##### Table of Contents



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, 2005
 or
 o
    
    Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
 For the transition period from ___to ___
  Matrixx Initiatives, Inc.
  Delaware
    
    87-0482806(State or other jurisdiction
of incorporation or organization)
    
    (I.R.S. Employer
Identification Number)
 4742 N. 24 th Street, Suite 455
Phoenix, AZ 85016
 (602) 385-8888
 þ o
 þ o
 o þ




---



MATRIXX INITIATIVES, INC.
FORM 10-Q
INDEX
 PagePART I FINANCIAL INFORMATIONItem 1.Condensed Consolidated Balance Sheets as of
September 30, 2005 (Unaudited) and December 31, 2004
    
    
    1Condensed Consolidated Statements of
Income for the three months ended
September 30, 2005 and 2004 (Unaudited)
    
    
    3Condensed Consolidated Statements of
Income for the nine months ended
September 30, 2005 and 2004 (Unaudited)
    
    
    4Condensed Consolidated Statements of
Cash Flows for the nine months ended
September 30, 2005 and 2004 (Unaudited)
    
    
    5Notes to Condensed Consolidated
Financial Statements (Unaudited)
    
    
    6Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
    
    
    12Item 3. Quantitative and Qualitative Disclosures
About Market Risk
    
    
    25Item 4. Controls and Procedures
    
    
    25PART II OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    26Item 6. Exhibits
    
    
    26SIGNATURES
    
    
    27EX-31.1EX-31.2EX-32.1EX-32.2




---



##### Table of Contents



MATRIXX INITIATIVES, INC. AND SUBSIDIARY
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 September 30, 2005
    
    
    December 31, 2004(Unaudited)ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    7,335,746
    
    
    $
    12,694,486Accounts receivable:Trade, net allowance for doubtful
accounts of $601,282 and $555,240
    
    
    20,852,675
    
    
    
    12,386,026Other
    
    
    1,167,839
    
    
    
    Inventories
    
    
    10,573,896
    
    
    
    7,241,434Prepaid expenses and other
    
    
    922,344
    
    
    
    887,586Interest receivable
    
    
    71,273
    
    
    
    57,658Deferred tax asset
    
    
    1,568,917
    
    
    
    5,029,600Total Current Assets
    
    
    42,492,690
    
    
    
    38,296,790Property and Equipment, at cost:Office furniture and equipment
    
    
    883,179
    
    
    
    780,961Machine tooling
    
    
    150,000
    
    
    
    150,000Leasehold improvements
    
    
    178,757
    
    
    
    179,6441,211,936
    
    
    
    1,110,605Less accumulated depreciation
    
    
    (656,834
    )
    
    
    (457,718
    )Net Property
and Equipment
    
    
    555,102
    
    
    
    652,887Other Assets:Deposits
    
    
    505,854
    
    
    
    220,190Restricted cash
    
    
    5,000,000
    
    
    
    5,000,000Debt issuance costs, net of accumulated amortization
of $5,832 and $18,750
    
    
    17,495
    
    
    
    6,250Patents, net of accumulated amortization of $256,171
and $205,861
    
    
    867,429
    
    
    
    917,739Goodwill
    
    
    15,039,836
    
    
    
    15,039,836Total Other Assets
    
    
    21,430,614
    
    
    
    21,184,015Total Assets
    
    $
    64,478,406
    
    
    $
    60,133,692
  1




---



##### Table of Contents



MATRIXX INITIATIVES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
 September 30, 2005
    
    
    December 31, 2004(Unaudited)LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    3,820,702
    
    
    $
    4,699,316Accrued expenses
    
    
    4,779,546
    
    
    
    6,314,971Sales commissions
    
    
    917,692
    
    
    
    1,261,899Sales returns and allowances
    
    
    3,181,088
    
    
    
    2,605,260Accrued taxes
    
    
    156,300
    
    
    
    209,946Total Current Liabilities
    
    
    12,855,328
    
    
    
    15,091,392Deferred tax liability
    
    
    916,738
    
    
    
    916,738Total Liabilities
    
    
    13,772,066
    
    
    
    16,008,130Commitments 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, 9,578,395 and 9,520,198 shares
issued and outstanding
    
    
    9,578
    
    
    
    9,520Additional paid in capital
    
    
    43,158,252
    
    
    
    42,527,862Unearned compensation
    
    
    (80,500
    )
    
    
    Accumulated earnings
    
    
    8,015,314
    
    
    
    1,984,48451,102,644
    
    
    
    44,521,866Less common stock held in treasury, at cost
(53,800 and 53,800 shares)
    
    
    (396,304
    )
    
    
    (396,304
    )Total Stockholders Equity
    
    
    50,706,340
    
    
    
    44,125,562Total Liabilities and Stockholders Equity
    
    $
    64,478,406
    
    
    $
    60,133,692
  2




---



##### Table of Contents



MATRIXX INITIATIVES, INC. AND SUBSIDIARY
 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 Three months ended September 30,2005
    
    
    2004Net sales
    
    $
    25,202,624
    
    
    $
    16,904,856Cost of sales
    
    
    8,153,578
    
    
    
    5,234,606Gross Profit
    
    
    17,049,046
    
    
    
    11,670,250Operating expenses
    
    
    7,007,818
    
    
    
    5,428,992Research and development
    
    
    784,087
    
    
    
    353,509Income From Operations
    
    
    9,257,141
    
    
    
    5,887,749Other Income (Expense):Interest and other income
    
    
    114,514
    
    
    
    271,444Interest and other expense
    
    
    
    
    
    
    (22,937
    )Total Other Income (Expense)
    
    
    114,514
    
    
    
    248,507Income Before Provision For Income Taxes
    
    
    9,371,655
    
    
    
    6,136,256Provision for income taxes
    
    
    3,731,740
    
    
    
    2,459,272Net Income
    
    $
    5,639,915
    
    
    $
    3,676,984Net Income Per Share of Common Stock:Basic:Weighted Average Number of Common Shares Outstanding
    
    
    9,483,174
    
    
    
    9,491,191Net Income Per Share of Common Stock
    
    $
    0.59
    
    
    $
    0.39Diluted:Weighted Average Number of Common Shares Outstanding
    
    
    9,696,344
    
    
    
    9,536,399Net Income Per Share of Common Stock
    
    $
    0.58
    
    
    $
    0.39
  3




---



##### Table of Contents



MATRIXX INITIATIVES, INC. AND SUBSIDIARY
 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 Nine months ended September 30,2005
    
    
    2004Net sales
    
    $
    46,438,883
    
    
    $
    33,229,143Cost of sales
    
    
    14,075,832
    
    
    
    10,405,376Gross Profit
    
    
    32,363,051
    
    
    
    22,823,767Operating expenses
    
    
    20,360,853
    
    
    
    16,317,473Research and development
    
    
    2,249,219
    
    
    
    1,345,543Income From Operations
    
    
    9,752,979
    
    
    
    5,160,751Other Income (Expense):Interest and other income
    
    
    300,927
    
    
    
    345,794Interest and other expense
    
    
    
    
    
    
    (22,937
    )Total Other Income (Expense)
    
    
    300,927
    
    
    
    322,857Income Before Provision For Income Taxes
    
    
    10,053,906
    
    
    
    5,483,608Provision for income taxes
    
    
    4,023,076
    
    
    
    2,199,382Net Income
    
    $
    6,030,830
    
    
    $
    3,284,226Net Income Per Share of Common Stock:Basic:Weighted Average Number of Common Shares Outstanding
    
    
    9,482,262
    
    
    
    9,493,115Net Income Per Share of Common Stock
    
    $
    0.64
    
    
    $
    0.35Diluted:Weighted Average Number of Common Shares Outstanding
    
    
    9,702,307
    
    
    
    9,574,215Net Income Per Share of Common Stock
    
    $
    0.62
    
    
    $
    0.34
  4




---



##### Table of Contents



CONDENSED STATEMENTS OF CASH FLOWS
 Nine months ended September 30,2005
    
    
    2004Cash Flows From Operating Activities:Net income
    
    $
    6,030,830
    
    
    $
    3,284,226Adjustments to reconcile net income to net cash
provided (used) by operating activities:Depreciation
    
    
    199,116
    
    
    
    145,312Amortization
    
    
    50,310
    
    
    
    50,311Amortization of debt issuance costs
    
    
    14,202
    
    
    
    12,500Deferred income taxes
    
    
    3,460,683
    
    
    
    2,113,283Common stock issued for compensation
    
    
    506,884
    
    
    
    Changes in assets and liabilities:Accounts receivable
    
    
    (9,634,488
    )
    
    
    (801,114
    )Inventories
    
    
    (3,332,462
    )
    
    
    (5,626,991
    )Prepaid expenses and other
    
    
    (34,758
    )
    
    
    (682,060
    )Interest receivable
    
    
    (13,615
    )
    
    
    (35,589
    )Accounts payable
    
    
    (878,614
    )
    
    
    (1,438,090
    )Accrued expenses
    
    
    (1,933,278
    )
    
    
    (437,603
    )Sales returns and allowances
    
    
    575,828
    
    
    
    344,873Net Cash (Used) By Operating Activities
    
    
    (4,989,362
    )
    
    
    (3,070,942
    )Cash Flows From Investing Activities:Capital expenditures
    
    
    (101,331
    )
    
    
    (237,920
    )Deposits and other
    
    
    (285,664
    )
    
    
    107,480Restricted cash
    
    
    
    
    
    
    (5,000,000
    )Net Cash (Used) By Investing Activities
    
    
    (386,995
    )
    
    
    (5,130,440
    )Cash Flows From Financing Activities:Purchase of treasury stock
    
    
    
    
    
    
    (157,081
    )Debt issuance costs
    
    
    (25,447
    )
    
    
    (25,000
    )Proceeds from borrowing
    
    
    
    
    
    
    2,000,000Issuance of common stock
    
    
    43,064
    
    
    
    369,149Net Cash Provided By Financing Activities
    
    
    17,617
    
    
    
    2,187,068Net (Decrease) in Cash and Cash Equivalents
    
    
    (5,358,740
    )
    
    
    (6,014,314
    )Cash and Cash Equivalents at Beginning of Period
    
    
    12,694,486
    
    
    
    10,682,614Cash and Cash Equivalents at End of Period
    
    $
    7,335,746
    
    
    $
    4,668,300Supplemental Disclosure of Cash Flow Information:Cash paid during the period for:Interest
    
    $
    
    
    
    $
    14,194Income taxes
    
    
    653,954
    
    
    
    327,739
  5




---



##### Table of Contents



MATRIXX INITIATIVES, INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
    Accounting for Stock-Based Compensation Accounting for Stock-Based Compensation  Transition and Disclosure  an Amendment to SFAS 123 , Accounting for Stock
Issued to Employees .
 6




---



##### Table of Contents



MATRIXX INITIATIVES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income applicable to common shareholders, as
reported
    
    $
    5,639,915
    
    
    $
    3,676,984
    
    
    $
    6,030,830
    
    
    $
    3,284,226Stock-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
    
    
    
    234,036
    
    
    
    1,504,469
    
    
    
    807,967Pro forma Net Income
    
    $
    5,587,609
    
    
    $
    3,442,948
    
    
    $
    4,526,362
    
    
    $
    2,476,259Net income per share of common stock:Basic:As reported
    
    $
    0.59
    
    
    $
    0.39
    
    
    $
    0.64
    
    
    $
    0.35Pro forma
    
    $
    0.59
    
    
    $
    0.36
    
    
    $
    0.48
    
    
    $
    0.26DilutedAs reported
    
    $
    0.58
    
    
    $
    0.39
    
    
    $
    0.62
    
    
    $
    0.34Pro forma
    
    $
    0.58
    
    
    $
    0.36
    
    
    $
    0.47
    
    
    $
    0.26
   Earnings Per Share
  7




---



##### Table of Contents



MATRIXX INITIATIVES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income applicable to common shareholders
    
    $
    5,639,915
    
    
    $
    3,676,984
    
    
    $
    6,030,830
    
    
    $
    3,284,226Weighted average common shares outstanding  Basic
    
    
    9,483,174
    
    
    
    9,491,191
    
    
    
    9,482,262
    
    
    
    9,493,115Dilutive Securities
    
    
    213,170
    
    
    
    45,208
    
    
    
    220,045
    
    
    
    81,100Weighted average common shares outstanding  Diluted
    
    
    9,696,344
    
    
    
    9,536,399
    
    
    
    9,702,307
    
    
    
    9,574,215Net Income per common share:Basic
    
    $
    0.59
    
    
    $
    0.39
    
    
    $
    0.64
    
    
    $
    0.35Diluted
    
    $
    0.58
    
    
    $
    0.39
    
    
    $
    0.62
    
    
    $
    0.34
   September 30,
    
    
    December 31,2005
    
    
    2004Raw materials and packaging
    
    $
    4,755,635
    
    
    $
    2,140,915Finished goods
    
    
    6,198,385
    
    
    
    5,580,974Less reserve for obsolescence
    
    
    (380,124
    )
    
    
    (480,455
    )Total
    
    $
    10,573,896
    
    
    $
    7,241,434
  Share-Based Payment Accounting for Stock-Based Compensation, Accounting for Stock Issued to Employees
 8




---



##### Table of Contents



MATRIXX INITIATIVES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  Amendment
to Rule 4- 01(a) of Regulation S-X Regarding the Compliance Date for Statement of Financial
Accounting Standards No. 123 (Revised 2004), Share-Based Payment
  Inventory Costs  An amendment of ARB No. 43,
Chapter 4
 Accounting Changes and Error Corrections  A
Replacement of APB Opinion No. 20 and FASB Statement No. 3.
   9




---



##### Table of Contents



MATRIXX INITIATIVES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  Litigation
    Product Liability Matters
     10




---



##### Table of Contents



MATRIXX INITIATIVES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 .
    Securities Litigation Matters
  11




---



##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Overview
      12




---



##### Table of Contents



1)
    
    We compare our year to date sales and net income performance against our stated annual
goal for each. For fiscal 2005, our goal is to grow sales 25%  35% and net income 10% -
20% above the level realized in 2004. If current sales trends continue we expect to exceed
the above stated sales and income goals. However, due to increased
investments in marketing and research and development, we do not
expect fourth quarter 2005 earnings will achieve the level earned in
the fourth quarter of 2004, which was $0.17 per share. The Company
will provide further guidance as the cold and flu season develops. For the nine months ended September 30, 2005 net
sales have increased 40% and net income increased to approximately $6.0 million, or 84%
from net income of $3.3 million for the same period in 2004. As noted above, net income for
the first nine months reflects actual and expected reimbursement of $1.7 million for a
portion of legal expense incurred in defense of product liability lawsuits.2)
    
    We monitor our share of the cough and cold market. For the 12 weeks ended October 2,
2005, retail sales of our products (as measured by three outlet syndicated scanner data,
not including our largest customer, Wal-Mart) increased approximately 40% over the
comparable period in the previous year, while the entire cough and cold category increased
approximately 1% over the same period. The increased sales of our products for the 12 weeks
ended October 2, 2005 achieved a share of approximately 1.4% of the
entire cough and cold market compared to a share of 1.0% in the
previous year.3)
    
    We measure our ability to maintain strong gross margins on our products. We achieved an
average gross margin of 68% for the third quarter of 2005, which is below our goal of 70%,
and below the average gross margin of 69% achieved in the third quarter of 2004 (gross
margins on our existing products vary between 65% and 80%). The decrease in gross margins
is primarily attributable to higher start-up costs related to new products and increased
freight costs. Average gross margin for the first nine months of 2005 increased to 70%
compared to 69% for the first nine months of 2004.4)
    
    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, 2005, our operating expenses were approximately 44% of our net sales compared
to 49% for the first nine months of 2004. Operating expenses for the first nine months, as
a percentage of net sales, have been positively impacted by operating expense increasing at
a lower rate than sales growth. Legal expense continues to negatively impact results.
Year-to-date legal expense increased to $3.8 million (net of the $1.7 million insurance
reimbursement discussed in Note 7 of the Consolidated Financial Statements) compared to
$3.5 million in the first nine
months of 2004. The increased legal expense is primarily related to the product liability
lawsuits which have been filed against the Company (see Note 7 of the Condensed
Consolidated Financial Statements).5)
    
    We review the distribution of our products by key national retailers. Our ten largest
retail customers carry, on average, 14 of our 23 products (Zicam & Nasal Comfort) compared
to 12 of our 16 products in 2004. Those customers accounted for approximately 75% of our
net sales in the first nine months of 2005, and 71% of net sales for the first nine months
of 2004.
 13




---



##### Table of Contents



Critical Accounting Policies and Estimates
    Intangible Assets and Goodwill:
 Income Taxes:
  Revenue Recognition:
 Customer Sales Returns and Allowances:
 14




---



##### Table of Contents



Legal Contingencies:
 Results of Operations for the Three Months Ended September 30, 2005 Compared to the Three
Months Ended September 30, 2004
  Three Months Ended September 30,2005
    
    
    2004Net sales
    
    $
    25,202,624
    
    
    
    100
    %
    
    $
    16,904,856
    
    
    
    100
    %Cost of sales
    
    
    8,153,578
    
    
    
    32
    
    
    
    5,234,606
    
    
    
    31Gross profit
    
    
    17,049,046
    
    
    
    68
    
    
    
    11,670,250
    
    
    
    69Operating expenses
    
    
    7,007,818
    
    
    
    28
    
    
    
    5,428,992
    
    
    
    32Research & development
    
    
    784,087
    
    
    
    3
    
    
    
    353,509
    
    
    
    2Income from operations
    
    
    9,257,141
    
    
    
    37
    
    
    
    5,887,749
    
    
    
    35Interest and other income
    
    
    114,514
    
    
    
    
    
    
    
    271,444
    
    
    
    2Interest expense
    
    
    0
    
    
    
    
    
    
    
    (22,937
    )
    
    
    Income before income taxes
    
    
    9,371,655
    
    
    
    37
    
    
    
    6,136,256
    
    
    
    36Provision for income taxes
    
    
    3,731,740
    
    
    
    15
    
    
    
    2,459,272
    
    
    
    15Net income
    
    $
    5,639,915
    
    
    
    22
    %
    
    $
    3,676,984
    
    
    
    22
    %
 Net Sales
  Cost of Sales
  Gross Profit
  15




---



##### Table of Contents



Operating Expenses
     Research and Development
  Interest & Other Income
  Interest Expense
  Income Before Income Taxes
  Income Tax Expense
  16




---



##### Table of Contents



Net Income
  Results of Operations for the Nine Months Ended September 30, 2005 Compared to the Nine Months
Ended September 30, 2004
  Nine Months Ended September 30,2005
    
    
    2004Net sales
    
    $
    46,438,883
    
    
    
    100
    %
    
    $
    33,229,143
    
    
    
    100
    %Cost of sales
    
    
    14,075,832
    
    
    
    30
    
    
    
    10,405,376
    
    
    
    31Gross profit
    
    
    32,363,051
    
    
    
    70
    
    
    
    22,823,767
    
    
    
    69Operating expenses
    
    
    20,360,853
    
    
    
    44
    
    
    
    16,317,473
    
    
    
    49Research & development
    
    
    2,249,219
    
    
    
    5
    
    
    
    1,345,543
    
    
    
    4Income from operations
    
    
    9,752,979
    
    
    
    21
    
    
    
    5,160,751
    
    
    
    16Interest and other income
    
    
    300,927
    
    
    
    1
    
    
    
    345,794
    
    
    
    1Interest expense
    
    
    
    
    
    
    
    
    
    
    (22,937
    )
    
    
    Income before income taxes
    
    
    10,053,906
    
    
    
    22
    
    
    
    5,483,608
    
    
    
    17Provision for income taxes
    
    
    4,023,076
    
    
    
    9
    
    
    
    2,199,382
    
    
    
    7Net income
    
    $
    6,030,830
    
    
    
    13
    %
    
    $
    3,284,226
    
    
    
    10
    %
 Net Sales
  Cost of Sales
  Gross Profit
  17




---



##### Table of Contents



Operating Expenses
    )
 Research and Development
  Interest & Other Income
  Interest Expense
  Income Before Income Taxes
  Provision for Income Tax Expense
  18




---



##### Table of Contents



Net Income
  Liquidity and Capital Resources
       19




---



##### Table of Contents



Contractual Obligations
  Contractual Cash Obligations(In thousands of dollars)Payments due by Period as of September 30, 2005Less 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
    
    
    276
    
    
    
    121
    
    
    
    155
    
    
    
    0
    
    
    
    0Purchase Obligations
    
    
    2,871
    
    
    
    2,871
    
    
    
    0
    
    
    
    0
    
    
    
    0Other Long-Term Liabilities Reflected on the
Companys Balance Sheet under GAAP
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Total
    
    $
    3,147
    
    
    $
    2,992
    
    
    $
    155
    
    
    $
    0
    
    
    $
    0
 CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS AND RISK FACTORS
 Forward Looking Statements
  
    
    our expectations of exceeding previous guidance regarding 2005 net sales growth of 25%
to 35% and net income growth of 10% to 20%, compared to 2004;
    
    due to increased investments in marketing and research and
development, we do not expect fourth quarter 2005 earnings will
achieve the level earned in the fourth quarter of 2004, which was
$0.17 per share.
    
    our anticipation that we will continue to incur approximately $1.0 to $1.5 million in
legal expense each quarter as a result of the Zicam Cold Remedy product liability and
securities 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
will 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 belief that new advertising approaches and public relations efforts will continue to
build brand awareness and attract new users;
    
    our belief that the acquired Viridian intellectual property
will promote continued improvement in the design of the
Companys dry handle swab products;
    
    our expectation of negotiating suitable manufacturing
agreements with third-party contract manufacturers to produce the
dry-handle swab;
 20




---



##### Table of Contents




    
    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 anticipation of increased sales in the fourth quarter as
well as increased marketing and R&D expense;
    
    our belief that the new brand, Nasal Comfort, will gain consumer acceptance and retail distribution;
    
    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 monthly and adjust the
reserve amounts as actual product return experience continues to develop, and our
expectation that a higher sales returns allowance will be recorded in the future for new
products that we introduce until such products achieve market acceptance;
    
    our intention to evaluate and adjust as appropriate the deferred tax valuation allowance
and expectation of realizing the tax benefit arising from our tax loss carryforward;
    
    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 2005 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 Scientific Advisory Boards may reconvene from time to time to review research;
    
    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;
    
    we may need to commit an additional $5 million to the self-funded insurance program;
    
    our expectation regarding reimbursement for legal expense from our insurance carriers
and our belief that our insurance coverage is adequate;
    
    our having no plans to directly manufacture and store our products;
    
    our belief that acquiring Viridians assets and intellectual property will assist in
improving the swab design, achieving cost reductions, and ensure capacity; 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.
   21




---



##### Table of Contents



Risk Factors
 We may continue to incur significant costs resulting from product liability claims or
securities litigation
  Our new business focus means we have a limited operating history on which to assess our current and
prospective performance
  If our products, particularly our new brand Nasal Comfort, do not gain widespread market acceptance
or receive additional adverse publicity, our anticipated sales and results of operations will
suffer
  22




---



##### Table of Contents



Unanticipated problems associated with product development and commercialization could adversely
affect our operating results
  
    
    we may experience unanticipated or otherwise negative research and development results;
    
    existing or proposed products may be found to be ineffective or unsafe, or may otherwise
fail to receive required regulatory clearances or approvals;
    
    we may find that existing or proposed products, while effective, are uneconomical to
commercialize or market;
    
    we may be unable to produce sufficient product inventories to meet customer demand;
    
    existing or proposed products do not achieve broad market acceptance;
    
    existing or proposed products do not attain broad distribution or retail shelf space; or
    
    proprietary rights held by third parties preclude us from developing or marketing
existing or proposed products.
  Our inability to provide scientific proof for product claims may adversely affect our sales
  FDA and other government regulation may restrict our ability to sell our products
  We may fail to compete effectively, particularly against, larger more established pharmaceutical
and health products companies, or low cost generic drug manufacturers, causing our business and
operating results to suffer
  If we are unable to protect our intellectual property or if we infringe the intellectual property
of others, our financial condition and future prospects could be materially harmed
 23




---



##### Table of Contents



We do not have manufacturing capabilities of our own
  We may experience product backlogs
  Loss of key personnel
  Our board of directors is authorized to issue shares of preferred stock that could have rights
superior to our outstanding shares of common stock, and, if issued, could adversely impact the
value of our common stock
  
    
    voting rights, including the right to vote as a class on particular matters;
    
    preferences as to dividends and liquidation rights;
    
    conversion rights;
    
    anti-dilution protections; and
    
    redemption rights
 24




---



##### Table of Contents



The price of our stock may continue to be volatile
  
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
   
 Item 4. Controls and Procedures
  25




---



##### Table of Contents



PART II
OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 6. Exhibits
 Exhibit No.
    
    Title3.01
    
    
    Articles of Incorporation and Amendments thereto of the registrant (1)3.02
    
    
    Bylaws of the registrant (1)4.01
    
    
    Rights Agreement dated as of July 22, 2002 by and between the registrant and
Corporate Stock Transfer, Inc. (2)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 Registration Statement on Form
8-A, filed July 23, 2002, file number 001-31404. 26




---



##### Table of Contents



SIGNATURES
  Matrixx Initiatives, Inc./s/ Carl J. JohnsonCarl J. JohnsonPresident andChief Executive Officer/s/ William J. HemeltWilliam J. HemeltExecutive Vice President,Chief Financial Officer, &TreasurerNovember 3, 2005
 27