
    
    
    
    17,049,046
    
    
    
    68Selling, general and administrative
    
    
    9,909,790
    
    
    
    29
    
    
    
    7,007,818
    
    
    
    28Research & development
    
    
    1,149,479
    
    
    
    3
    
    
    
    784,087
    
    
    
    3Income from operations
    
    
    11,908,177
    
    
    
    35
    
    
    
    9,257,141
    
    
    
    37Interest and other income
    
    
    76,636
    
    
    
    
    
    
    
    114,514
    
    
    
    Interest expense
    
    
    64,222
    
    
    
    
    
    
    
    0
    
    
    
    Income before income taxes
    
    
    11,920,591
    
    
    
    35
    
    
    
    9,371,655
    
    
    
    37Provision for income taxes
    
    
    4,770,221
    
    
    
    14
    
    
    
    3,731,740
    
    
    
    15Net income
    
    $
    7,150,370
    
    
    
    21
    %
    
    $
    5,639,915
    
    
    
    22
    %
 17




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##### Table of Contents



Net Sales
  Cost of Sales
  Gross Profit
 Customer Sales Returns and Allowance
 Selling, General & Administrative
    Research and Development
  18




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##### Table of Contents



Interest & Other Income
  Interest Expense
  Income Before Income Taxes
  Income Tax Expense
  Net Income
  Results of Operations for the Nine Months Ended September 30, 2006 Compared to the Nine Months
Ended September 30, 2005
  Nine Months Ended September 30,2006
    
    
    2005Net sales
    
    $
    60,003,448
    
    
    
    100
    %
    
    $
    46,438,883
    
    
    
    100
    %Cost of sales
    
    
    19,423,828
    
    
    
    32
    
    
    
    14,075,832
    
    
    
    30Gross profit
    
    
    40,579,620
    
    
    
    68
    
    
    
    32,363,051
    
    
    
    70Selling, general and administrative
    
    
    28,180,709
    
    
    
    47
    
    
    
    20,360,853
    
    
    
    44Research & development
    
    
    4,139,514
    
    
    
    7
    
    
    
    2,249,219
    
    
    
    5Income from operations
    
    
    8,259,397
    
    
    
    14
    
    
    
    9,752,979
    
    
    
    21Interest and other income
    
    
    385,355
    
    
    
    
    
    
    
    300,927
    
    
    
    1Interest expense
    
    
    64,222
    
    
    
    
    
    
    
    0
    
    
    
    Income before income taxes
    
    
    8,580,530
    
    
    
    14
    
    
    
    10,053,906
    
    
    
    22Provision for income taxes
    
    
    3,191,197
    
    
    
    5
    
    
    
    4,023,076
    
    
    
    9Net income
    
    $
    5,389,333
    
    
    
    9
    %
    
    $
    6,030,830
    
    
    
    13
    %
 19




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##### Table of Contents



Net Sales
  Cost of Sales
  Gross Profit
 Customer Sales Returns and Allowance
 Selling, General and Administrative
    Research and Development
  20




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##### Table of Contents



Interest & Other Income
  Interest Expense
  Income Before Income Taxes
  Income Tax Expense
  Net Income
  Liquidity and Capital Resources
    21




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##### Table of Contents



Contractual Obligations
  Contractual Cash Obligations(In thousands of dollars)Payments due by Period as of September 30, 2006Less than
    
    
    
    
    
    
    
    
    
    
    AfterTotal
    
    
    1 year
    
    
    1-3 years
    
    
    3-5 years
    
    
    5 yearsLong-Term Debt Obligations
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0Capital Lease Obligations
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Operating Lease Obligations
    
    
    722
    
    
    
    257
    
    
    
    255
    
    
    
    210
    
    
    
    0Purchase Obligations
    
    
    5,859
    
    
    
    5,859
    
    
    
    0
    
    
    
    0
    
    
    
    0Other Long-Term Liabilities Reflected on the
Companys Balance Sheet under GAAP
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Total
    
    $
    6,581
    
    
    $
    6,116
    
    
    $
    255
    
    
    $
    210
    
    
    $
    0
 22




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##### Table of Contents



CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
 Forward Looking Statements
  
    
    our belief that the reserve for litigation losses will be sufficient to resolve the remaining cases;
    
    our belief that significant growth opportunities continue to exist;
    
    our expectations regarding 2006 net sales increasing 25%-35% over the $90.5 million
recorded in 2005 and net income increasing 15%-25% above the $7.6 million level realized in
2005, which excludes the impact of an $8.5 million for settling Arizona product liability
litigation and recording a reserve for the remaining product liability lawsuits and tax
credits of approximately $477,000;
    
    our belief that Cough products will achieve higher consumer acceptance in the future;
    
    our belief that new advertising approaches and public relations efforts will continue to
build brand awareness;
    
    our anticipation that we will continue to incur approximately $1.5 million in legal expense
each quarter as a result of the Zicam Cold Remedy product liability litigation in which we
are engaged;
    
    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 expectation that the trend of growth in sales in future periods will continue as we
expand consumer awareness and acceptance of our entire Zicam brand of products, increase
distribution, introduce new products, and avoid additional adverse publicity;
    
    our expectation regarding future net income, our belief that expenditures for advertising
and research and development will vary by quarter throughout the year, and our expectation
that advertising expenses will be heaviest in our first and fourth fiscal quarters;
    
    our expectation of the effect of recently issued accounting standards;
    
    our expectation that our mix of products sold will change due to seasonality and varying
growth rates within our three market categories;
    
    our expectation of continuing profitability in future years;
    
    our expectation regarding product returns and our intention to review our product return
reserve provision at least monthly and adjust the reserve amounts as actual product return
experience continues to develop;
    
    our expectation of making income tax payments at our statutory rates in future years;
    
    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 expectations regarding cost reductions related to product improvements;
    
    our expectation that our net income and operating expenses in future periods will vary
largely in connection with the level of our advertising, research and development, and legal
expenses;
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##### Table of Contents




    
    our expectation of converting accounts receivables into cash during the fourth quarter of
2006;
    
    our expectation that research and development spending will be between 4-5% of net sales
for 2006 and in subsequent years;
    
    our expectation that earnings in future periods will be significantly impacted by 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 expectation of increasing our credit facility to meet seasonal working capital requirements;
    
    our expectation regarding reimbursement for legal expense from our insurance carriers;
    
    our having no plans to directly manufacture and store our products;
    
    our expectation of paying $4 million to build new swab manufacturing equipment and our
expectation that the new equipment will begin producing products in the fourth quarter of
2006;
    
    our expectation that we will repay the $4 million borrowed from our credit facility by the
end of 2006;
    
    our expectation that our manufacturers will continue to produce inventory available for
sales of products through the 2006-2007 cough and cold season;
    
    our expectation of achieving increased gross margin in the future;
    
    our belief that moderate interest rate increases will not have a material adverse impact on
our results of operations or financial position in the foreseeable future.
    
    our intention to conduct additional clinical studies and consumer research regarding our
oral care product concept;
    
    our expectations regarding the success of our marketing plans for the cold season; and
    
    our expectations regarding expansion into new categories
    24




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures about Market Risk
   
 Item 4. Controls and Procedures
  
 PART II
OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  25




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##### Table of Contents



Item 6. Exhibits
 Exhibit No.
    
    Title3.01
    
    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)10.01
    
    ** *Amended and Restated Employment Agreement between the registrant and Carl
Johnson, dated October 18, 200610.02
    
    ** *Agreement between registrant
and William Hemelt, dated October 18, 200610.03
    
    ** *Matrixx Initiatives, Inc. 2001 Long-Term Incentive Plan Form of Restricted
Stock Program Agreement (Directors)10.04
    
    ** *Amendment to the Matrixx Initiatives 2001 Long-Term Incentive Plan
Restricted Stock Program Agreement between registrant and Edward Walsh10.05
    
    ** *Amendment to the Matrixx Initiatives 2001 Long-Term Incentive Plan
Restricted Stock Program Agreement between registrant and Edward Faber31.1*
    
    Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2*
    
    Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1*
    
    Certification of CEO pursuant to 18 U.S.C. Section 135032.2*
    
    Certification of 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 Registrants Amendment No. 1 to Form 8-A,
filed June 18, 2002, file number 000-27646.(2)
    
    Incorporated by reference to the Registrants Report on Form 8-K, filed July
25, 2006, file number 001-31404.(3)
    
    Incorporated by reference to the Registrants Registration Statement on Form
8-A, filed July 23, 2002, file number 001-31404. 26




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##### Table of Contents



SIGNATURES
  Matrixx Initiatives, Inc./s/  Carl J. JohnsonCarl J. JohnsonPresident and
Chief Executive Officer/s/  William J. HemeltWilliam J. HemeltExecutive Vice President,
Chief Financial Officer, &
TreasurerNovember 8, 2006  27




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##### Table of Contents



Exhibit No.
    
    Title3.01
    
    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)10.01
    
    ** *Amended and Restated Employment Agreement between the registrant and Carl
Johnson, dated October 18, 200610.02
    
    ** *Agreement between registrant
and William Hemelt, dated October 18, 200610.03
    
    ** *Matrixx Initiatives, Inc. 2001 Long-Term Incentive Plan Form of Restricted
Stock Program Agreement (Directors)10.04
    
    ** *Amendment to the Matrixx Initiatives 2001 Long-Term Incentive Plan
Restricted Stock Program Agreement between registrant and Edward Walsh10.05
    
    ** *Amendment to the Matrixx Initiatives 2001 Long-Term Incentive Plan
Restricted Stock Program Agreement between registrant and Edward Faber31.1*
    
    Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2*
    
    Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1*
    
    Certification of CEO pursuant to 18 U.S.C. Section 135032.2*
    
    Certification of 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 Registrants Amendment No. 1 to Form 8-A,
filed June 18, 2002, file number 000-27646.(2)
    
    Incorporated by reference to the Registrants Report on Form 8-K, filed July
25, 2006, file number 001-31404.(3)
    
    Incorporated by reference to the Registrants Registration Statement on Form
8-A, filed July 23, 2002, file number 001-31404.