##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 Form 10-Q
  þ
    
    Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarter ended September 30, 2010
 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




---



##### 



MATRIXX INITIATIVES, INC.
FORM 10-Q
INDEX
 PART I FINANCIAL INFORMATION
    
    
    PageItem 1.
    
    Condensed Consolidated Balance Sheets as of
September 30, 2010 (Unaudited) and March 31, 2010
    
    
    3Condensed Consolidated Statements of
Income for the three months ended
September 30, 2010 and 2009 (Unaudited)
    
    
    4Condensed Consolidated Statements of
Operations for the six months ended
September 30, 2010 and 2009 (Unaudited)
    
    
    5Condensed Consolidated Statements of
Cash Flows for the six months ended
September 30, 2010 and 2009 (Unaudited)
    
    
    6Notes to Condensed Consolidated
Financial Statements (Unaudited)
    
    
    7Item 2.
    
    Managements Discussion and Analysis of
Financial Condition and Results of Operations
    
    
    19Item 3.
    
    Quantitative and Qualitative Disclosures
About Market Risk
    
    
    31Item 4.
    
    Controls and Procedures
    
    
    31PART II OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    32Item 1A.
    
    Risk Factors
    
    
    32Item 6.
    
    Exhibits
    
    
    32SIGNATURES
    
    
    33EX-31.1EX-32.1
   2




---



##### Table of Contents



MATRIXX INITIATIVES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 September 30,
    
    
    March 31,2010
    
    
    2010ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    24,023,702
    
    
    $
    26,482,499Certificates of deposit
    
    
    
    
    
    
    3,736,525Accounts receivable:Trade, net of allowance for doubtful accounts of $178,345 and $169,720
    
    
    13,656,188
    
    
    
    5,386,044Inventories
    
    
    9,468,573
    
    
    
    6,166,809Prepaid expenses
    
    
    1,378,898
    
    
    
    2,230,116Interest receivable
    
    
    648
    
    
    
    3,443Income tax receivable
    
    
    4,491,704
    
    
    
    5,661,554Current deferred tax asset
    
    
    4,785,614
    
    
    
    5,071,475Total Current Assets
    
    
    57,805,327
    
    
    
    54,738,465Property and Equipment, at cost:Office furniture and computer equipment
    
    
    1,578,751
    
    
    
    1,722,176Machine tooling and manufacturing equipment
    
    
    4,865,248
    
    
    
    4,415,352Laboratory furniture and equipment
    
    
    381,079
    
    
    
    486,459Leasehold improvements
    
    
    423,442
    
    
    
    562,7387,248,520
    
    
    
    7,186,725Less accumulated depreciation
    
    
    (4,104,598
    )
    
    
    (3,865,302
    )Net Property and Equipment
    
    
    3,143,922
    
    
    
    3,321,423Other Assets:Deposits
    
    
    192,806
    
    
    
    636,924Other assets
    
    
    40,043
    
    
    
    40,043Patents, net of accumulated amortization of $349,312 and $311,209
    
    
    755,704
    
    
    
    793,807Non-current deferred tax asset
    
    
    1,738,059
    
    
    
    1,934,686Total Other Assets
    
    
    2,726,612
    
    
    
    3,405,460Total Assets
    
    $
    63,675,861
    
    
    $
    61,465,348LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    1,381,714
    
    
    $
    1,007,886Accrued expenses
    
    
    4,843,507
    
    
    
    7,026,708Sales commissions
    
    
    362,810
    
    
    
    188,433Sales returns and allowances
    
    
    1,316,461
    
    
    
    1,420,600Deferred insurance proceeds
    
    
    942,000
    
    
    
    Legal liability
    
    
    522,500
    
    
    
    740,000Total Current Liabilities
    
    
    9,368,992
    
    
    
    10,383,627Total Liabilities
    
    
    9,368,992
    
    
    
    10,383,627Commitments 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,
9,398,587 and 9,455,620 shares issued
and outstanding
    
    
    9,399
    
    
    
    9,455Additional paid-in capital
    
    
    39,024,721
    
    
    
    38,657,444Retained earnings
    
    
    15,272,749
    
    
    
    12,414,822Total Stockholders Equity
    
    
    54,306,869
    
    
    
    51,081,721Total Liabilities and Stockholders Equity
    
    $
    63,675,861
    
    
    $
    61,465,348
  3




---



##### Table of Contents



MATRIXX INITIATIVES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
(Unaudited)
 2010
    
    
    2009Net sales
    
    $
    21,310,960
    
    
    $
    25,626,789Cost of sales
    
    
    5,590,076
    
    
    
    6,829,913Gross Profit
    
    
    15,720,884
    
    
    
    18,796,876Selling, general and administrative expenses
    
    
    6,764,319
    
    
    
    10,150,409Research and development
    
    
    354,257
    
    
    
    418,749Income From Operations
    
    
    8,602,308
    
    
    
    8,227,718Interest and other income
    
    
    6,427
    
    
    
    38,190Income Before Income Taxes
    
    
    8,608,735
    
    
    
    8,265,908Income taxes
    
    
    3,317,800
    
    
    
    3,187,521Net Income
    
    $
    5,290,935
    
    
    $
    5,078,307Net Income Per Share of Common Stock:Basic and Diluted:Weighted Average Number of Common Shares
Outstanding
    
    
    9,301,924
    
    
    
    9,228,970Net Income Per Share of Common Stock
    
    $
    0.57
    
    
    $
    0.55
  4




---



##### Table of Contents



MATRIXX INITIATIVES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
(Unaudited)
 2010
    
    
    2009Net sales
    
    $
    24,518,358
    
    
    $
    32,543,026Cost of sales
    
    
    6,922,654
    
    
    
    9,622,975Gross Profit
    
    
    17,595,704
    
    
    
    22,920,051Selling, general and administrative expenses
    
    
    12,078,217
    
    
    
    26,639,046Research and development
    
    
    884,485
    
    
    
    1,353,142Goodwill impairment
    
    
    
    
    
    
    15,039,836Asset impairments
    
    
    
    
    
    
    8,827,322Income (Loss) From Operations
    
    
    4,633,002
    
    
    
    (28,939,295
    )Interest and other income
    
    
    22,825
    
    
    
    85,470Income (Loss) Before Income Taxes
    
    
    4,655,827
    
    
    
    (28,853,825
    )Income taxes
    
    
    1,797,900
    
    
    
    (11,099,960
    )Net Income (Loss)
    
    $
    2,857,927
    
    
    $
    (17,753,865
    )Net Income (Loss) Per Share of Common Stock:Basic and Diluted:Weighted
Average Number of Common Shares Outstanding
    
    
    9,294,791
    
    
    
    9,199,561Net Income (Loss) Per Share of Common Stock
    
    $
    0.31
    
    
    $
    (1.93
    )
  5




---



##### Table of Contents



MATRIXX INITIATIVES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
(Unaudited)
 2010
    
    
    2009Cash Flows From Operating ActivitiesNet income (loss)
    
    $
    2,857,927
    
    
    $
    (17,753,865
    )Adjustments to reconcile net income (loss) to net cash used by operating activities:Depreciation
    
    
    666,281
    
    
    
    395,682Amortization
    
    
    38,103
    
    
    
    56,672Deferred income taxes
    
    
    482,488
    
    
    
    (11,535,585
    )Common stock issued for compensation
    
    
    521,041
    
    
    
    1,490,342Asset impairments and abandonments
    
    
    
    
    
    
    24,287,130Changes in assets and liabilities:Accounts receivable
    
    
    (8,270,144
    )
    
    
    (8,198,496
    )Insurance receivable
    
    
    
    
    
    
    (25,386
    )Interest and other receivables
    
    
    2,795
    
    
    
    (308,099
    )Income tax receivable
    
    
    1,169,850
    
    
    
    (108,474
    )Inventories
    
    
    (3,301,764
    )
    
    
    (1,336,989
    )Prepaid expenses and other
    
    
    851,218
    
    
    
    (1,508,659
    )Accounts payable
    
    
    373,828
    
    
    
    (1,220,642
    )Accrued expenses
    
    
    (2,008,824
    )
    
    
    1,191,266Legal liability
    
    
    (217,500
    )
    
    
    (45,000
    )Deferred insurance proceeds
    
    
    942,000
    
    
    
    Sales returns and allowances
    
    
    (104,139
    )
    
    
    307,719Net Cash Used By Operating Activities
    
    
    (5,996,840
    )
    
    
    (14,312,384
    )Cash Flows From Investing ActivitiesPurchases of certificates of deposit
    
    
    
    
    
    
    (3,736,525
    )Maturities of certificates of deposit
    
    
    3,736,525
    
    
    
    7,371,439Capital expenditures
    
    
    (44,662
    )
    
    
    (42,371
    )Deposits and other
    
    
    
    
    
    
    (2,252,563
    )Net Cash Provided By Investing Activities
    
    
    3,691,863
    
    
    
    1,339,980Cash Flows From Financing Activities:Issuance of common stock
    
    
    
    
    
    
    1,362,219Purchase of treasury stock
    
    
    (153,820
    )
    
    
    (1,187,906
    )Net Cash Provided (Used) By Financing Activities
    
    
    (153,820
    )
    
    
    174,313Net Decrease in Cash and Cash Equivalents
    
    
    (2,458,797
    )
    
    
    (12,798,091
    )Cash and Cash Equivalents at Beginning of Period
    
    
    26,482,499
    
    
    
    25,144,088Cash and Cash Equivalents at End of Period
    
    $
    24,023,702
    
    
    $
    12,345,997Supplemental Disclosure of Cash Flow Information:Cash paid for income taxes
    
    $
    
    
    
    $
    8,000Supplemental Disclosure of Non-cash Financing Activities:Retirement of treasury stock
    
    $
    153,820
    
    
    $
    1,187,906Manufacturing equipment placed in service
    
    
    444,118
    
    
    
    
  6




---



##### Table of Contents



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




---



##### Table of Contents



MATRIXX INITIATIVES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
        Three Months Ended
    
    
    Six Months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Net income (loss) applicable to common shareholders
    
    $
    5,290,935
    
    
    $
    5,078,387
    
    
    $
    2,857,927
    
    
    $
    (17,753,865
    )Weighted average common shares outstanding  Basic
    
    
    9,301,924
    
    
    
    9,228,970
    
    
    
    9,294,791
    
    
    
    9,199,561Dilutive Securities:Options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Restricted Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted average common shares outstanding  Diluted
    
    
    9,301,924
    
    
    
    9,228,970
    
    
    
    9,294,791
    
    
    
    9,199,561Net income (loss) per common share:Basic
    
    $
    0.57
    
    
    $
    0.55
    
    
    $
    0.31
    
    
    $
    (1.93
    )Diluted
    
    $
    0.57
    
    
    $
    0.55
    
    
    $
    0.31
    
    
    $
    (1.93
    )
 8




---



##### Table of Contents



MATRIXX INITIATIVES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
   September 30,
    
    
    March 31,2010
    
    
    2010Raw materials and packaging
    
    $
    397,610
    
    
    $
    623,808Finished goods
    
    
    9,070,963
    
    
    
    5,543,001Total
    
    $
    9,468,573
    
    
    $
    6,166,809
  Zicam Cold Remedy Nasal Gel and Cold Remedy Gel Swabs Recall
    9




---



##### Table of Contents



MATRIXX INITIATIVES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
    Product Liability Matters
 General.
  Our Position and Our Response
 Product Safety
 10




---



##### Table of Contents



MATRIXX INITIATIVES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
   Product Effectiveness
 Total Pending Product Liability Lawsuits
 Cases filed since June 30, 2010 (Pending in Federal Courts)
 Personal Injury:
 Date Filed
    
    United States District Court
    
    Named Plaintiff7/1/2010
    
    Arizona
    
    Warrington, J.7/9/2010
    
    Arizona
    
    MacDonald, C.7/14/2010
    
    Arizona
    
    Barton, J.7/15/2010
    
    Arizona
    
    Holloway, S.7/15/2010
    
    Arizona
    
    Wilhite, J.7/15/2010
    
    Arizona
    
    Ponthieux, S.7/15/2010
    
    Arizona
    
    Murter, J.7/20/2010
    
    Arizona
    
    Carter, C.7/20/2010
    
    Arizona
    
    Davis, L.7/20/2010
    
    Arizona
    
    Floyd, R.7/20/2010
    
    Arizona
    
    Foley, L.7/20/2010
    
    Arizona
    
    Hamilton, A.7/20/2010
    
    Arizona
    
    Jackson, A.7/20/2010
    
    Arizona
    
    Jackson, R.
 11




---



##### Table of Contents



Date Filed
    
    United States District Court
    
    Named Plaintiff7/20/2010
    
    Arizona
    
    Lipscomb, D.7/20/2010
    
    Arizona
    
    Moore, B.7/20/2010
    
    Arizona
    
    Pilkenton, L.7/20/2010
    
    Arizona
    
    Rentch, B.7/20/2010
    
    Arizona
    
    Saur, M.7/20/2010
    
    Arizona
    
    Short, J.7/21/2010
    
    Arizona
    
    Richmond, J.7/26/2010
    
    Arizona
    
    Swenson, J.7/27/2010
    
    Arizona
    
    Cochren, M.7/28/2010
    
    Arizona
    
    Hill, S.8/2/2010
    
    Arizona
    
    Flom, J.8/11/2010
    
    Arizona
    
    Saunders, L.8/11/2010
    
    Arizona
    
    Bethel, C.8/11/2010
    
    Arizona
    
    Nunley, Janee8/11/2010
    
    Arizona
    
    Nunley, Juliette8/12/2010
    
    Arizona
    
    Lundgren, K.8/12/2010
    
    Arizona
    
    Chase, T.8/13/2010
    
    Arizona
    
    Strickland, A.8/16/2010
    
    Arizona
    
    Richardson, D.8/16/2010
    
    Arizona
    
    Williams, L.8/16/2010
    
    Arizona
    
    Beamon, K.8/16/2010
    
    Arizona
    
    Bernholz, D.8/17/2010
    
    Arizona
    
    McAllister, B.8/17/2010
    
    Arizona
    
    Hernandez, B.8/17/2010
    
    Arizona
    
    Reynolds, C.8/17/2010
    
    Arizona
    
    Yeager, L.8/17/2010
    
    Arizona
    
    Annunziata, T.8/24/2010
    
    Arizona
    
    Meza, L.8/25/2010
    
    Arizona
    
    Haller, J.8/27/2010
    
    Arizona
    
    Schmidtman, D.9/1/2010
    
    Arizona
    
    Ryan, C.9/2/2010
    
    Arizona
    
    Chontos, J.9/2/2010
    
    Arizona
    
    Carlson, L.9/9/2010
    
    Arizona
    
    Helm, J.9/13/2010
    
    Arizona
    
    Forray, T.9/13/2010
    
    Arizona
    
    Harley, R.9/16/2010
    
    Arizona
    
    Archias, K.9/20/2010
    
    Southern District, Florida
    
    Stone, J.9/21/2010
    
    Arizona
    
    Bucher, R.9/21/2010
    
    Arizona
    
    Fugozzotto, S.9/22/2010
    
    Arizona
    
    Driscoll, J.9/22/2010
    
    Arizona
    
    Lock, P.9/24/2010
    
    Arizona
    
    Brown, D.9/27/2010
    
    Middle District, Florida
    
    Barber, J.9/29/2010
    
    Arizona
    
    Collins, R.9/29/2010
    
    Arizona
    
    Henry, C.10/1/2010
    
    Illinois
    
    Anderson, N.10/1/2010
    
    Arizona
    
    Thompkins, S.10/8/2010
    
    Eastern District, New York
    
    Burns, J.10/25/2010
    
    Western District, Missouri
    
    Artrip, M.10/25/2010
    
    Western District, Missouri
    
    Hall, J.
 Putative Class Actions for Economic Injury:
 Multi-District Litigation Matters.
 12




---



##### Table of Contents



Cases filed since June 30, 2010 (Pending in State Courts).
 Personal Injury:
 Date Filed
    
    Court
    
    Named Plaintiff7/8/2010
    
    Maricopa County, AZ
    
    Michaels, A.7/9/2010
    
    St. Clair County, IL
    
    MacDonald, C.7/23/2010
    
    Jerome County, ID
    
    Huettig, L.7/26/2010
    
    Maricopa County, AZ
    
    Allen, R.8/2/2010
    
    Maricopa County, AZ
    
    Kolomyetz, A.8/2/2010
    
    Maricopa County, AZ
    
    Martin, M.8/2/2010
    
    Maricopa County, AZ
    
    Michelson, P.8/3/2010
    
    Maricopa County, AZ
    
    Bey, C.8/16/2010
    
    Maricopa County, AZ
    
    Vosh, L.8/18/2010
    
    Maricopa County, AZ
    
    Bloodworth-Ferrero, C.8/27/2010
    
    Maricopa County, AZ
    
    Young, J.9/2/2010
    
    Pinellas County, FL
    
    Whiteside, J.9/10/2010
    
    Palm Beach County, FL
    
    Benfante, R.9/14/2010
    
    Maricopa County, AZ
    
    Allen, P.9/15/2010
    
    Maricopa County, AZ
    
    Altman, S.9/24/2010
    
    Maricopa County, AZ
    
    Tuma, J.10/4/2010
    
    Maricopa County, AZ
    
    Ellison, G.10/15/2010
    
    Maricopa County, AZ
    
    Allen, S.10/18/2010
    
    Montgomery County, AL
    
    Johnson, R.10/22/2010
    
    Twin Falls County, ID
    
    Hine, C.
 Putative Class Actions for Economic Injury:
 Cases Dismissed Subsequent to June 30, 2010 (Federal Courts).
  Cases dismissed Subsequent to June 30, 2010 (State Courts)
 13




---



##### Table of Contents



Date Filed
    
    Court
    
    Named Plaintiff
    
    Date Dismissed6/30/09
    
    St. Louis County,
    
    West
    
    10/4/10Missouri
 Settlement with Certain Claimants.
 Hohman v. Matrixx
Initiatives, Inc.
    14




---



##### Table of Contents



Potential Claimants.
  Litigation Reserves
 Securities Litigation Matters
   15




---



##### Table of Contents



Shareholder Derivative Lawsuits
     16




---



##### Table of Contents



MATRIXX INITIATIVES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  Related Legal Matters  Informal Inquiries
  Legal Expense
     17




---



##### Table of Contents



MATRIXX INITIATIVES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
      Cash, cash equivalents, accounts payable and accounts receivable
 18




---



##### Table of Contents



Certificates of Deposit:
 
 Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
 Overview
      3 Months Ended September 30,
    
    
    6 Months Ended September 30,$000s
    
    2010
    
    
    % NS
    
    
    2009
    
    
    % NS
    
    
    2010
    
    
    % NS
    
    
    2009
    
    
    % NSNet Sales
    
    $
    21,311
    
    
    
    100
    %
    
    $
    25,627
    
    
    
    100
    %
    
    $
    24,518
    
    
    
    100
    %
    
    $
    32,543
    
    
    
    100
    %Marketing
    
    $
    2,151
    
    
    
    10
    %
    
    $
    2,518
    
    
    
    10
    %
    
    $
    4,744
    
    
    
    19
    %
    
    $
    5,830
    
    
    
    18
    %Sales
    
    $
    892
    
    
    
    4
    %
    
    $
    856
    
    
    
    3
    %
    
    $
    1,436
    
    
    
    6
    %
    
    $
    1,474
    
    
    
    5
    %General & Administrative
    
    $
    2,664
    
    
    
    13
    %
    
    $
    4,385
    
    
    
    17
    %
    
    $
    5,178
    
    
    
    21
    %
    
    $
    16,367
    
    
    
    50
    %Legal -Product Liability & Regulatory
    
    $
    1,057
    
    
    
    5
    %
    
    $
    2,391
    
    
    
    9
    %
    
    $
    720
    
    
    
    3
    %
    
    $
    2,968
    
    
    
    9
    %Total Selling, General
and Administrative
    
    $
    6,764
    
    
    
    32
    %
    
    $
    10,150
    
    
    
    40
    %
    
    $
    12,078
    
    
    
    49
    %
    
    $
    26,639
    
    
    
    82
    %Research & Development
    
    $
    354
    
    
    
    2
    %
    
    $
    419
    
    
    
    2
    %
    
    $
    884
    
    
    
    4
    %
    
    $
    1,353
    
    
    
    4
    %Goodwill & Asset Impairments
    
    $
    0
    
    
    
    0
    %
    
    $
    0
    
    
    
    0
    %
    
    $
    0
    
    
    
    0
    %
    
    $
    23,867
    
    
    
    73
    %
 19




---



##### Table of Contents



1)
    
    We review sales and net income performance against our annual goals. In fiscal 2011,
the Company will focus on growing sales in our core Cold Remedy and Allergy/Sinus franchise
and offsetting declines in our symptom relief and other cough/cold products. For fiscal
2011, the Company anticipates revenue increasing 3% to 5% above the $67.3 million achieved
in fiscal 2010. We anticipate expense for litigation will be between $1.3 million and $1.8
million per quarter (prior to insurance reimbursement) in fiscal 2011. We expect higher
sales in the second half of fiscal 2011 as the incidence of illness increases during the
cold season. In addition, we anticipate marketing expense and increased legal expense will
somewhat offset higher gross profit associated with increased sales in the second half of
fiscal 2011and we expect to report net income between $2.0 and $3.0 million for the full
year.2)
    
    We monitor sales of our products at retail because increased consumer purchases of our
products are an indicator of growth. For the 12 weeks ended October 3, 2010, retail unit
sales (as measured by three outlet syndicated scanner data, not including Wal-Mart) of our
oral Cold Remedy products decreased approximately 4% while sales of our allergy and
congestion products declined approximately 2% versus the comparable period in the previous
year, while the entire cough and
 20




---



##### Table of Contents



cold category declined approximately 3%. We expect our retail unit sales to increase during
the cold season.3)
    
    We measure our ability to maintain strong gross margins on our products. During the
quarter ended September 2010, we realized an average gross margin of 74%, compared to the
73% average gross margin achieved in the prior year. Gross margins on our existing products
generally vary between 65% and 80%. Due to the decline in sales of our lower-priced symptom
relief products and a lower level of in-store promotional activity, our average selling
price per unit increased 5% in the six months ended September 30, 2010, compared to the
prior year.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. We anticipate fiscal 2011 operating expenses will decline as a percentage of sales
compared to the prior fiscal year.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. We expect our ten largest retailers
to have a net increase in Zicam oral Cold Remedy products on shelf during this years cold
season. Although retailers are increasing the number of our products they sell, they are
also increasing the number of store brand products that directly compete with our Zicam
offerings. Store brand products are generally sold at a substantial discount to branded
products. Store brand versions of our products may adversely affect our mix of products
sold at retail as well as our sales levels.
 Critical Accounting Policies and Estimates
    Legal Contingencies.
 21




---



##### Table of Contents



Intangible Assets and Goodwill.
  Income Taxes.
 Revenue Recognition.
 Sales Adjustments.
  22




---



##### Table of Contents



Accounts Receivable and Allowance for Doubtful Accounts.
 Product Recalls.
  Results of Operations for the Three Months Ended September 30, 2010 Compared to the Three
Months Ended September 30, 2009
  Three Months Ended September 30,2010
    
    
    2009Net sales
    
    $
    21,311
    
    
    
    100
    %
    
    $
    25,627
    
    
    
    100
    %Cost of sales
    
    
    5,590
    
    
    
    26
    
    
    
    6,830
    
    
    
    27Gross profit
    
    
    15,721
    
    
    
    74
    
    
    
    18,797
    
    
    
    73Selling, general and administrative
    
    
    6,764
    
    
    
    32
    
    
    
    10,150
    
    
    
    40Research & development
    
    
    354
    
    
    
    2
    
    
    
    419
    
    
    
    2Goodwill Impairment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Asset Impairments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income from Operations
    
    
    8,602
    
    
    
    40
    
    
    
    8,228
    
    
    
    32Interest and other income
    
    
    6
    
    
    
    
    
    
    
    38
    
    
    
    Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income before income taxes
    
    
    8,609
    
    
    
    40
    
    
    
    8,266
    
    
    
    32Income taxes
    
    
    3,318
    
    
    
    16
    
    
    
    3,188
    
    
    
    12Net Income
    
    $
    5,291
    
    
    
    25
    %
    
    $
    5,078
    
    
    
    20
    %
 23




---



##### Table of Contents



Net Sales
   Cost of Sales
  Gross Profit
  Selling, General & Administrative (SG&A)
   Research and Development
  Interest & Other Income
  Income Before Income Taxes
  24




---



##### Table of Contents



Income Taxes
  Net Income
  Results of Operations for the Six Months Ended September 30, 2010 Compared to the Six Months
Ended September 30, 2009
  Six Months Ended September 30,2010
    
    
    
    
    
    
    
    
    
    
    2009Net sales
    
    $
    24,518
    
    
    
    100
    %
    
    $
    32,543
    
    
    
    100
    %Cost of sales
    
    
    6,923
    
    
    
    28
    
    
    
    9,623
    
    
    
    30Gross profit
    
    
    17,596
    
    
    
    72
    
    
    
    22,920
    
    
    
    70Selling, general and administrative
    
    
    12,078
    
    
    
    49
    
    
    
    26,639
    
    
    
    82Research & development
    
    
    884
    
    
    
    4
    
    
    
    1,353
    
    
    
    4Goodwill Impairment
    
    
    
    
    
    
    
    
    
    
    15,040
    
    
    
    46Asset Impairments
    
    
    
    
    
    
    
    
    
    
    8,827
    
    
    
    27Income (Loss) From Operations
    
    
    4,633
    
    
    
    19
    
    
    
    (28,939
    )
    
    
    (89
    )Interest and other income
    
    
    23
    
    
    
    
    
    
    
    85
    
    
    
    Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income (Loss) before income taxes
    
    
    4,656
    
    
    
    19
    
    
    
    (28,854
    )
    
    
    (89
    )Income taxes (Benefit)
    
    
    1,798
    
    
    
    7
    
    
    
    (11,100
    )
    
    
    (34
    )Net Income (Loss)
    
    $
    2,858
    
    
    
    12
    %
    
    $
    (17,754
    )
    
    
    (55
    )%
 Net Sales
   Cost of Sales
 25




---



##### Table of Contents



Gross Profit
  Selling, General & Administrative (SG&A)
   Research and Development
  Goodwill and Asset Impairments
  Interest & Other Income
  26




---



##### Table of Contents



Income (Loss) Before Income Taxes
  Income Taxes (Benefits)
  Net Income (Loss)
  Liquidity and Capital Resources
    27




---



##### Table of Contents



Contractual Obligations
  28




---



##### Table of Contents



Contractual Cash Obligations(In thousands of dollars)Payments due by Period as of September 30, 2010Less 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
    
    
    1,238
    
    
    
    439
    
    
    
    799
    
    
    
    0
    
    
    
    0Purchase Obligations
    
    
    11,058
    
    
    
    11,058
    
    
    
    0
    
    
    
    0
    
    
    
    0Other Long-Term Liabilities Reflected on the
Companys Balance Sheet under GAAP
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Total
    
    $
    12,296
    
    
    $
    11,497
    
    
    $
    799
    
    
    $
    0
    
    
    $
    0
 CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
 Forward Looking Statements
  
    
    our belief that any additional recall charges will be immaterial;
 
    
    our belief that reserves for customer programs are adequate and proper;
 
    
    our expectation regarding continued expansion of the Zicam line of products;
 
    
    our expectation of achieving fiscal 2011 revenue in the $69.3 million to $70.7 million
range;
 
    
    our expectation of achieving fiscal 2011 net income in the $2.0 million to $3.0 million
range;
 
    
    our belief that our allowance for uncollectible accounts is adequate;
 
    
    our expectation that ongoing legal expense will be between $1.3 million and $1.8
million per quarter;
 
    
    our expectation that any federal consumer fraud and personal injury matter filed in the
future will be transferred and consolidated pursuant to the MDL transfer process, subject
to the plaintiffs opportunity to object;
 
    
    our intention to continue vigorously defending the Zicam Cold Remedy product liability
and securities litigation claims, our expectation that additional product liability
lawsuits may be filed against us, and our belief that any liability resulting from these or
other lawsuits, including any adverse publicity, could materially impact our financial
results;
 
    
    our expectations regarding litigation reserves;
 
    
    our expectation of utilizing deferred tax assets;
 29




---



##### Table of Contents




    
    our expectation that sales in future periods will be affected by the recall of our
nasal Cold Remedy products;
 
    
    our expectations regarding the effect of accounting standard updates;
 
    
    our expectation that retailers will add new and/or different Zicam products;
 
    
    our expectations regarding store brand competition;
 
    
    our intention to review our product return reserve provision regularly and adjust the
reserve amounts if actual product returns differ materially from our reserve estimates;
 
    
    our expectation of making income tax payments at our statutory rates in future years;
 
    
    our expectation that operating expenses in fiscal 2011 will decline as a percentage of
sales compared to fiscal 2010;
 
    
    our expectation that the average unit cost of goods sold and gross margin will continue
to be affected by the relative mix of products sold;
 
    
    our expectation that our net income and operating expenses in future periods will vary
largely with the seasonality of our sales, the severity of the cold season, the revenues
and expenses associated with new products, and the timing and amount of advertising,
research and development, and legal expenses;
 
    
    our expectations regarding derivative instruments;
 
    
    our belief that we will not repurchase shares of common stock in the open market;
 
    
    our expectations regarding the amount of advertising expense and that advertising
expense will be highest in our third and fourth fiscal quarters;
 
    
    our intention of focusing promotional and marketing support on Zicam oral Cold Remedy
products during the 2010/2011 cold season;
 
    
    our belief that focusing on consumer consumption of our oral Cold Remedy products will
allow us to grow the Zicam brand;
 
    
    our belief that our existing capital resources are sufficient to fund our operations
and capital requirements for the next 12 months;
 
    
    our expectations regarding our manufacturers ability to timely produce inventory
adequate for sales of products through the 2010/2011 cough and cold season;
 
    
    our belief that moderate interest rate increases and current uncertainties regarding
the availability of credit will not have a material adverse impact on our results of
operations or financial position in the foreseeable future and that we are not subject in
any material way to other forms of market risk.
  30




---



##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures about Market Risk
   
 Item 4. Controls and Procedures
  31




---



##### Table of Contents



PART II
OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
 Item 6. Exhibits
 Exhibit No.
    
    Title3.01
    
    Articles of Incorporation and Amendments thereto of the registrant (1)3.02
    
    Bylaws of the registrant (2)4.01
    
    Rights Agreement dated as of July 22, 2002 by and between the registrant and
Corporate Stock Transfer, Inc. (3)31.1*
    
    Certification of CEO and CFO pursuant to Section 302 of the Sarbanes-Oxley
Act of 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. 32




---



##### Table of Contents



SIGNATURES
  Matrixx Initiatives, Inc./s/  William J. HemeltWilliam HemeltChief Executive Officer and
Principal Financial OfficerNovember 5, 2010 33