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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 Form 10-Q
 (Mark One)
 þ
    
    Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarter ended September 30, 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
    
    87-0482806(State or other jurisdiction 
of incorporation or organization)
    
    (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
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ




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##### 



MATRIXX INITIATIVES, INC.
FORM 10-Q
INDEX
 PART I
    
    FINANCIAL INFORMATION
    
    
    PageItem 1.
    
    Condensed Consolidated Balance Sheets as of September 30, 2009 (Unaudited) and March 31, 2009
    
    
    3Condensed Consolidated Statements of Income for the three months ended September 30, 2009 and 2008 (Unaudited)
    
    
    4Condensed Consolidated Statements of Operations for the six months ended September 30, 2009 and 2008 (Unaudited)
    
    
    5Condensed Consolidated Statements of Cash Flows for the six months ended September 30, 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
    
    
    33Item 4.
    
    Controls and Procedures
    
    
    33PART II
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    33Item 1A.
    
    Risk Factors
    
    
    34Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    34Item 6.
    
    Exhibits
    
    
    34SIGNATURES
    
    
    
    
    35EX-10.01EX-10.02EX-31.1EX-32.1
   2




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MATRIXX INITIATIVES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 September 30,
    
    March 31,2009
    
    2009ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    12,345,997
    
    
    $
    25,144,088Certificates of deposit
    
    
    11,235,803
    
    
    
    14,870,717Accounts receivable:Trade, net of allowance for doubtful accounts of $222,113 and $226,180
    
    
    22,967,981
    
    
    
    14,769,485Other receivable
    
    
    312,350
    
    
    
    Insurance receivable
    
    
    50,900
    
    
    
    25,514Inventories
    
    
    5,149,571
    
    
    
    7,740,343Prepaid expenses
    
    
    3,544,287
    
    
    
    2,035,628Interest receivable
    
    
    9,616
    
    
    
    13,867Income tax receivable
    
    
    1,424,576
    
    
    
    1,316,102Current deferred tax asset
    
    
    7,472,611
    
    
    
    1,636,707Total Current Assets
    
    
    64,513,692
    
    
    
    67,552,451Property and Equipment, at cost:Office furniture and computer equipment
    
    
    1,760,327
    
    
    
    1,738,727Machine tooling and manufacturing equipment
    
    
    4,402,847
    
    
    
    4,581,866Laboratory furniture and equipment
    
    
    486,459
    
    
    
    484,215Leasehold improvements
    
    
    562,738
    
    
    
    544,2117,212,371
    
    
    
    7,349,019Less accumulated depreciation
    
    
    (3,486,429
    )
    
    
    (3,219,081
    )Net Property and Equipment
    
    
    3,725,942
    
    
    
    4,129,938Other Assets:Deposits
    
    
    702,292
    
    
    
    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 $273,106 and $725,956
    
    
    831,910
    
    
    
    1,691,505Non-current deferred tax asset
    
    
    2,893,680
    
    
    
    Goodwill
    
    
    
    
    
    
    15,039,836Total Other Assets
    
    
    4,458,671
    
    
    
    19,677,784Total Assets
    
    $
    72,698,305
    
    
    $
    91,360,173LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    1,790,086
    
    
    $
    3,010,728Accrued expenses
    
    
    10,921,478
    
    
    
    9,665,310Sales commissions
    
    
    339,997
    
    
    
    404,899Sales returns and allowances
    
    
    1,918,771
    
    
    
    1,611,052Legal liability
    
    
    740,000
    
    
    
    785,000Total Current Liabilities
    
    
    15,710,332
    
    
    
    15,476,989Deferred tax liability
    
    
    
    
    
    
    2,806,001Total Liabilities
    
    
    15,710,332
    
    
    
    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
    
    
    38,741,790
    
    
    
    37,077,316Retained earnings
    
    
    18,236,728
    
    
    
    35,990,593Total Stockholders Equity
    
    
    56,987,973
    
    
    
    73,077,183Total Liabilities and Stockholders Equity
    
    $
    72,698,305
    
    
    $
    91,360,173
  3




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MATRIXX INITIATIVES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(Unaudited)
 2009
    
    2008Net sales
    
    $
    25,626,789
    
    
    $
    33,631,906Cost of sales
    
    
    6,829,913
    
    
    
    10,378,915Gross Profit
    
    
    18,796,876
    
    
    
    23,252,991Selling, general and administrative expenses
    
    
    10,150,409
    
    
    
    8,836,878Research and development
    
    
    418,749
    
    
    
    1,143,214Income From Operations
    
    
    8,227,718
    
    
    
    13,272,899Interest and other income
    
    
    38,190
    
    
    
    84,752Income Before Income Tax Provision
    
    
    8,265,908
    
    
    
    13,357,651Income tax provision
    
    
    3,187,521
    
    
    
    5,115,769Net Income
    
    $
    5,078,387
    
    
    $
    8,241,882Net Income Per Share of Common Stock:Basic:Weighted Average Number of Common Shares
Outstanding
    
    
    9,228,970
    
    
    
    9,287,871Net Income Per Share of Common Stock
    
    $
    0.55
    
    
    $
    0.89Diluted:Weighted Average Number of Common Shares
Outstanding
    
    
    9,228,970
    
    
    
    9,582,672Net Income Per Share of Common Stock
    
    $
    0.55
    
    
    $
    0.86
  4




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MATRIXX INITIATIVES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(Unaudited)
 2009
    
    2008Net sales
    
    $
    32,543,026
    
    
    $
    42,139,950Cost of sales
    
    
    9,622,975
    
    
    
    13,573,198Gross Profit
    
    
    22,920,051
    
    
    
    28,566,752Selling, general and administrative expenses
    
    
    26,639,046
    
    
    
    17,299,004Research and development
    
    
    1,353,142
    
    
    
    1,753,509Impairment of goodwill and other assets
    
    
    23,867,158
    
    
    
    Income (Loss) From Operations
    
    
    (28,939,295
    )
    
    
    9,514,239Interest and other income
    
    
    85,470
    
    
    
    191,986Income (Loss) Before Income
Tax Provision (Benefit)
    
    
    (28,853,825
    )
    
    
    9,706,225Income tax provision (benefit)
    
    
    (11,099,960
    )
    
    
    3,730,200Net Income (Loss)
    
    $
    (17,753,865
    )
    
    $
    5,976,025Net Income (Loss) Per Share of Common Stock:Basic:Weighted Average Number of Common Shares
Outstanding
    
    
    9,199,561
    
    
    
    9,326,993Net Income (Loss) Per Share of Common Stock
    
    $
    (1.93
    )
    
    $
    0.64Diluted:Weighted Average Number of Common Shares
Outstanding
    
    
    9,199,561
    
    
    
    9,599,826Net Income (Loss) Per Share of Common Stock
    
    $
    (1.93
    )
    
    $
    0.62
  5




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MATRIXX INITIATIVES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(Unaudited)
 2009
    
    2008Cash Flows From Operating ActivitiesNet income (loss)
    
    $
    (17,753,865
    )
    
    $
    5,976,025Adjustments to reconcile net income (loss) to net cash used by operating activities:Depreciation
    
    
    395,682
    
    
    
    586,657Amortization
    
    
    56,672
    
    
    
    75,242Deferred income taxes
    
    
    (11,535,585
    )
    
    
    (316,037
    )Common stock issued for compensation
    
    
    1,490,342
    
    
    
    1,482,784Asset impairments and abandonments
    
    
    24,287,130
    
    
    
    Changes in assets and liabilities:Accounts receivable
    
    
    (8,198,496
    )
    
    
    (17,895,049
    )Insurance receivable
    
    
    (25,386
    )
    
    
    Interest and other receivables
    
    
    (308,099
    )
    
    
    55,266Income taxes
    
    
    (108,474
    )
    
    
    1,518,213Inventories
    
    
    (1,336,989
    )
    
    
    (680,223
    )Prepaid expenses and other
    
    
    (1,508,659
    )
    
    
    (1,978,483
    )Accounts payable
    
    
    (1,220,642
    )
    
    
    3,759,663Accrued expenses
    
    
    1,191,266
    
    
    
    1,165,694Legal liability
    
    
    (45,000
    )
    
    
    (35,000
    )Sales returns and allowances
    
    
    307,719
    
    
    
    788,141Net Cash Used By Operating Activities
    
    
    (14,312,384
    )
    
    
    (5,497,107
    )Cash Flows From Investing ActivitiesPurchases of certificates of deposit
    
    
    (3,736,525
    )
    
    
    Maturities of certificates of deposit
    
    
    7,371,439
    
    
    
    Capital expenditures
    
    
    (42,371
    )
    
    
    (205,519
    )Restricted cash
    
    
    
    
    
    
    500,000Deposits and other
    
    
    (2,252,563
    )
    
    
    12,692Net Cash Provided By Investing Activities
    
    
    1,339,980
    
    
    
    307,173Cash Flows From Financing Activities:Issuance of common stock
    
    
    1,362,219
    
    
    
    1,023,157Purchase of treasury stock
    
    
    (1,187,906
    )
    
    
    (4,042,330
    )Net Cash Provided (Used) By Financing Activities
    
    
    174,313
    
    
    
    (3,019,173
    )Net Decrease in Cash and Cash Equivalents
    
    
    (12,798,091
    )
    
    
    (8,209,107
    )Cash and Cash Equivalents at Beginning of Period
    
    
    25,144,088
    
    
    
    27,932,672Cash and Cash Equivalents at End of Period
    
    $
    12,345,997
    
    
    $
    19,723,565Supplemental Disclosure of Cash Flow Information:Cash paid for income taxes
    
    $
    8,000
    
    
    $
    2.268,000Supplemental Disclosure of Noncash Financing Activities:Retirement of treasury stock
    
    $
    1,187,906
    
    
    $
    7,566,432
  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)
        9




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MATRIXX INITIATIVES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Three Months Ended
    
    
    Six Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net income (loss) applicable to common shareholders
    
    $
    5,078,387
    
    
    $
    8,241,882
    
    
    $
    (17,753,865
    )
    
    $
    5,976,025Weighted average common shares outstanding  Basic
    
    
    9,228,970
    
    
    
    9,287,871
    
    
    
    9,199,561
    
    
    
    9,326,993Dilutive Securities:Options
    
    
    
    
    
    
    138,410
    
    
    
    
    
    
    
    134,560Restricted Stock
    
    
    
    
    
    
    156,391
    
    
    
    
    
    
    
    138,273Weighted average common shares outstanding  Diluted
    
    
    9,228,970
    
    
    
    9,582,672
    
    
    
    9,199,561
    
    
    
    9,599,826Net income (loss) per common share:Basic
    
    $
    0.55
    
    
    $
    0.89
    
    
    $
    (1.93
    )
    
    $
    0.64Diluted
    
    $
    0.55
    
    
    $
    0.86
    
    
    $
    (1.93
    )
    
    $
    0.62
   September 30,
    
    
    March 31,2009
    
    
    2009Raw materials and packaging
    
    $
    813,210
    
    
    $
    2,618,261Finished goods
    
    
    4,336,361
    
    
    
    5,122,082Total
    
    $
    5,149,571
    
    
    $
    7,740,343
  Zicam Cold Remedy Nasal Gel and Cold Remedy Gel Swabs Recall
   10




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ChewCaps, RapidMelts® and RapidMelts + C Recall
 ®
  Canadian Products Withdrawal
  FDA Matters
     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
   12




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MATRIXX INITIATIVES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Product Effectiveness
 Total Pending Product Liability Lawsuits
 Cases since July 1, 2009 (Pending in Federal Courts).
 Personal Injury:
 Date Filed
    
    United States District Court
    
    Lead Plaintiff7/1/09
    
    Southern District, Florida
    
    Gonzales-Jones7/2/09
    
    Southern District, California
    
    Tassi7/2/09
    
    Eastern District, New York
    
    Coleman7/6/09
    
    Massachusetts
    
    Alt7/9/09
    
    Hawaii
    
    Yamasaki7/10/09
    
    Eastern Division, Texas
    
    Echols7/16/09
    
    Southern District, Florida
    
    Rhodes7/29/09
    
    Colorado
    
    Lilak7/30/09
    
    Southern Division, Florida
    
    Capiro7/31/09
    
    Eastern Division, Texas
    
    King8/3/09
    
    Eastern Division, Texas
    
    Head8/13/09
    
    Arizona
    
    Butera8/13/09
    
    Puerto Rico
    
    Pages8/25/09
    
    Arizona
    
    Treadwell8/31/09
    
    Idaho
    
    Nuss9/4/09
    
    Eastern Division, Texas
    
    Griffin9/11/09
    
    Arizona
    
    Fasano9/16/09
    
    Arizona
    
    Lawson9/18/09
    
    Arizona
    
    Arden9/23/09
    
    Puerto Rico
    
    Nunez9/23/09
    
    Arizona
    
    Mah9/24/09
    
    Arizona
    
    Smith10/16/09
    
    Arizona
    
    Vaughan10/20/09
    
    Arizona
    
    Somjit10/26/09
    
    Arizona
    
    Marion10/26/09
    
    Arizona
    
    McCluskey
 13




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Putative Class Action for Consumer Fraud:
 Date Filed
    
    United States District Court
    
    Lead Plaintiff7/6/09
    
    Eastern Division, Arkansas
    
    Thrasher7/6/09
    
    Southern District, Mississippi
    
    Hammett7/28/09
    
    Northern Division, Georgia
    
    Hand7/30/09
    
    Northern Division, Florida
    
    Sitzes8/3/09
    
    Eastern Division, Michigan
    
    Buszta8/10/09
    
    Middle Division, Alabama
    
    Young9/23/09
    
    Eastern District, North Carolina
    
    Siferd10/12/09
    
    Northern District, Ohio
    
    Suhr
 Multi-District Litigation Matters
 14




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Cases since July 1, 2009 (Pending in State Courts).
 Personal Injury:
 Date Filed
    
    Court
    
    Lead Plaintiff7/2/09
    
    Macon County, Illinois
    
    Rohr7/9/09
    
    Broward County, Florida
    
    Eichel7/22/09
    
    San Bernardino County, California
    
    Richardson7/31/09
    
    McClean County, Illinois
    
    Wood8/10/09
    
    San Francisco County, California
    
    Lane8/20/09
    
    Stanislaus County, California
    
    McDaniel8/20/09
    
    Whatcom County, Washington
    
    Adams*9/24/09
    
    San Bernardino County, California
    
    DeRosier9/30/09
    
    Maricopa County, Arizona
    
    Hoffman10/1/09
    
    Oklahoma County, Oklahoma
    
    Wyatt10/1/09
    
    Lee County, Florida
    
    Luten10/5/09
    
    Marin County, California
    
    Nissim10/7/09
    
    Lahaina County, Hawaii
    
    Welsh10/9/09
    
    Calhoun County, Texas
    
    Mikolas10/16/09
    
    San Francisco County, California
    
    Bobrink10/19/09
    
    Broward County, Florida
    
    Bunin10/26/09
    
    King County, Washington
    
    Touhey
 
 *
    
    The Company is not a named defendant in the Adams case; however, the Company is
contractually obligated to indemnify the defendant named therein, Botanical Laboratories, Inc. Putative Class Action for Consumer Fraud:
 Cases Dismissed Subsequent to June 30, 2009 (Federal Courts).
 Date Filed
    
    United States District Court
    
    Named Plaintiff
    
    Date Dismissed2/29/08
    
    Middle District, Louisiana
    
    Carter
    
    10/26/09
 Cases Dismissed Subsequent to June 30, 2009 (State Courts).
 Date Filed
    
    Court
    
    Named Plaintiff
    
    Date Dismissed11/3/06
    
    Maricopa County, Arizona
    
    Poole
    
    7/28/091/13/05
    
    Fresno County, California
    
    Cash
    
    9/28/098/14/09
    
    Stanislaus County, California
    
    McDaniel
    
    10/15/09
 Settlement with Certain Claimants.
 Potential Claimants.
 15




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MATRIXX INITIATIVES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  Litigation Reserves
 Product Recall Related Litigation
 tm ®
   16




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Intellectual Property Protection
  Securities Litigation Matters
   17




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




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MATRIXX INITIATIVES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Legal Expense
      19




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QuotedPrices inActive
    
    SignificantSix Months
    
    Markets for
    
    Other
    
    SignificantEnded
    
    Identical
    
    Observable
    
    Unobservable
    
    TotalSeptember
    
    Assets
    
    Inputs
    
    Inputs
    
    GainsDescription
    
    30, 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
    )
  
 Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
 Overview
 ®
    20




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3 Months Ended September 30,
    
    
    6 Months Ended September 30,$000s
    
    2009
    
    % NS
    
    2008
    
    % NS
    
    
    2009
    
    % NS
    
    2008
    
    % NSNet Sales
    
    $
    25,627
    
    
    
    100
    %
    
    $
    33,632
    
    
    
    100
    %
    
    
    $
    32,543
    
    
    
    100
    %
    
    $
    42,140
    
    
    
    100
    %Marketing
    
    $
    2,518
    
    
    
    10
    %
    
    $
    3,709
    
    
    
    11
    %
    
    
    $
    5,830
    
    
    
    18
    %
    
    $
    6,631
    
    
    
    16
    %Sales
    
    $
    856
    
    
    
    3
    %
    
    $
    1,238
    
    
    
    4
    %
    
    
    $
    1,474
    
    
    
    5
    %
    
    $
    1,888
    
    
    
    4
    %General & Administrative
    
    $
    4,385
    
    
    
    17
    %
    
    $
    3,134
    
    
    
    9
    %
    
    
    $
    16,367
    
    
    
    50
    %
    
    $
    7,281
    
    
    
    17
    %Litigation
    
    $
    2,391
    
    
    
    9
    %
    
    $
    756
    
    
    
    2
    %
    
    
    $
    2,968
    
    
    
    9
    %
    
    $
    1,499
    
    
    
    4
    %Total Selling, General,
and Administrative
    
    $
    10,150
    
    
    
    40
    %
    
    $
    8,837
    
    
    
    26
    %
    
    
    $
    26,639
    
    
    
    82
    %
    
    $
    17,299
    
    
    
    41
    %Research & Development
    
    $
    419
    
    
    
    2
    %
    
    $
    1,143
    
    
    
    3
    %
    
    
    $
    1,353
    
    
    
    4
    %
    
    $
    1,754
    
    
    
    4
    %Asset Impairments
    
    $
    0
    
    
    
    0
    %
    
    $
    0
    
    
    
    0
    %
    
    
    $
    23,867
    
    
    
    73
    %
    
    $
    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 $65 million to $70
million range. In addition, due to increased marketing between November and March and
ongoing legal expense, the Company expects to incur a net loss in the second half of fiscal
2010.2)
    
    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 comparing consumer consumption of our
products excluding historical consumption of the nasal Cold Remedy products. We believe
excluding those items will
allow us to better evaluate the strength of the brand as well as conversion to oral Cold
Remedy
 22




---



##### Table of Contents



products. For the 12 weeks ended October 4, 2009, retail unit sales of our products
(as measured by three outlet syndicated scanner data, not including our largest customer,
Wal-Mart and excluding nasal Cold Remedy) increased approximately 4% over the comparable
period in the previous year, while the entire cough and cold category increased approximately
2% over the same period. We believe the increase in the recent 12-week period relates to the
increased incidence of illness early in the season compared to the prior year.3)
    
    We measure our ability to maintain strong gross margins on our products. During the
quarter ended September 30, 2009, we realized an average gross margin of 73%, compared to
the 69% average gross margin achieved in the quarter ended September 30, 2008. Gross
margins on our existing products vary between 55% and 80%. The higher average gross margin
realized in the quarter was due to a higher average selling price, as well as 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.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 private label versions of certain Zicam products. We have
seen the number of private label products increase going into this years cold season.
Private label products are generally sold at a substantial discount to branded products. An
increase in private label 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:
 23




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##### Table of Contents



Income Taxes.
 Revenue Recognition:
 Sales Returns and Allowances:
  24




---



##### Table of Contents



Accounts Receivable and Allowance for Doubtful Accounts:
 Legal Contingencies:
 Results of Operations for the Three Months Ended September 30, 2009 Compared to the Three
Months Ended September 30, 2008
  Three Months Ended September 30,2009
    
    
    2008Net sales
    
    $
    25,626,789
    
    
    
    100
    %
    
    $
    33,631,906
    
    
    
    100
    %Cost of sales
    
    
    6,829,913
    
    
    
    27
    
    
    
    10,378,915
    
    
    
    31Gross profit
    
    
    18,796,876
    
    
    
    73
    
    
    
    23,252,991
    
    
    
    69Selling, general and administrative
    
    
    10,150,409
    
    
    
    40
    
    
    
    8,836,878
    
    
    
    26Research & development
    
    
    418,749
    
    
    
    2
    
    
    
    1,143,214
    
    
    
    3Income from operations
    
    
    8,227,718
    
    
    
    32
    
    
    
    13,272,899
    
    
    
    39Interest and other income
    
    
    38,190
    
    
    
    
    
    
    
    84,752
    
    
    
    Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income before income taxes
    
    
    8,265,908
    
    
    
    32
    
    
    
    13,357,651
    
    
    
    40Provision for income taxes
    
    
    3,187,521
    
    
    
    12
    
    
    
    5,115,769
    
    
    
    15Net Income
    
    $
    5,078,387
    
    
    
    20
    %
    
    $
    8,241,882
    
    
    
    25
    %
 Net Sales
  Cost of Sales
  25




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##### Table of Contents



Gross Profit
  Selling, General & Administrative (SG&A)
   Research and Development
  Interest & Other Income
  Income Before Income Taxes
  Provision for Income Taxes
  26




---



##### Table of Contents



Net Income
  Results of Operations for the Six Months Ended September 30, 2009 Compared to the Six Months
Ended September 30, 2008
  Six Months Ended September 30,2009
    
    
    2008Net sales
    
    $
    32,543,026
    
    
    
    100
    %
    
    $
    42,139,950
    
    
    
    100
    %Cost of sales
    
    
    9,622,975
    
    
    
    30
    
    
    
    13,573,198
    
    
    
    32Gross profit
    
    
    22,920,051
    
    
    
    70
    
    
    
    28,566,752
    
    
    
    68Selling, general and administrative
    
    
    26,639,046
    
    
    
    82
    
    
    
    17,299,004
    
    
    
    41Research & development
    
    
    1,353,142
    
    
    
    4
    
    
    
    1,753,509
    
    
    
    4Asset Impairments
    
    
    23,867,158
    
    
    
    73
    
    
    
    
    
    
    
    Income (Loss) from operations
    
    
    (28,939,295
    )
    
    
    (89
    )
    
    
    9,514,239
    
    
    
    23Interest and other income
    
    
    85,470
    
    
    
    
    
    
    
    191,986
    
    
    
    Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income (Loss) before income taxes
    
    
    (28,853,825
    )
    
    
    (89
    )
    
    
    9,706,225
    
    
    
    23Provision (Benefit) for income taxes
    
    
    (11,099,960
    )
    
    
    (34
    )
    
    
    3,730,200
    
    
    
    16Net Income (Loss)
    
    $
    (17,753,865
    )
    
    
    (55
    )%
    
    $
    5,976,025
    
    
    
    14
    %
 Net Sales
  Cost of Sales
  Gross Profit
  27




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##### Table of Contents



Selling, General & Administrative (SG&A)
    Research and Development
  Asset Impairments
  Interest & Other Income
  Income (Loss) Before Income Taxes
  28




---



##### Table of Contents



Provision (Benefit) for Income Tax Expense
  Net Income (Loss)
  Liquidity and Capital Resources
       29




---



##### Table of Contents



Contractual Obligations
  Contractual Cash Obligations(In thousands of dollars)Payments due by Period as of  September 30, 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
  30




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##### Table of Contents




    
    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 previous users of our nasal Cold Remedy product will now purchase
our oral Cold Remedy product;
 
    
    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 $65 million to $70 million
range
 
    
    our expectation of incurring a net loss in the second half of fiscal 2009;
 
    
    our belief that our allowance for uncollectible accounts is adequate;
 
    
    our expectation that legal expense will average approximately $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 belief that the increased incidence of colds and flu early in the 2009/2010 cold
season may result in increased early season sales of our products;
 
    
    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 belief that our allowance for uncollectible accounts is adequate;
    
    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 or recalled
items with new or different Zicam products;
 
    
    our expectations regarding private label competition;
 
    
    our expectation that sales to retailers will closely mirror retails 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;
 31




---



##### Table of Contents




    
    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 sales, advertising, research and development,
and legal expenses;
 
    
    our expectations regarding derivative instruments;
 
    
    our expectation that earnings in future periods will be significantly impacted by the
seasonality of our sales, the severity of the cold season, the revenues and expenses
associated with new products, and the timing and amount of advertising, research and
development, and legal expenses;
 
    
    our expectation that advertising expense will be highest in our third and fourth fiscal
quarters;
 
    
    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 Capricorn is responsible for costs we incurred in connection with the
recall of certain lots that Capricorn manufactured ;
 
    
    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.
    32




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##### Table of Contents



Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
   
 Item 4.
    
    Controls and Procedures
  
 PART II
OTHER INFORMATION
 
 Item 1.
    
    Legal Proceedings
  33




---



##### Table of Contents



Item 1A.
    
    Risk Factors
  
 Item 4.
    
    Submission of Matters to a Vote of Security Holders
  Director
    
    Votes For
    
    Votes Withheld
    
    Abstentions
    
    Broker Non-VotesWilliam C. Egan
    
    
    7,043,081
    
    
    
    616,188
    
    
    
    0
    
    
    
    0Samuel C. Cowley
    
    
    7,131,432
    
    
    
    527,837
    
    
    
    0
    
    
    
    0L. White Matthews, III
    
    
    7,135,962
    
    
    
    523,307
    
    
    
    0
    
    
    
    0
   Votes For
    
    Votes Against
    
    Abstentions
    
    Broker Non-Votes2,905,942
    
    
    636,732
    
    
    
    9,859
    
    
    
    4,106,736
  Votes For
    
    Votes Against
    
    Abstentions
    
    Broker Non-Votes7,366,858
    
    
    229,404
    
    
    
    63,006
    
    
    
    0
 
 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* **
    
    Form of Executive Retention Agreement (4)
 34




---



##### Table of Contents



Exhibit No.
    
    Title10.02* **
    
    Executive Retention Agreement Trust31.1*
    
    Certification of CEO and CFO pursuant to Section 302 of the Sarbanes-Oxley
Act of 200232.1*
    
    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.(4)
    
    See the  Registrants Form 8-K, filed September 10, 2009, file number 001-31404. 
 SIGNATURES
  Matrixx Initiatives, Inc./s/  William J. HemeltWilliam HemeltPresident and Chief Executive Officer
     November 6, 2009 35