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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 December 31, 2009
 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.
  Delaware
(State or other jurisdiction 
of incorporation or organization)
    
    87-0482806
(I.R.S. Employer
Identification Number)
 8515 E. Anderson Drive
Scottsdale, AZ 85255
 (602) 385-8888
 þ o
 o o
  Large accelerated filer o
Accelerated filer þ
Non-accelerated filer o(Do not check if a smaller reporting company)
Smaller reporting company o
 o þ




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##### 



MATRIXX INITIATIVES, INC.
FORM 10-Q
INDEX
 PagePART I FINANCIAL INFORMATIONItem 1.
    
    Condensed Consolidated Balance Sheets as of December 31, 2009 (Unaudited) and March 31, 2009
    
    
    3Condensed Consolidated Statements of Income for the three months ended December 31, 2009 and 2008 (Unaudited)
    
    
    4Condensed Consolidated Statements of Operations for the nine months ended December 31, 2009 and 2008 (Unaudited)
    
    
    5Condensed Consolidated Statements of Cash Flows for the nine months ended December 31, 2009 and 2008 (Unaudited)
    
    
    6Notes to Condensed Consolidated  Financial Statements (Unaudited)
    
    
    7Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    20Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    32Item 4.
    
    Controls and Procedures
    
    
    33PART II OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    33Item 1A.
    
    Risk Factors
    
    
    33Item 6.
    
    Exhibits
    
    
    33SIGNATURES
    
    
    34EX-31.1EX-32.1
   2




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MATRIXX INITIATIVES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 December 31,
    
    March 31,2009
    
    2009ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    25,784,190
    
    
    $
    25,144,088Certificates of deposit
    
    
    7,485,803
    
    
    
    14,870,717Accounts receivable:Trade, net of allowance for doubtful accounts of $227,577 and $226,180
    
    
    15,786,964
    
    
    
    14,769,485Other receivable
    
    
    311,669
    
    
    
    Insurance receivable
    
    
    50,900
    
    
    
    25,514Inventories
    
    
    5,340,214
    
    
    
    7,740,343Prepaid expenses
    
    
    4,376,150
    
    
    
    2,035,628Interest receivable
    
    
    7,879
    
    
    
    13,867Income tax receivable
    
    
    1,439,479
    
    
    
    1,316,102Current deferred tax asset
    
    
    5,192,481
    
    
    
    1,636,707Total Current Assets
    
    
    65,775,729
    
    
    
    67,552,451Property and Equipment, at cost:Office furniture and computer equipment
    
    
    1,722,176
    
    
    
    1,738,727Machine tooling and manufacturing equipment
    
    
    4,402,847
    
    
    
    4,581,866Laboratory furniture and equipment
    
    
    486,459
    
    
    
    484,215Leasehold improvements
    
    
    562,738
    
    
    
    544,2117,174,220
    
    
    
    7,349,019Less accumulated depreciation
    
    
    (3,649,612
    )
    
    
    (3,219,081
    )Net Property and Equipment
    
    
    3,524,608
    
    
    
    4,129,938Other Assets:Deposits
    
    
    636,924
    
    
    
    2,913,855Other assets
    
    
    30,789
    
    
    
    30,789Debt issuance costs, net of accumulated amortization of $14,395 and $12,596
    
    
    
    
    
    
    1,799Patents, net of accumulated amortization of $292,157 and $725,956
    
    
    812,858
    
    
    
    1,691,505Non-current deferred tax asset
    
    
    2,754,926
    
    
    
    Goodwill
    
    
    
    
    
    
    15,039,836Total Other Assets
    
    
    4,235,497
    
    
    
    19,677,784Total Assets
    
    $
    73,535,834
    
    
    $
    91,360,173LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    2,359,212
    
    
    $
    3,010,728Accrued expenses
    
    
    7,189,682
    
    
    
    9,665,310Sales commissions
    
    
    652,729
    
    
    
    404,899Sales returns and allowances
    
    
    1,305,492
    
    
    
    1,611,052Legal liability
    
    
    740,000
    
    
    
    785,000Total Current Liabilities
    
    
    12,247,115
    
    
    
    15,476,989Deferred tax liability
    
    
    
    
    
    
    2,806,001Total Liabilities
    
    
    12,247,115
    
    
    
    18,282,990Commitments 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, 9,455,620 and 9,273,949 shares issued
    
    
    9,455
    
    
    
    9,274Additional paid-in capital
    
    
    39,216,153
    
    
    
    37,077,316Retained earnings
    
    
    22,063,111
    
    
    
    35,990,593Total Stockholders Equity
    
    
    61,288,719
    
    
    
    73,077,183Total Liabilities and Stockholders Equity
    
    $
    73,535,834
    
    
    $
    91,360,173
  3




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MATRIXX INITIATIVES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED DECEMBER 31, 2009 AND 2008
(Unaudited)
 2009
    
    2008Net sales
    
    $
    28,462,685
    
    
    $
    38,702,412Cost of sales
    
    
    7,649,820
    
    
    
    11,204,657Gross Profit
    
    
    20,812,865
    
    
    
    27,497,755Selling, general and administrative expenses
    
    
    14,067,533
    
    
    
    18,869,536Research and development
    
    
    543,478
    
    
    
    796,996Income From Operations
    
    
    6,201,854
    
    
    
    7,831,223Interest and other income
    
    
    33,553
    
    
    
    47,929Income Before Income Tax Provision
    
    
    6,235,407
    
    
    
    7,879,152Income tax provision
    
    
    2,409,024
    
    
    
    3,127,707Net Income
    
    $
    3,826,383
    
    
    $
    4,751,445Net Income Per Share of Common Stock:Basic:Weighted Average Number of Common Shares
Outstanding
    
    
    9,228,970
    
    
    
    9,179,232Net Income Per Share of Common Stock
    
    $
    0.41
    
    
    $
    0.52Diluted:Weighted Average Number of Common Shares
Outstanding
    
    
    9,228,970
    
    
    
    9,471,944Net Income Per Share of Common Stock
    
    $
    0.41
    
    
    $
    0.50
  4




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MATRIXX INITIATIVES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED DECEMBER 31, 2009 AND 2008
(Unaudited)
 2009
    
    2008Net sales
    
    $
    61,005,711
    
    
    $
    80,842,362Cost of sales
    
    
    17,272,795
    
    
    
    24,777,855Gross Profit
    
    
    43,732,916
    
    
    
    56,064,507Selling, general and administrative expenses
    
    
    40,706,579
    
    
    
    36,168,540Research and development
    
    
    1,896,620
    
    
    
    2,550,505Impairment of goodwill and other assets
    
    
    23,867,158
    
    
    
    Income (Loss) From Operations
    
    
    (22,737,411
    )
    
    
    17,345,462Interest and other income
    
    
    119,023
    
    
    
    239,915Income (Loss) Before Income Tax Provision
(Benefit)
    
    
    (22,618,418
    )
    
    
    17,585,377Income tax provision (benefit)
    
    
    (8,690,936
    )
    
    
    6,857,907Net Income (Loss)
    
    $
    (13,927,482
    )
    
    $
    10,727,470Net Income (Loss) Per Share of Common Stock:Basic:Weighted Average Number of Common Shares
Outstanding
    
    
    9,209,400
    
    
    
    9,277,560Net Income (Loss) Per Share of Common Stock
    
    $
    (1.51
    )
    
    $
    1.16Diluted:Weighted Average Number of Common Shares
Outstanding
    
    
    9,209,400
    
    
    
    9,564,561Net Income (Loss) Per Share of Common Stock
    
    $
    (1.51
    )
    
    $
    1.12
  5




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MATRIXX INITIATIVES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31, 2009 AND 2008
(Unaudited)
 2009
    
    
    2008Cash Flows From Operating ActivitiesNet income (loss)
    
    $
    (13,927,482
    )
    
    $
    10,727,470Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities:Depreciation
    
    
    579,557
    
    
    
    1,017,754Amortization
    
    
    75,723
    
    
    
    112,863Deferred income taxes
    
    
    (9,116,701
    )
    
    
    60,135Common stock issued for compensation
    
    
    1,964,705
    
    
    
    1,764,123Asset impairments and abandonments
    
    
    24,287,130
    
    
    
    Changes in assets and liabilities:Accounts receivable
    
    
    (1,017,479
    )
    
    
    (12,993,272
    )Insurance receivable
    
    
    (25,386
    )
    
    
    19,815Interest and other receivables
    
    
    (305,681
    )
    
    
    68,324Income taxes
    
    
    (123,377
    )
    
    
    (1,072,817
    )Inventories
    
    
    (1,527,632
    )
    
    
    1,073,672Prepaid expenses and other
    
    
    (2,340,522
    )
    
    
    (382,460
    )Accounts payable
    
    
    (651,516
    )
    
    
    4,943,409Accrued expenses
    
    
    (2,227,798
    )
    
    
    2,589,166Legal liability
    
    
    (45,000
    )
    
    
    (35,000
    )Sales returns and allowances
    
    
    (305,560
    )
    
    
    450,422Net Cash Provided (Used) By Operating Activities
    
    
    (4,707,019
    )
    
    
    8,343,604Cash Flows From Investing ActivitiesPurchases of certificates of deposit
    
    
    (3,736,525
    )
    
    
    Maturities of certificates of deposit
    
    
    11,121,439
    
    
    
    Capital expenditures
    
    
    (24,912
    )
    
    
    (447,331
    )Restricted cash
    
    
    
    
    
    
    500,000Deposits and other
    
    
    (2,187,194
    )
    
    
    (14,464
    )Net Cash Provided By Investing Activities
    
    
    5,172,808
    
    
    
    38,205Cash Flows From Financing Activities:Issuance of common stock
    
    
    1,362,219
    
    
    
    1,138,157Purchase of treasury stock
    
    
    (1,187,906
    )
    
    
    (6,786,597
    )Net Cash Provided (Used) By Financing Activities
    
    
    174,313
    
    
    
    (5,648,440
    )Net Increase in Cash and Cash Equivalents
    
    
    640,102
    
    
    
    2,733,369Cash and Cash Equivalents at Beginning of Period
    
    
    25,144,088
    
    
    
    27,932,672Cash and Cash Equivalents at End of Period
    
    $
    25,784,190
    
    
    $
    30,666,041Supplemental Disclosure of Cash Flow Information:Cash paid for income taxes
    
    $
    8,000
    
    
    $
    7,588,795Supplemental Disclosure of Noncash Financing Activities:Retirement of treasury stock
    
    $
    1,187,906
    
    
    $
    7,650,054
  6




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MATRIXX INITIATIVES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
   TM
    7




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MATRIXX INITIATIVES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
        8




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MATRIXX INITIATIVES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
     Three Months Ended
    
    
    Nine Months EndedDecember 31,
    
    
    December 31,2009
    
    
    2008
    
    
    2009
    
    
    2008Net income (loss) applicable to common shareholders
    
    $
    3,826,383
    
    
    $
    4,751,445
    
    
    $
    (13,927,482
    )
    
    $
    10,727,470Weighted average common shares outstanding  Basic
    
    
    9,228,970
    
    
    
    9,179,232
    
    
    
    9,209,400
    
    
    
    9,277,560Dilutive Securities:Options
    
    
    
    
    
    
    109,754
    
    
    
    
    
    
    
    126,243Restricted Stock
    
    
    
    
    
    
    182,958
    
    
    
    
    
    
    
    160,758Weighted average common shares outstanding  Diluted
    
    
    9,228,970
    
    
    
    9,471,944
    
    
    
    9,209,400
    
    
    
    9,564,561Net income (loss) per common share:Basic
    
    $
    0.41
    
    
    $
    0.52
    
    
    $
    (1.51
    )
    
    $
    1.16Diluted
    
    $
    0.41
    
    
    $
    0.50
    
    
    $
    (1.51
    )
    
    $
    1.12
 9




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MATRIXX INITIATIVES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
   December 31,
    
    
    March 31,2009
    
    
    2009Raw materials and packaging
    
    $
    1,179,497
    
    
    $
    2,618,261Finished goods
    
    
    4,160,717
    
    
    
    5,122,082Total
    
    $
    5,340,214
    
    
    $
    7,740,343
  Zicam Cold Remedy Nasal Gel and Cold Remedy Gel Swabs Recall
   ChewCaps, RapidMelts® and RapidMelts + C Recall
 ®
 10




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MATRIXX INITIATIVES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  Canadian Products Withdrawal
     Product Liability Matters
 General.
  11




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MATRIXX INITIATIVES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Our Position and Our Response
 Product Safety
   Product Effectiveness
 Total Pending Product Liability Lawsuits
 Cases since September 30, 2009 (Pending in Federal Courts).
 12




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MATRIXX INITIATIVES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Personal Injury:
 Date Filed
    
    United States District Court
    
    Lead Plaintiff10/1/09
    
    Middle District, Florida
    
    Luten10/1/09
    
    Western District, Oklahoma
    
    Wyatt10/9/09
    
    Southern District, Texas
    
    Mikolas10/16/09
    
    Arizona
    
    Vaughan10/20/09
    
    Arizona
    
    Shartle10/26/09
    
    Arizona
    
    Marion10/26/09
    
    Arizona
    
    McCluskey10/29/09
    
    Oregon
    
    Smith11/6/09
    
    Northern District, Illinois
    
    Wright11/9/09
    
    Idaho
    
    Fargo11/17/09
    
    Minnesota
    
    Bridenstine11/19/09
    
    Hawaii
    
    Kwiatkowski11/19/09
    
    Hawaii
    
    Wilcox11/20/09
    
    Rhode Island
    
    Dugas11/20/09
    
    Northern District, California
    
    Neilson11/24/09
    
    Central District, California
    
    Kersanty12/2/09
    
    Eastern District, New York
    
    Woods12/7/09
    
    Eastern District, Tennessee
    
    Reich12/14/09
    
    Eastern District, Tennessee
    
    George12/16/09
    
    Florida
    
    Davis12/23/09
    
    Southern District, Indiana
    
    Goodall12/23/09
    
    Middle District, Florida
    
    Lewis12/30/09
    
    New York
    
    Catalano1/8/10
    
    Northern District, Texas
    
    McDaniel1/8/10
    
    Northern District, Texas
    
    Rosenberg1/15/10
    
    Montana
    
    Miller1/21/10
    
    Arizona
    
    Poole
 Putative Class Actions for Consumer Fraud:
 Date Filed
    
    United States District Court
    
    Lead Plaintiff10/12/09
    
    Northern District, Ohio
    
    Suhr11/17/09
    
    Northern District, Illinois
    
    Webb
 Multi-District Litigation Matters
 13




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MATRIXX INITIATIVES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Cases since September 30, 2009 (Pending in State Courts).
 Personal Injury:
 Date Filed
    
    Court
    
    Lead Plaintiff10/5/09
    
    Marin County, California
    
    Nissim10/7/09
    
    Lahaina County, Hawaii
    
    Welsh10/16/09
    
    San Francisco County,
California
    
    Bobrink10/19/09
    
    Broward County, Florida
    
    Bunin10/20/09
    
    King County, Washington
    
    Touhey10/30/09
    
    Maricopa County, Arizona
    
    Ambrose10/30/09
    
    Maricopa County, Arizona
    
    Glasser11/24/09
    
    Dallas County, Texas
    
    Touhey11/25/09
    
    Los Angeles County, California
    
    Collins11/30/09
    
    Davis County, Utah
    
    Olsen12/21/09
    
    St. Clark County, Illinois
    
    Bollone12/22/09
    
    Merced County, California
    
    Alexander12/23/09
    
    Maricopa County, Arizona
    
    Kimball12/24/09
    
    Contra Costa County,
California
    
    Bradley12/28/09
    
    Okeechobee County, Florida
    
    Everett12/29/09
    
    Maricopa County, Arizona
    
    Johnson12/31/09
    
    Madison County, Illinois
    
    Glisson12/31/09
    
    Tarrant County, Texas
    
    Nicholas1/5/10
    
    Kootenai County, Idaho
    
    Campbell1/5/10
    
    Kootenai County, Idaho
    
    Cooper1/14/10
    
    Kootenai County, Idaho
    
    Moore1/14/10
    
    Durham County, North Carolina
    
    Magers1/19/10
    
    Maricopa County, Arizona
    
    Baietty1/19/10
    
    Maricopa County, Arizona
    
    Colello1/19/10
    
    Maricopa County, Arizona
    
    Remming1/20/10
    
    Maricopa County, Arizona
    
    Alex1/20/10
    
    Maricopa County, Arizona
    
    Marshall1/25/10
    
    Maricopa County, Arizona
    
    Viviani
 Putative Class Action for Consumer Fraud:
 Cases Dismissed Subsequent to September 30, 2009 (Federal Courts).
 14




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MATRIXX INITIATIVES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Cases Dismissed Subsequent to September 30, 2009 (State Courts).
 Date Filed
    
    Court
    
    Named Plaintiff
    
    Date Dismissed8/14/09
    
    Stanislaus County, California
    
    McDaniel
    
    10/15/09
 Settlement with Certain Claimants.
 Potential Claimants.
  Litigation Reserves
 15




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MATRIXX INITIATIVES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  Product Recall Related Litigation
 tm ®
   Intellectual Property Protection
  Securities Litigation Matters
  16




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MATRIXX INITIATIVES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
     Shareholder Derivative Lawsuits
    17




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MATRIXX INITIATIVES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
    Related Legal Matters  Informal Inquiries
   Legal Expense
    18




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MATRIXX INITIATIVES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
      QuotedPrices in
    
    SignificantActive
    
    Other
    
    SignificantMarkets for
    
    Observable
    
    Unobservable
    
    TotalIdentical Assets
    
    Inputs
    
    Inputs
    
    GainsDescription
    
    December 31, 2009
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)
    
    (Losses)Goodwill
    
    $
    0
    
    
    
    
    
    
    
    
    
    
    $
    0
    
    
    
    ($15,039,836
    )Deposits
    
    $
    0
    
    
    
    
    
    
    $
    0
    
    
    
    
    
    
    
    ($4,283,685
    )Patent
    
    $
    0
    
    
    
    
    
    
    $
    0
    
    
    
    
    
    
    
    ($615,877
    )
  19




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MATRIXX INITIATIVES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
    Cash, cash equivalents, accounts payable and accounts receivable
 Certificates of Deposit: c
 
 Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
 Overview
 ®
    20




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3 Months Ended December 31,
    
    
    9 Months Ended December 31,$000s
    
    2009

    
    % NS

    
    2008

    
    % NS
    
    
    2009
    
    
    % NS
    
    
    2008
    
    
    % NSNet Sales
    
    $
    28,463
    

    
    
    100
    %

    
    $
    38,702
    

    
    
    100
    %
    
    
    $
    61,006
    
    
    
    
    100
    %
    
    
    $
    80,842
    
    
    
    
    100
    %Marketing
    
    $
    8,643
    

    
    
    30
    %

    
    $
    13,209
    

    
    
    34
    %
    
    
    $
    14,473
    
    
    
    
    24
    %
    
    
    $
    19,840
    
    
    
    
    25
    %Sales
    
    $
    1,374
    

    
    
    5
    %

    
    $
    1,025
    

    
    
    3
    %
    
    
    $
    2,847
    
    
    
    
    5
    %
    
    
    $
    2,913
    
    
    
    
    4
    %General & Administrative
    
    $
    2,293
    

    
    
    8
    %

    
    $
    4,197
    

    
    
    11
    %
    
    
    $
    18,659
    
    
    
    
    31
    %
    
    
    $
    11,474
    
    
    
    
    14
    %Litigation
    
    $
    1,758
    

    
    
    6
    %

    
    $
    439
    

    
    
    1
    %
    
    
    $
    4,727
    
    
    
    
    8
    %
    
    
    $
    1,941
    
    
    
    
    2
    %Total Selling, General,
and Administrative
    
    $
    14,068
    

    
    
    49
    %

    
    $
    18,870
    

    
    
    49
    %
    
    
    $
    40,706
    
    
    
    
    67
    %
    
    
    $
    36,168
    
    
    
    
    45
    %Research & Development
    
    $
    543
    

    
    
    2
    %

    
    $
    797
    

    
    
    2
    %
    
    
    $
    1,897
    
    
    
    
    3
    %
    
    
    $
    2,551
    
    
    
    
    3
    %Asset Impairments
    
    $
    0
    

    
    
    0
    %

    
    $
    0
    

    
    
    0
    %
    
    
    $
    23,867
    
    
    
    
    39
    %
    
    
    $
    0
    
    
    
    
    0
    %
   21




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##### Table of Contents



1)
    
    We compare our year-to-date sales and net income performance against our stated annual
goal for each. Due to the FDA action, we withdrew our previous guidance. The Company is now
executing operating plans that reflect fiscal 2010 revenue in the $68 million to $72
million range. In addition, the Company anticipates spending approximately $10 million on
marketing activities during the quarter ending March 31, 2010 to further invest in our oral
Cold Remedy products. Due to the high level of marketing support planned for the fourth
quarter relative to anticipated sales, the Company expects to incur a sizable loss in that
quarter.2)
    
    We monitor our share of the cough and cold market because increased consumer purchases
of our products are an indicator of growth. Due to the recall and withdrawal from the
market of our nasal Cold Remedy products, we are now focusing on consumer consumption of
our oral Cold Remedy products. We believe this focus will allow us to better evaluate the
strength of the brand as well as conversion to oral Cold Remedy products. For the 12 weeks
ended December 27, 2009, retail unit sales of our oral Cold Remedy products (as measured by
three outlet syndicated scanner data, not including our largest customer, Wal-Mart and
excluding nasal Cold Remedy) increased approximately 16% over the comparable period in the
previous year, while the entire cough and cold category increased approximately 5% over the
same period.3)
    
    We measure our ability to maintain strong gross margins on our products. During the
nine months ended December 31, 2009, we realized an average gross margin of 72%, compared
to the 69% average gross margin achieved in the nine months ended December 31, 2008. Gross
margins on our existing products vary between 55% and 80%. The higher average gross margin
realized in the period was due to the mix of products sold and a lower average cost per
unit sold.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. If we realize a lower level of sales in the future due to an inability to sell our
nasal Cold Remedy products, our operating expense as a percentage of sales will increase.
 22




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##### Table of Contents



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. During the past year, a number of our
largest customers began selling store brand versions of certain Zicam products. We have
seen the number of store brand products significantly increase going into this years cold
season. Store brand products are generally sold at a substantial discount to branded
products. An increase in store brand sales could adversely affect our mix of products at
retail as well as our future sales levels.
 Critical Accounting Policies and Estimates
    Intangible Assets and Goodwill:
  Income Taxes.
 23




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##### Table of Contents



Revenue Recognition:
 Sales Returns and Allowances:
  Accounts Receivable and Allowance for Doubtful Accounts:
 Legal Contingencies:
 24




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##### Table of Contents



Product Recalls:
 Results of Operations for the Three Months Ended December 31, 2009 Compared to the Three
Months Ended December 31, 2008
  Three Months Ended December 31,2009
    
    
    2008Net sales
    
    $
    28,462,685
    
    
    
    100
    %
    
    $
    38,702,412
    
    
    
    100
    %Cost of sales
    
    
    7,649,820
    
    
    
    27
    
    
    
    11,204,657
    
    
    
    29Gross profit
    
    
    20,812,865
    
    
    
    73
    
    
    
    27,497,755
    
    
    
    71Selling, general and administrative
    
    
    14,067,533
    
    
    
    49
    
    
    
    18,869,536
    
    
    
    49Research & development
    
    
    543,478
    
    
    
    2
    
    
    
    796,996
    
    
    
    2Income from operations
    
    
    6,201,854
    
    
    
    22
    
    
    
    7,831,223
    
    
    
    20Interest and other income
    
    
    33,553
    
    
    
    
    
    
    
    47,929
    
    
    
    Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income before income taxes
    
    
    6,235,407
    
    
    
    22
    
    
    
    7,879,152
    
    
    
    20Provision for income taxes
    
    
    2,409,024
    
    
    
    9
    
    
    
    3,127,707
    
    
    
    8Net Income
    
    $
    3,826,383
    
    
    
    13
    %
    
    $
    4,751,445
    
    
    
    12
    %
 Net Sales
  Cost of Sales
  Gross Profit
  25




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##### Table of Contents



Selling, General & Administrative (SG&A)
   Research and Development
  Interest & Other Income
  Income Before Income Taxes
  Provision for Income Taxes
  Net Income
  Results of Operations for the Nine Months Ended December 31, 2009 Compared to the Nine Months
Ended December 31, 2008
 26




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##### Table of Contents



Nine Months Ended December 31,2009
    
    
    2008Net sales
    
    $
    61,005,711
    
    
    
    100
    %
    
    $
    80,842,362
    
    
    
    100
    %Cost of sales
    
    
    17,272,795
    
    
    
    28
    
    
    
    24,777,855
    
    
    
    31Gross profit
    
    
    43,732,916
    
    
    
    72
    
    
    
    56,064,507
    
    
    
    69Selling, general and administrative
    
    
    40,706,579
    
    
    
    67
    
    
    
    36,168,540
    
    
    
    45Research & development
    
    
    1,896,620
    
    
    
    3
    
    
    
    2,550,505
    
    
    
    3Asset Impairments
    
    
    23,867,158
    
    
    
    39
    
    
    
    
    
    
    
    Income (Loss) from operations
    
    
    (22,737,441
    )
    
    
    (37
    )
    
    
    17,345,462
    
    
    
    21Interest and other income
    
    
    119,023
    
    
    
    
    
    
    
    239,915
    
    
    
    Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income (Loss) before income taxes
    
    
    (22,618,418
    )
    
    
    (37
    )
    
    
    17,585,377
    
    
    
    22Provision (Benefit) for income taxes
    
    
    (8,690,936
    )
    
    
    (14
    )
    
    
    6,857,907
    
    
    
    8Net Income (Loss)
    
    $
    (13,927,482
    )
    
    
    (23
    )%
    
    $
    10,727,470
    
    
    
    13
    %
 Net Sales
  Cost of Sales
  Gross Profit
  Selling, General & Administrative (SG&A)
  27




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##### Table of Contents



Research and Development
  Asset Impairments
  Interest & Other Income
  Income (Loss) Before Income Taxes
  Provision (Benefit) for Income Tax Expense
  28




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##### Table of Contents



Net Income (Loss)
  Liquidity and Capital Resources
      29




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##### Table of Contents



Contractual Obligations
  Contractual Cash Obligations(In thousands of dollars)Payments due by Period as of December 31, 2009Less 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
    
    
    1,665
    
    
    
    426
    
    
    
    892
    
    
    
    347
    
    
    
    0Purchase Obligations
    
    
    3,006
    
    
    
    3,006
    
    
    
    0
    
    
    
    0
    
    
    
    0Other Long-Term Liabilities Reflected on the
Companys Balance Sheet under GAAP
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Total
    
    $
    4,671
    
    
    $
    3,432
    
    
    $
    892
    
    
    $
    347
    
    
    $
    0
 CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
 Forward Looking Statements
  
    
    our belief that the reserve for recall costs will be sufficient;
    
    our expectations regarding the impact of the recall on demand for Zicam products;
    
    our expectation that certain previous users of our nasal Cold Remedy product will now
purchase our oral Cold Remedy product;
 30




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##### Table of Contents




    
    our expectations regarding returns of discontinued products;
    
    our expectation regarding continued expansion of the Zicam line of products;
    
    our expectation of achieving fiscal 2010 revenue in the $68 million to $72 million
range;
    
    our expectation of incurring a sizable net loss in the fourth quarter of fiscal 2010;
    
    our belief that our allowance for uncollectible accounts is adequate;
    
    our expectation that ongoing legal expense will be between $1.5 million and $2 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 plaintiffs 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 may be affected by the recall of our nasal
Cold Remedy products;
    
    our expectations regarding the effect of accounting standard updates;
    
    our expectation that our mix of products sold will change due to seasonality and
varying growth rates within the market groups;
    
    our expectation that retailers will replace, at least in part, discontinued items with
new or different Zicam products;
    
    our expectations regarding store brand competition;
    
    our expectation that over time, sales to retailers will reflect retail sales of our
products to consumers;
    
    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 regarding the utilization of our tax loss benefit;
    
    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;
 31




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##### Table of Contents




    
    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
products during the 2009/2010 cold season;
    
    our belief that focusing on consumer consumption of our oral Cold Remedy products will
allow us to evaluate the strength of 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 2009/2010 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.
    
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
  32




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##### Table of Contents



Item 4. Controls and Procedures
  
 PART II
OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
 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)31.1*
    
    
    Certification of CEO and CFO pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
 33




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##### Table of Contents



Exhibit No.
    
    Title32.1*
    
    
    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 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. 
 SIGNATURES
  Matrixx Initiatives, Inc./s/  William J. HemeltWilliam HemeltChief Executive Officer and
Principal Financial Officer 
February 5, 2010 34