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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 Form 10-Q
  þ
    
    Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarter ended June 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
(State or other jurisdiction
of incorporation or organization)
    
    87-0482806
(I.R.S. Employer
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
June 30, 2006 (Unaudited) and December 31, 2005
    
    
    1Condensed Consolidated Statements of
Income for the three months ended
June 30, 2006 and 2005 (Unaudited)
    
    
    3Condensed Consolidated Statements of
Income for the six months ended
June 30, 2006 and 2005 (Unaudited)
    
    
    4Condensed Consolidated Statements of
Cash Flows for the six months ended
June 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
    
    
    24Item 4.
    
    Controls and Procedures
    
    
    24PART II
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    25Item 1A.
    
    Risk Factors
    
    
    25Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    25Item 6.
    
    Exhibits
    
    
    25SIGNATURES
    
    
    
    
    
    
    27EX-10.01EX-10.02EX-10.03EX-31.1EX-31.2EX-32.1EX-32.2




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MATRIXX INITIATIVES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 June 30, 2006
    
    December 31, 2005ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    7,618,010
    
    
    $
    12,266,671Accounts receivable:Trade, net allowance for doubtful
accounts of $368,508 and $642,915
    
    
    4,171,987
    
    
    
    28,719,382Other receivable
    
    
    1,237,455
    
    
    
    1,234,886Insurance receivable
    
    
    4,094,400
    
    
    
    4,800,000Inventories
    
    
    15,878,879
    
    
    
    8,803,135Prepaid expenses
    
    
    1,813,947
    
    
    
    837,877Interest receivable
    
    
    25,830
    
    
    
    124,533Income tax receivable
    
    
    2,225,547
    
    
    
    Deferred tax asset
    
    
    7,797,299
    
    
    
    7,797,299Total Current Assets
    
    
    44,863,354
    
    
    
    64,583,783Property and Equipment, at cost:Office furniture and computer equipment
    
    
    1,291,202
    
    
    
    1,248,427Machine tooling and manufacturing equipment
    
    
    991,835
    
    
    
    616,645Leasehold improvements
    
    
    257,909
    
    
    
    178,7572,540,946
    
    
    
    2,043,829Less accumulated depreciation
    
    
    (1,083,023
    )
    
    
    (803,479
    )Net Property and Equipment
    
    
    1,457,923
    
    
    
    1,240,350Other Assets:Deposits
    
    
    2,565,703
    
    
    
    1,008,309Other assets
    
    
    57,963
    
    
    
    57,963Restricted cash
    
    
    500,000
    
    
    
    5,000,000Debt issuance costs, net of accumulated amortization
of $24,353 and $29,166
    
    
    30,668
    
    
    
    46,262Deferred tax asset
    
    
    14,984
    
    
    
    Patents, net of accumulated amortization of $348,462
and $283,437
    
    
    1,786,058
    
    
    
    1,774,235Goodwill
    
    
    15,039,836
    
    
    
    15,039,836Total Other Assets
    
    
    19,995,212
    
    
    
    22,926,605Total Assets
    
    $
    66,316,489
    
    
    $
    88,750,738
  1




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MATRIXX INITIATIVES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 LIABILITIES AND STOCKHOLDERS EQUITY
 June 30, 2006
    
    December 31, 2005Current Liabilities:Accounts payable
    
    $
    5,982,030
    
    
    $
    8,741,651Accrued expenses
    
    
    4,244,794
    
    
    
    7,774,871Sales commissions
    
    
    175,007
    
    
    
    2,600,467Sales returns and allowances
    
    
    2,161,842
    
    
    
    3,880,552Legal liability
    
    
    1,210,000
    
    
    
    13,245,000Accrued taxes
    
    
    
    
    
    
    882,611Total Current Liabilities
    
    
    13,773,673
    
    
    
    37,125,152Deferred tax liability
    
    
    3,515,951
    
    
    
    3,515,951Total Liabilities
    
    
    17,289,624
    
    
    
    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, 9,856,106 and 9,599,529 issued and outstanding
    
    
    9,856
    
    
    
    9,599Additional paid in capital
    
    
    47,197,426
    
    
    
    43,433,364Unearned compensation
    
    
    (1,086,052
    )
    
    
    Retained earnings
    
    
    3,301,939
    
    
    
    5,062,97649,423,169
    
    
    
    48,505,939Less common stock held in treasury, at cost
(53,800 and 53,800 shares)
    
    
    (396,304
    )
    
    
    (396,304
    )Total Stockholders Equity
    
    
    49,026,865
    
    
    
    48,109,635Total Liabilities and Stockholders Equity
    
    $
    66,316,489
    
    
    $
    88,750,738
  2




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MATRIXX INITIATIVES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 Three months ended June 30,2006
    
    
    2005Net sales
    
    $
    8,206,133
    
    
    $
    6,254,669Cost of sales
    
    
    2,404,707
    
    
    
    1,684,820Gross Profit
    
    
    5,801,426
    
    
    
    4,569,849Selling, general and administrative expenses
    
    
    7,578,412
    
    
    
    4,529,521Research and development
    
    
    1,863,189
    
    
    
    965,571Loss From Operations
    
    
    (3,640,175
    )
    
    
    (925,243
    )Other Income (Expense):Interest and other income
    
    
    134,808
    
    
    
    125,258Interest expense
    
    
    
    
    
    
    Total Other Income
    
    
    134,808
    
    
    
    125,258Loss Before Provision For Income Taxes
    
    
    (3,505,367
    )
    
    
    (799,985
    )Benefit from income taxes
    
    
    (1,647,570
    )
    
    
    (295,342
    )Net Loss
    
    $
    (1,857,797
    )
    
    $
    (504,643
    )Net Loss Per Share of Common Stock:Basic:Weighted Average Number of Common Shares Outstanding
    
    
    9,658,471
    
    
    
    9,481,685Net Loss Per Share of Common Stock
    
    $
    (0.19
    )
    
    $
    (0.05
    )Diluted:Weighted Average Number of Common Shares Outstanding
    
    
    9,658,471
    
    
    
    9,481,685Net Loss Per Share of Common Stock
    
    $
    (0.19
    )
    
    $
    (0.05
    )
  3




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MATRIXX INITIATIVES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 Six months ended June 30,2006
    
    
    2005Net sales
    
    $
    25,882,092
    
    
    $
    21,236,259Cost of sales
    
    
    8,269,918
    
    
    
    5,922,254Gross Profit
    
    
    17,612,174
    
    
    
    15,314,005Selling, general and administrative expenses
    
    
    18,270,919
    
    
    
    13,353,035Research and development
    
    
    2,990,035
    
    
    
    1,465,132Income
(Loss) From Operations
    
    
    (3,648,780
    )
    
    
    495,838Other Income (Expense):Interest and other income
    
    
    308,719
    
    
    
    186,413Interest expense
    
    
    
    
    
    
    Total Other Income
    
    
    308,719
    
    
    
    186,413Income (Loss) Before Provision For Income Taxes
    
    
    (3,340,061
    )
    
    
    682,251Provision (benefit) for income taxes
    
    
    (1,579,024
    )
    
    
    291,336Net Income (Loss)
    
    $
    (1,761,037
    )
    
    $
    390,915Net Income (Loss) Per Share of Common Stock:Basic:Weighted Average Number of Common Shares Outstanding
    
    
    9,612,473
    
    
    
    9,481,799Net Income (Loss) Per Share of Common Stock
    
    $
    (0.18
    )
    
    $
    0.04Diluted:Weighted Average Number of Common Shares Outstanding
    
    
    9,612,473
    
    
    
    9,671,265Net Income (Loss) Per Share of Common Stock
    
    $
    (0.18
    )
    
    $
    0.04
  4




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MATRIXX INITIATIVES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 Six months ended June 30,2006
    
    
    2005Cash Flows From Operating Activities:Net income (loss)
    
    $
    (1,761,037
    )
    
    $
    390,915Adjustments to reconcile net income to net cash
provided (used) by operating activities:Depreciation
    
    
    279,544
    
    
    
    129,925Amortization
    
    
    65,025
    
    
    
    33,540Amortization of debt issuance costs
    
    
    24,975
    
    
    
    6,250Deferred income taxes
    
    
    (14,984
    )
    
    
    (268,356
    )Common stock issued for compensation
    
    
    1,129,190
    
    
    
    380,384Changes in assets and liabilities:Accounts receivable
    
    
    25,250,426
    
    
    
    7,659,290Interest receivable
    
    
    98,703
    
    
    
    12,644Income tax receivable
    
    
    (2,225,547
    )
    
    
    Inventories
    
    
    (7,075,744
    )
    
    
    (95,791
    )Prepaid expenses and other
    
    
    (976,070
    )
    
    
    (212,035
    )Accounts payable
    
    
    (2,759,621
    )
    
    
    (2,235,601
    )Accrued expenses
    
    
    (6,838,148
    )
    
    
    (4,330,826
    )Legal liability
    
    
    (12,035,000
    )
    
    
    Sales returns and allowances
    
    
    (1,718,710
    )
    
    
    (388,006
    )Net Cash Provided (Used) By Operating Activities
    
    
    (8,556,998
    )
    
    
    1,082,333Cash Flows From Investing Activities:Capital expenditures
    
    
    (573,965
    )
    
    
    (75,927
    )Restricted cash
    
    
    4,500,000
    
    
    
    Deposits and other
    
    
    (1,557,394
    )
    
    
    (270,112
    )Net Cash Provided (Used) By Investing Activities
    
    
    2,368,641
    
    
    
    (346,039
    )Cash Flows From Financing Activities:Debt issuance costs
    
    
    (9,381
    )
    
    
    Issuance of common stock
    
    
    1,549,077
    
    
    
    Net Cash Provided By Financing Activities
    
    
    1,539,696
    
    
    
    Net Increase (Decrease) in Cash and Cash Equivalents
    
    
    (4,648,661
    )
    
    
    736,294Cash and Cash Equivalents at Beginning of Period
    
    
    12,266,671
    
    
    
    12,694,486Cash and Cash Equivalents at End of Period
    
    $
    7,618,010
    
    
    $
    13,430,780Supplemental Disclosure of Cash Flow Information:Cash paid during the period for:Interest
    
    $
    
    
    
    $
    Income taxes
    
    
    1,544,117
    
    
    
    500,054
  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
    
    
    Six Months EndedJune 30, 2005
    
    
    June 30, 2005Net income (loss) applicable to common shareholders, as
reported
    
    $
    (504,643
    )
    
    $
    390,915Add 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
    
    
    72,725
    
    
    
    1,452,163Proforma net income (loss)
    
    $
    (577,368
    )
    
    $
    (1,061,248
    )Net income (loss) per share of common stock:Basic:As reported
    
    $
    (0.05
    )
    
    $
    0.04Pro forma
    
    $
    (0.06
    )
    
    $
    (0.11
    )DilutedAs reported
    
    $
    (0.05
    )
    
    $
    0.04Pro forma
    
    $
    (0.06
    )
    
    $
    (0.11
    )
 ,
  Earnings Per Share
  7




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MATRIXX INITIATIVES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income (loss) applicable to common shareholders
    
    $
    (1,857,797
    )
    
    $
    (504,643
    )
    
    $
    (1,761,037
    )
    
    $
    390,915Weighted average common shares outstanding  Basic
    
    
    9,658,471
    
    
    
    9,481,685
    
    
    
    9,612,473
    
    
    
    9,481,799Dilutive Securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    189,466Weighted average common shares outstanding  Diluted
    
    
    9,658,471
    
    
    
    9,481,685
    
    
    
    9,612,473
    
    
    
    9,671,265Net income (loss) per common share:Basic
    
    $
    (0.19
    )
    
    $
    (0.05
    )
    
    $
    (0.18
    )
    
    $
    0.04Diluted
    
    $
    (0.19
    )
    
    $
    (0.05
    )
    
    $
    (0.18
    )
    
    $
    0.04
   June 30,
    
    
    December 31,2006
    
    
    2005Raw materials and packaging
    
    $
    4,684,068
    
    
    $
    3,520,013Finished goods
    
    
    11,559,289
    
    
    
    5,829,699Less reserve for obsolescence
    
    
    (364,478
    )
    
    
    (546,577
    )Total
    
    $
    15,878,879
    
    
    $
    8,803,135
    Inventory Costs  An Amendment of ARB No. 43,
Chapter 4
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MATRIXX INITIATIVES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Accounting Changes and Error Corrections  A
Replacement of APB Opinion No. 20 and FASB Statement No. 3.
 Accounting for Uncertainty in Income
Taxes Accounting for Income Taxes.
    Litigation
  9




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MATRIXX INITIATIVES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  Product Liability Matters
 General.
 December 31, 2005
    
    
    March 31,2006
    
    
    July 31, 2006Number of Pending
Lawsuits
    
    
    50
    
    
    
    37
    
    
    
    36Number of Plaintiffs
    
    
    427
    
    
    
    67
    
    
    
    51
  Settlement of Arizona Consolidated Litigation.
 Cases Dismissed or Settled Since March 31, 2006.
 Cases Filed Since March 31, 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 Letter
  ®
 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 June 30,
    
    
    
    Six Months Ended June 30,$000s
    
    2006
    
    
    % NS
    
    
    2005
    
    
    % NS
    
    
    
    2006
    
    
    % NS
    
    
    2005
    
    
    % NSNet Sales
    
    $
    8,206
    
    
    
    
    
    
    $
    6,255
    
    
    
    
    
    
    
    $
    25,882
    
    
    
    
    
    
    $
    21,236Marketing
    
    $
    1,792
    
    
    
    22
    %
    
    $
    1,668
    
    
    
    27
    %
    
    
    $
    8,491
    
    
    
    33
    %
    
    $
    6,737
    
    
    
    32
    %Sales
    
    $
    336
    
    
    
    4
    %
    
    $
    431
    
    
    
    7
    %
    
    
    $
    904
    
    
    
    3
    %
    
    $
    1,045
    
    
    
    5
    %General & Administrative
    
    $
    2,650
    
    
    
    32
    %
    
    $
    1,611
    
    
    
    26
    %
    
    
    $
    4,825
    
    
    
    19
    %
    
    $
    3,479
    
    
    
    16
    %Legal
    
    $
    2,800
    
    
    
    34
    %
    
    $
    819
    
    
    
    13
    %
    
    
    $
    4,051
    
    
    
    16
    %
    
    $
    2,092
    
    
    
    10
    %Total Operating Expenses
    
    $
    7,578
    
    
    
    92
    %
    
    $
    4,529
    
    
    
    73
    %
    
    
    $
    18,271
    
    
    
    71
    %
    
    $
    13,353
    
    
    
    63
    %Research & Development
    
    $
    1,863
    
    
    
    23
    %
    
    $
    966
    
    
    
    15
    %
    
    
    $
    2,990
    
    
    
    12
    %
    
    $
    1,465
    
    
    
    7
    %
 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
 14




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settling Arizona product
liability litigation and recording a reserve for the remaining product liability lawsuits
and tax credits of approximately $477,000. 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.
  2)
    
    We monitor our share of the cough and cold market. Year-to-date (for the period ending
June 18, 2006), retail sales of our products (as measured by three outlet syndicated
scanner data, not including our largest customer, Wal-Mart) increased approximately 13%
over the comparable period in the previous year, while sales within the entire cough and
cold category decreased approximately 5% over the same period. The increased sales of our
products achieved a share of approximately 2.4% of the entire cough and cold market
compared to a share of 2.0% 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 71% for the second quarter of 2006, which is below the average
gross margin of 73% achieved in the second quarter of 2005 (gross margins on our existing
products, exclusive of the flu relief, vary between 60% and 80%). For the first six months
of 2006, we achieved an average gross margin of 68%, which is below our goal of 70% and
below the 72% gross margin achieved in the first six months of 2005. The decrease in gross
margins is primarily attributable to higher start-up costs related to our flu relief
products and increased freight costs. We expect to reduce costs on our flu relief products
and realize improved gross margins in the near future.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 six months ended
June 30, 2006, our operating expenses (which exclude research and development expense) were
approximately 71% of our net sales compared to 63% for the first half of 2005. Legal
expense continues to negatively impact results. For the six months ended June 30, 2006,
legal expense was approximately $4.1 million compared to $2.1 million (net of the $1.4
million of insurance reimbursement discussed in Note 7) recognized in the comparable period
of 2005. We do not expect to 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
six months ended June 30, 2006, our ten largest retail customers, which are responsible for
approximately 70% of our annual sales, carried, on average, 14 of our 23 products, compared
to 12 of our 16 products in the second quarter of 2005. We anticipate these customers will
carry a higher number of products during the 2006/2007 cold season.
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Critical Accounting Policies and Estimates
    Intangible Assets and Goodwill:
 Income Taxes:
 Revenue Recognition:
 Customer Sales Returns and Allowances:
 Insurance Reimbursements:
 16




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Legal Contingencies:
 Results of Operations for the Three Months Ended June 30, 2006 Compared to the Three Months
Ended June 30, 2005
  Three Months Ended June 30,2006
    
    
    2005Net sales
    
    $
    8,206,133
    
    
    
    100
    %
    
    $
    6,254,669
    
    
    
    100
    %Cost of sales
    
    
    2,404,707
    
    
    
    29
    
    
    
    1,684,819
    
    
    
    27Gross profit
    
    
    5,801,426
    
    
    
    71
    
    
    
    4,569,850
    
    
    
    73Selling, general and administrative
    
    
    7,578,412
    
    
    
    92
    
    
    
    4,529,521
    
    
    
    72Research & development
    
    
    1,863,189
    
    
    
    23
    
    
    
    965,571
    
    
    
    15Income (Loss) from operations
    
    
    (3,640,175
    )
    
    
    (44
    )
    
    
    (925,242
    )
    
    
    (15
    )Interest and other income
    
    
    134,808
    
    
    
    2
    
    
    
    125,258
    
    
    
    2Interest expense
    
    
    0
    
    
    
    
    
    
    
    0
    
    
    
    Income (Loss) before income taxes
    
    
    (3,505,367
    )
    
    
    (43
    )
    
    
    (799,985
    )
    
    
    (13
    )Provision for income taxes
    
    
    (1,647,570
    )
    
    
    20
    
    
    
    (295,342
    )
    
    
    5Net income (loss)
    
    
    ($1,857,797
    )
    
    
    (23
    )%
    
    
    ($504,643
    )
    
    
    (8
    )%
 Net Sales
  Cost of Sales
  17




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##### Table of Contents



Gross Profit
  Selling, General & Administrative
    Research and Development
  Interest & Other Income
  Income (Loss) Before Income Taxes
  18




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##### Table of Contents



Income Tax Expense (Benefit)
  Net Income (Loss)
  Results of Operations for the Six Months Ended June 30, 2006 Compared to the Six Months Ended
June 30, 2005
  Six Months Ended June 30,2006
    
    
    2005Net sales
    
    $
    25,882,092
    
    
    
    100
    %
    
    $
    21,236,259
    
    
    
    100
    %Cost of sales
    
    
    8,269,918
    
    
    
    32
    
    
    
    5,922,254
    
    
    
    28Gross profit
    
    
    17,612,174
    
    
    
    68
    
    
    
    15,314,005
    
    
    
    72Selling, general and administrative
    
    
    18,270,919
    
    
    
    71
    
    
    
    13,353,035
    
    
    
    63Research & development
    
    
    2,990,035
    
    
    
    12
    
    
    
    1,465,133
    
    
    
    7Income (Loss) from operations
    
    
    (3,648,781
    )
    
    
    (14
    )
    
    
    495,838
    
    
    
    2Interest and other income
    
    
    308,719
    
    
    
    1
    
    
    
    186,413
    
    
    
    1Interest expense
    
    
    0
    
    
    
    
    
    
    
    0
    
    
    
    Income (Loss) before income taxes
    
    
    (3,340,061
    )
    
    
    (13
    )
    
    
    682,251
    
    
    
    3Provision for income taxes
    
    
    (1,579,024
    )
    
    
    6
    
    
    
    291,336
    
    
    
    1Net income (loss)
    
    
    ($1,761,037
    )
    
    
    (7
    )%
    
    $
    390,915
    
    
    
    2
    %
 Net Sales
  Cost of Sales
  Gross Profit
  19




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Selling, General and Administrative
    Research and Development
  Interest & Other Income
  Income (Loss) Before Income Taxes
  Income Tax Expense (Benefit)
  20




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Net Income (Loss)
  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 June 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
    
    
    761
    
    
    
    272
    
    
    
    304
    
    
    
    185
    
    
    
    0Purchase Obligations
    
    
    12,187
    
    
    
    12,187
    
    
    
    0
    
    
    
    0
    
    
    
    0Other Long-Term Liabilities
Reflected on the
Companys Balance Sheet under GAAP
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Total
    
    $
    12,948
    
    
    $
    12,459
    
    
    $
    304
    
    
    $
    185
    
    
    $
    0
 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 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
 22




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##### Table of Contents



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 our 10 largest retailers adding new products;
    
    our expectation of continuing profitability in future years;
    
    our intention to review our product return reserve provision at least quarterly 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 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;
    
    our expectation that research and development spending will be between 4-6% 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 belief that our existing capital resources and our credit line will be sufficient to
fund our operations and capital requirements for the next 12 months;
    
    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 of financing the new swab manufacturing equipment;
    
    our expectation that we will repay the $4 million borrowed from our credit facility by the
end of 2006;
    
    our anticipation that initial sales and shipments of the Zicam Rapid Melts +C, Zicam
ChewCaps, and Zicam Cough Melts will begin in the third quarter of 2006;
    
    our expectation that our manufacturers will have produced inventory available for sales of
products through the 2006-2007 cough and cold season;
    
    our expectation of achieving increased gross margin in the future;
 23




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##### Table of Contents




    
    our intention to conduct additional clinical studies and consumer research regarding our
oral care product concept; and
    
    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.
    
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
   
 Item 4. Controls and Procedures
  24




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##### Table of Contents



PART II
OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
 Item 4. Submission of Matters to a Vote of Security Holders
  Director
    
    Votes For
    
    Votes Withheld
    
    Abstentions
    
    Broker Non-VotesJohn M. Clayton PhD.
    
    
    8,636,719
    
    
    
    67,870
    
    
    
    0
    
    
    
    0Samuel C. Cowley
    
    
    8,636,819
    
    
    
    67,770
    
    
    
    0
    
    
    
    0Edward E. Faber
    
    
    8,636,719
    
    
    
    67,870
    
    
    
    0
    
    
    
    0L. White Matthews, III
    
    
    8,614,248
    
    
    
    90,341
    
    
    
    0
    
    
    
    0
   Votes For
    
    Votes Against
    
    Abstentions
    
    Broker Non-Votes8,689,769
    
    
    4,732
    
    
    
    10,087
    
    
    
    0
 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
    
    
    ** *Summary of Matrixx Initiatives, Inc. Director Restricted Stock Purchase Program10.02
    
    
    ** *Matrixx Initiatives, Inc. 2001 Long-Term Incentive Plan Form of Restricted
Stock Program Agreement (Time Vesting)10.03
    
    
    ** *Matrixx Initiatives, Inc. 2001 Long-Term Incentive Plan Form of Restricted
Stock Program Agreement (Time and Performance Vesting)31.1*
    
    
    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, &
TreasurerAugust 7, 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
    
    
    ** *Summary of Matrixx Initiatives, Inc. Director Restricted Stock Purchase Program10.02
    
    
    ** *Matrixx Initiatives, Inc. 2001 Long-Term Incentive Plan Form of Restricted
Stock Program Agreement (Time Vesting)10.03
    
    
    ** *Matrixx Initiatives, Inc. 2001 Long-Term Incentive Plan Form of Restricted
Stock Program Agreement (Time and Performance Vesting)31.1*
    
    
    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.