##### 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 June 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 _______
 Commission File number 001-31404
 Matrixx Initiatives, Inc.
  Delaware
(State or other jurisdiction
of incorporation or organization)
    
    87-0482806
(I.R.S. Employer
Identification Number)
 4742 N. 24 th Street, Suite 455
Phoenix, AZ 85016
 (602) 385-8888
 þ o
 þ o




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MATRIXX INITIATIVES, INC.
 FORM 10-Q
INDEX
 PagePART I
    
    FINANCIAL INFORMATIONItem 1.
    
    Condensed Consolidated Balance Sheets
as of June 30, 2005 (Unaudited) and December 31, 2004
    
    
    1Condensed Consolidated Statements of
Operations for the three months ended
June 30, 2005 and 2004 (Unaudited)
    
    
    3Condensed Consolidated Statements of
Operations for the six months ended
June 30, 2005 and 2004 (Unaudited)
    
    
    4Condensed Consolidated Statements of
Cash Flows for the six months ended
June 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
    
    
    13Item 3.
    
    Quantitative and Qualitative Disclosures
About Market Risk
    
    
    26Item 4.
    
    Controls and Procedures
    
    
    27PART II
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    27Item 4.
    
    Submission of Matters to a Vote of
Security Holders
    
    
    27Item 6.
    
    Exhibits
    
    
    28SIGNATURES
    
    
    
    
    
    
    29EX-31.1EX-31.2EX-32.1EX-32.2




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##### Table of Contents



PART I.
 FINANCIAL INFORMATION
 
 Item 1.
 MATRIXX INITIATIVES, INC. AND SUBSIDIARY
 CONDENSED CONSOLIDATED BALANCE SHEETS
 ASSETS
 June 30, 2005(Unaudited)
    
    December 31, 2004Current Assets:Cash and cash equivalents
    
    $
    13,430,780
    
    
    $
    12,694,486Accounts receivable:Trade, net allowance for doubtful
accounts of $575,539 and $555,240
    
    
    4,126,736
    
    
    
    12,386,026Other
    
    
    600,000
    
    
    
    Inventories
    
    
    7,337,225
    
    
    
    7,241,434Prepaid expenses and other
    
    
    1,099,621
    
    
    
    887,586Interest receivable
    
    
    45,014
    
    
    
    57,658Deferred tax asset
    
    
    5,297,956
    
    
    
    5,029,600Total Current Assets
    
    
    31,937,332
    
    
    
    38,296,790Property and Equipment, at cost:Office furniture and equipment
    
    
    857,775
    
    
    
    780,961Machine tooling
    
    
    150,000
    
    
    
    150,000Leasehold improvements
    
    
    178,757
    
    
    
    179,6441,186,532
    
    
    
    1,110,605Less accumulated depreciation
    
    
    (587,643
    )
    
    
    (457,718
    )Net Property and Equipment
    
    
    598,889
    
    
    
    652,887Other Assets:Deposits
    
    
    490,302
    
    
    
    220,190Restricted cash
    
    
    5,000,000
    
    
    
    5,000,000Debt issuance costs, net of accumulated amortization
of $25,000 and $18,750
    
    
    
    
    
    
    6,250Patents, net of accumulated amortization of $239,401
and $205,861
    
    
    884,199
    
    
    
    917,739Goodwill
    
    
    15,039,836
    
    
    
    15,039,836Total Other Assets
    
    
    21,414,337
    
    
    
    21,184,015Total Assets
    
    $
    53,950,558
    
    
    $
    60,133,692
  1




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MATRIXX INITIATIVES, INC. AND SUBSIDIARY
 CONDENSED CONSOLIDATED BALANCE SHEETS
 LIABILITIES AND STOCKHOLDERS EQUITY
 June 30, 2005(Unaudited)
    
    December 31, 2004Current Liabilities:Accounts payable
    
    $
    2,463,715
    
    
    $
    4,699,316Accrued expenses
    
    
    2,952,205
    
    
    
    6,314,971Sales commissions
    
    
    195,785
    
    
    
    1,261,899Sales returns and allowances
    
    
    2,217,254
    
    
    
    2,605,260Accrued taxes
    
    
    308,000
    
    
    
    209,946Total Current Liabilities
    
    
    8,136,959
    
    
    
    15,091,392Deferred tax liability
    
    
    916,738
    
    
    
    916,738Total Liabilities
    
    
    9,053,697
    
    
    
    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, 9,565,395 and 9,520,198 shares
issued and outstanding
    
    
    9,565
    
    
    
    9,520Additional paid in capital
    
    
    43,028,951
    
    
    
    42,527,862Unearned compensation
    
    
    (120,750
    )
    
    
    Accumulated earnings
    
    
    2,375,399
    
    
    
    1,984,48445,293,165
    
    
    
    44,521,866Less common stock held in treasury, at cost
(53,800 and 53,800 shares)
    
    
    (396,304
    )
    
    
    (396,304
    )Total Stockholders Equity
    
    
    44,896,861
    

    
    
    44,125,562Total Liabilities and
Stockholders Equity
    
    $
    53,950,558
    
    
    $
    60,133,692
  2




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MATRIXX INITIATIVES, INC. AND SUBSIDIARY
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 Three months ended June 30,2005
    
    2004Net sales
    
    $
    6,254,669
    
    
    $
    3,391,721Cost of sales
    
    
    1,684,820
    
    
    
    1,071,545Gross Profit
    
    
    4,569,849
    
    
    
    2,320,176Operating expenses
    
    
    4,529,521
    
    
    
    3,471,905Research and development
    
    
    965,571
    
    
    
    521,565Income From Operations
    
    
    (925,243
    )
    
    
    (1,673,294
    )Other Income (Expense):Interest and other income
    
    
    125,258
    
    
    
    28,518Interest and other expense
    
    
    
    
    
    
    Total Other Income (Expense)
    
    
    125,258
    
    
    
    28,518Income (Loss) Before Provision For Income Taxes
    
    
    (799,985
    )
    
    
    (1,644,776
    )Provision for income taxes
    
    
    (295,342
    )
    
    
    (655,380
    )Net (Loss) Income
    
    $
    (504,643
    )
    
    $
    (989,396
    )Net Income (Loss) Per Share of Common Stock:Basic:Weighted Average Number of Common Shares Outstanding
    
    
    9,481,685
    
    
    
    9,499,156Net Income (Loss) Per Share of Common Stock
    
    $
    (0.05
    )
    
    $
    (0.10
    )Diluted:Weighted Average Number of Common Shares Outstanding
    
    
    9,481,685
    
    
    
    9,499,156Net Income (Loss) Per Share of Common Stock
    
    $
    (0.05
    )
    
    $
    (0.10
    )
  3




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MATRIXX INITIATIVES, INC. AND SUBSIDIARY
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 Six months ended June 30,2005
    
    2004Net sales
    
    $
    21,236,259
    
    
    $
    16,324,287Cost of sales
    
    
    5,922,254
    
    
    
    5,170,770Gross Profit
    
    
    15,314,005
    
    
    
    11,153,517Operating expenses
    
    
    13,353,035
    
    
    
    10,888,481Research and development
    
    
    1,465,132
    
    
    
    992,034Income From Operations
    
    
    495,838
    
    
    
    (726,998
    )Other Income (Expense):Interest and other income
    
    
    186,413
    
    
    
    74,350Interest and other expense
    
    
    
    
    
    
    Total Other Income (Expense)
    
    
    186,413
    
    
    
    74,350Income (Loss) Before Provision For Income Taxes
    
    
    682,251
    
    
    
    (652,648
    )Provision for income taxes
    
    
    291,336
    
    
    
    (259,890
    )Net (Loss) Income
    
    $
    390,915
    
    
    $
    (392,758
    )Net Income (Loss) Per Share of Common Stock:Basic:Weighted Average Number of Common Shares Outstanding
    
    
    9,481,799
    
    
    
    9,494,087Net Income (Loss) Per Share of Common Stock
    
    $
    0.04
    
    
    $
    (0.04
    )Diluted:Weighted Average Number of Common Shares Outstanding
    
    
    9,671,265
    
    
    
    9,494,087Net Income (Loss) Per Share of Common Stock
    
    $
    0.04
    
    
    $
    (0.04
    )
  4




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MATRIXX INITIATIVES, INC. AND SUBSIDIARY
 
 CONDENSED STATEMENTS OF CASH FLOWS
 Six months ended June 30,2005
    
    2004Cash Flows From Operating Activities:Net income (loss)
    
    $
    390,915
    
    
    $
    (392,758
    )Adjustments to reconcile net income to net cash
provided (used) by operating activities:Depreciation
    
    
    129,925
    
    
    
    78,779Amortization
    
    
    33,540
    
    
    
    33,541Amortization of debt issuance costs
    
    
    6,250
    
    
    
    6,250Deferred income taxes
    
    
    (268,356
    )
    
    
    (314,002
    )Common stock issued for compensation
    
    
    380,384
    
    
    
    Changes in assets and liabilities:Accounts receivable
    
    
    7,659,290
    
    
    
    9,630,996Inventories
    
    
    (95,791
    )
    
    
    (4,442,510
    )Prepaid expenses and other
    
    
    (212,035
    )
    
    
    (687,198
    )Interest receivable
    
    
    12,644
    
    
    
    (14,072
    )Accounts payable
    
    
    (2,235,601
    )
    
    
    (2,873,966
    )Accrued expenses
    
    
    (4,330,826
    )
    
    
    (2,075,049
    )Sales returns and allowances
    
    
    (388,006
    )
    
    
    23,501Net Cash Provided By Operating Activities
    
    
    1,082,333
    
    
    
    (1,026,488
    )Cash Flows From Investing Activities:Capital expenditures
    
    
    (75,927
    )
    
    
    (218,895
    )Deposits and other
    
    
    (270,112
    )
    
    
    (145,348
    )Restricted cash
    
    
    
    
    
    
    (5,000,000
    )Net Cash (Used) By Investing Activities
    
    

    (346,039
    )
    
    
    (5,364,243
    )Cash Flows From Financing Activities:Purchase of treasury stock
    
    
    
    
    
    
    (157,081
    )Debt issuance costs
    
    
    
    
    
    
    (25,000
    )Issuance of common stock
    
    
    
    
    
    
    392,499Net Cash Provided By Financing Activities
    
    
    
    
    
    
    210,418Net Increase in Cash and Cash Equivalents
    
    
    736,294
    
    
    
    (6,180,313
    )Cash and Cash Equivalents at Beginning of Period
    
    
    12,694,486
    
    
    
    10,682,614Cash and Cash Equivalents at End of Period
    
    $
    13,430,780
    
    
    $
    4,502,301Supplemental Disclosure of Cash Flow Information:Cash paid during the period for:Interest
    
    $
    
    
    
    $
    Income taxes
    
    
    500,054
    
    
    
    280,751
  5




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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




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MATRIXX INITIATIVES, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Net income (loss) applicable to common shareholders, as
reported
    
    $
    (504,643
    )
    
    $
    (989,396
    )
    
    $
    390,915
    
    
    $
    (392,758
    )Stock-based employee compensation expense included
in net earnings, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Less stock based employee compensation expense
determined under fair value based methods for all awards,
net of related tax effects
    
    
    72,725
    
    
    
    270,511
    
    
    
    1,452,163
    
    
    
    670,491Proforma Net Income (loss)
    
    $
    (577,368
    )
    
    $
    (1,259,907
    )
    
    $
    (1,061,248
    )
    
    $
    (1,063,249
    )Net income (loss) per share of common stock:Basic:As reported
    
    $
    (0.05
    )
    
    $
    (0.10
    )
    
    $
    0 04
    
    
    $
    (0.04
    )Pro forma
    
    $
    (0.06
    )
    
    $
    (0.13
    )
    
    $
    (0.11
    )
    
    $
    (0.11
    )DilutedAs reported
    
    $
    (0.05
    )
    
    $
    (0.10
    )
    
    $
    0.04
    
    
    $
    (0.04
    )Pro forma
    
    $
    (0.06
    )
    
    $
    (0.13
    )
    
    $
    (0.11
    )
    
    $
    (0.11
    )
   Earnings Per Share
  7




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MATRIXX INITIATIVES, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Net income (loss) applicable to common shareholders
    
    $
    (504,643
    )
    
    $
    (989,396
    )
    
    $
    390,915
    
    
    $
    (392,758
    )Weighted average common shares outstanding  Basic
    
    
    9,481,685
    
    
    
    9,499,156
    
    
    
    9,481,799
    
    
    
    9,494,087Dilutive Securities
    
    
    
    
    
    
    
    
    
    
    189,466
    
    
    
    Weighted average common shares outstanding  Diluted
    
    
    9,481,685
    
    
    
    9,499,156
    
    
    
    9,671,265
    
    
    
    9,494,087Net Income (loss) per common share:Basic
    
    $
    (0.05
    )
    
    $
    (0.10
    )
    
    $
    0.04
    
    
    $
    (0.04
    )Diluted
    
    $
    (0.05
    )
    
    $
    (0.10
    )
    
    $
    0.04
    
    
    $
    (0.04
    )
   June 30,
    
    December 31,2005
    
    2004Raw materials and packaging
    
    $
    2,942,514
    
    
    $
    2,140,915Finished goods
    
    
    4,797,071
    
    
    
    5,580,974Less reserve for obsolescence
    
    
    (402,360
    )
    
    
    (480,455
    )Total
    
    $
    7,337,225
    
    
    $
    7,241,434
  Share-Based Payment Accounting for Stock-Based Compensation, Accounting for Stock Issued to Employees
 8




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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
  Application of FASB Statement
No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities
Provided by the American Jobs Creation Act of 2004 (AJCA)
 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




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




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




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MATRIXX INITIATIVES, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 , ; ; . ; :
   12




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MATRIXX INITIATIVES, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
    Securities Litigation Matters
  
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Overview
   13




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14




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Critical Accounting Policies and Estimates
    Intangible Assets and Goodwill:
 Income Taxes:
 15




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Revenue Recognition:
 Customer Sales Returns and Allowances:
 Legal Contingencies:
 16




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Results of Operations for the Three Months Ended June 30, 2005 Compared to the Three Months
Ended June 30, 2004
  Three Months Ended June 30,2005
    
    2004Net sales
    
    $
    6,254,669
    
    
    
    100
    %
    
    $
    3,391,721
    
    
    
    100
    %Cost of sales
    
    
    1,684,820
    
    
    
    27
    
    
    
    1,071,545
    
    
    
    32Gross profit
    
    
    4,569,849
    
    
    
    73
    
    
    
    2,320,176
    
    
    
    68Operating expenses
    
    
    4,529,521
    
    
    
    73
    
    
    
    3,471,905
    
    
    
    102Research & development
    
    
    965,571
    
    
    
    15
    
    
    
    521,565
    
    
    
    15Income (Loss) from operations
    
    
    (925,243
    )
    
    
    (15
    )
    
    
    (1,673,294
    )
    
    
    (49
    )Interest and other income
    
    
    125,258
    
    
    
    2
    
    
    
    28,518
    
    
    
    1Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income (Loss) before income taxes
    
    
    (799,985
    )
    
    
    (13
    )
    
    
    (1,644,776
    )
    
    
    (48
    )Provision for income taxes
    
    
    (295,342
    )
    
    
    (5
    )
    
    
    (655,380
    )
    
    
    (19
    )Net income (Loss)
    
    
    (504,643
    )
    
    
    (8
    )%
    
    
    (989,396
    )
    
    
    (29
    )%
 Net Sales
  Cost of Sales
  Gross Profit
  Operating Expenses
   17




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Research and Development
  Interest & Other Income
  Income (Loss) Before Income Taxes
  Benefit for Income Tax Expense
  Net Income (Loss)
  18




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Results of Operations for the Six Months Ended June 30, 2005 Compared to the Six Months Ended
June 30, 2004
  Six Months Ended June 30,2005
    
    2004Net sales
    
    $
    21,236,259
    
    
    
    100
    %
    
    $
    16,324,287
    
    
    
    100
    %Cost of sales
    
    
    5,922,254
    
    
    
    28
    
    
    
    5,170,770
    
    
    
    32Gross profit
    
    
    15,314,005
    
    
    
    72
    
    
    
    11,153,517
    
    
    
    68Operating expenses
    
    
    13,353,035
    
    
    
    63
    
    
    
    10,888,481
    
    
    
    67Research & development
    
    
    1,465,132
    
    
    
    7
    
    
    
    992,034
    
    
    
    6Income (Loss) from operations
    
    
    495,838
    
    
    
    2
    
    
    
    (726,998
    )
    
    
    (4
    )Interest and other income
    
    
    186,413
    
    
    
    1
    
    
    
    74,350
    
    
    
    Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income (Loss) before income taxes
    
    
    682,251
    
    
    
    3
    
    
    
    (652,648
    )
    
    
    (4
    )Provision for income taxes
    
    
    291,336
    
    
    
    1
    
    
    
    (259,890
    )
    
    
    (2
    )Net income (Loss)
    
    $
    390,915
    
    
    
    2
    %
    
    $
    (392,758
    )
    
    
    (2
    )%
 Net Sales
  Cost of Sales
  Gross Profit
  Operating Expenses
  19




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)
 Research and Development
  Interest & Other Income
  Income(Loss) Before Income Taxes
  Provision for Income Tax Expense
  Net Income (Loss)
  Liquidity and Capital Resources
  20




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Contractual Obligations
  Contractual Cash Obligations(In thousands of dollars)Payments due by Period as of June 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
    
    
    306
    
    
    
    120
    
    
    
    186
    
    
    
    0
    
    
    
    0Purchase Obligations
    
    
    1,678
    
    
    
    1,678
    
    
    
    0
    
    
    
    0
    
    
    
    0Other Long-Term Liabilities Reflected on the
Companys Balance Sheet under GAAP
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Total
    
    $
    1,984
    
    
    $
    1,798
    
    
    $
    186
    
    
    $
    0
    
    
    $
    0
 21




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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS AND RISK FACTORS
 Forward Looking Statements
  
    
    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 expectations regarding 2005 net sales growth of 25% to 35% and 2005 net income growth of
10% to 20%, compared to 2004;
    
    our belief that new advertising approaches and public relations efforts will continue to
build brand awareness and attract new users;
    
    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 third and fourth quarters;
    
    our anticipation that initial sales and shipments of the Nasal Comfort brand will begin
in the third quarter of 2005;
    
    our expectation that initial sales and shipments of the four Zicam Cold and Flu Relief
products and the new Zicam Cough Mist Max will begin in the third quarter of 2005;
    
    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 of achieving a 70% gross margin for 2005;
    
    our expectation that our net income and operating expenses in future periods will vary
largely in connection with the level of our advertising, research and development, and
legal expenses;
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
    
    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 plan to do further testing of the zinc gluconate nasal
gel on human volunteers and animal models, and our expectation that members of the
Scientific Advisory Board will reconvene from time to time to review the findings of such
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; 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.
    Risk Factors
 We may continue to incur significant costs resulting from product liability claims or
securities litigation
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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
  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
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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
  We do not have manufacturing capabilities of our own
  We may experience product backlogs
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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
  The price of our stock may continue to be volatile
  
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
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Item 4. Controls and Procedures
  
 PART II
 OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 4. Submission of Matters to a Vote of Security Holders
  Director
    
    Votes For
    
    Votes Withheld
    
    Abstentions
    
    Broker Non-VotesLori H. Bush
    
    
    9,051,695
    
    
    
    321,600
    
    
    
    0
    
    
    
    0William C. Egan
    
    
    9,074,388
    
    
    
    298,908
    
    
    
    0
    
    
    
    0Carl J. Johnson
    
    
    9,092,861
    
    
    
    280,435
    
    
    
    0
    
    
    
    0
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Votes For
    
    Votes Against
    
    Abstentions
    
    Broker Non-Votes3,333,373
    
    
    1,144,605
    
    
    
    53,528
    
    
    
    4,841,790
 
 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)10.01
    
    **Matrixx Initiatives, Inc. 2001 Long-Term Incentive Plan (3)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.(3)
    
    Incorporated by reference to Appendix A to the Registrants Proxy Statement,
filed April 8, 2005, file number 001-31404. 28




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SIGNATURES
  Matrixx Initiatives, Inc./s/ Carl J. JohnsonCarl J. JohnsonPresident andChief Executive Officer/s/ William J. HemeltWilliam J. HemeltExecutive Vice President,Chief Financial Officer, &TreasurerAugust 5, 2005
 29