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  • 10-K (Jun 8, 2009)
  • 10-K (Jul 3, 2008)
  • 10-K (Jun 13, 2008)
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  • 10-K (Mar 15, 2007)

 
Quarterly Reports

 
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Matrixx Initiatives 10-K 2008
e10vkza
 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
Form 10-K/A
(Mark One)
     
o   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2008
or
     
þ   FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 001-31404
Matrixx Initiatives, Inc.
(Exact Name of Registrant as Specified in Its Charter)
     
Delaware
(State or Other Jurisdiction
of Incorporation or Organization)
  87-0482806
(I.R.S. Employer
Identification No.)
8515 E. Anderson Drive
Scottsdale, AZ 85255
602-385-8888

(Address of principal executive offices,
Registrant’s Telephone Number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
     
Title of Each Class   Name of Each Exchange on Which Registered
Common Stock, $.001 par value   Nasdaq Global Select Market
Securities registered pursuant to Section 12(g) of the Act: None
     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ
     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ
     Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K, is not to be contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
             
Large accelerated filer o
  Accelerated filer þ   Non-accelerated filer o   Smaller reporting company o
 
      (Do not check if a smaller reporting company)    
     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
     The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $142.6 million based on the closing price of $19.78 per share of common stock as reported on the Nasdaq Global Select Market on September 28, 2007. For purposes of this determination, shares of common stock held by each officer and director and by each person who owns 5% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates of the registrant. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
     As of June 10, 2008 9,629,962 shares of the registrant’s common stock were outstanding.
 
 

 


 

Explanatory Note
Matrixx Initiatives, Inc. (the “Company”) is filing this Amendment No. 1 (“Amendment No. 1”) on Form 10-K/A to its Annual Report on Form 10-K for the fiscal year ended March 31, 2008 (the “2008 Form 10-K”) solely for the purpose of correcting the following: the Report On Internal Control Over Financial Reporting Of Independent Registered Public Accounting Firm, the Report Of Independent Registered Public Accounting Firm, and the Consent of Independent Registered Public Accounting Firm filed as Exhibit 23.1 to the 2008 Form 10-K. The body of the two reports and the consent inadvertently referenced June 11, 2008 as the report date. The correct report date for each of the two reports and the consent is June 12, 2008.
In accordance with Rule 12b-15 of the Exchange Act of 1934, this Amendment No. 1 sets forth the complete text of Items 9A and 15, which include a corrected Report On Internal Control Over Financial Reporting Of Independent Registered Public Accounting Firm and a corrected Report Of Independent Registered Public Accounting Firm, respectively. Attached as Exhibit 23.1 to Part IV of this Amendment No. 1 is a corrected Consent of Independent Registered Public Accounting Firm and attached as Exhibits 31.1, 31.2, 32.1 and 32.2 to Part IV of this Amendment No. 1 are new certifications executed as of the date of this Amendment No. 1 by the Chief Executive Officer and Chief Financial Officer as required by Rule 12b-15.
Except as described above, no other changes have been made to the 2008 Form 10-K and this Amendment No. 1 does not amend, update or change any other information contained in the 2008 Form 10-K. Information not affected by the changes described above is unchanged and reflects the disclosures made at the time of the original filing of the 2008 Form 10-K on June 12, 2008. Accordingly, this Amendment No.1 should be read in conjunction with the Company’s filings made with the Securities Exchange Commission subsequent to the filing of the 2008 Form 10-K, including any amendments to those filings.

2


 

PART II
ITEM 9A. CONTROLS AND PROCEDURES
     a) Evaluation of Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934 as of the end of the period covered by this report. Based on such evaluation, such officers have concluded that our disclosure controls and procedures were effective as of March 31, 2008 in alerting them on a timely basis to material information relating to us (including our consolidated subsidiaries) required to be included in our filings under the Exchange Act.
     b) Management’s Annual Report on Internal Control Over Financial Reporting
     Management of the Company, including our Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting as defined by rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that:
  (i)   pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
 
  (ii)   provide reasonable assurance that the transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with the authorizations of management and directors of the Company; and
 
  (iii)   provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect of the financial statements.
     Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of the Company’s internal control over financial reporting as of March 31, 2008. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.
     Management’s assessment included an evaluation of the design of our internal control over financial reporting and testing the operational effectiveness of our internal control over financial reporting.  Management reviewed the results of the assessment with the Audit Committee of the Board of Directors.  Based on such assessment, management determined that, at March 31, 2008, we maintained effective internal control over financial reporting.
     Mayer Hoffman McCann, P.C., the independent registered public accounting firm that audited the consolidated financial statements of the Company included in this Annual Report on Form 10-K/A, has issued a report on management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of March 31, 2008. The report is included below in this Item under the heading “Report on Internal Control over Financial Reporting of Independent Registered Public Accounting Firm.”

3


 

REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Matrixx Initiatives, Inc.
     We have audited management’s assessment, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting, that Matrixx Initiatives, Inc. and subsidiaries (the “Company”) did maintain effective internal control over financial reporting as of March 31, 2008, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
     We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
     A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
     Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
     In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2008, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
     We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended March 31, 2008 of the Company and our report dated June 12, 2008 expressed an unqualified opinion on those consolidated financial statements.
/s/ Mayer Hoffman McCann, P.C.
MAYER HOFFMAN MCCANN P.C.
Phoenix, Arizona
June 12, 2008

4


 

PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
     (a)1. Financial Statements
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
         
Financial Statements   Page
    6  
 
    7  
 
    8  
 
    9  
 
    12  
 
    13  

5


 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Matrixx Initiatives, Inc.
We have audited the accompanying consolidated balance sheets of Matrixx Initiatives, Inc. and subsidiaries (the “Company”) as of March 31, 2008 and March 31, 2007 and the related consolidated statements of income, changes in stockholders’ equity and cash flows for the year ended March 31, 2008, three months ended March 31, 2007 and for the years ended December 31, 2006 and 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of March 31, 2008 and 2007, and the results of their operations and their cash flows for the year ended March 31, 2008, three months ended March 31, 2007, and the years ended December 31, 2006 and 2005 in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of March 31, 2008, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated June 12, 2008 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
/s/ Mayer Hoffman McCann, P.C.
MAYER HOFFMAN MCCANN P.C.
Phoenix, Arizona
June 12, 2008

6


 

MATRIXX INITIATIVES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2008 AND 2007
                 
    2008     2007  
     
ASSETS
               
Current Assets:
               
Cash and cash equivalents
  $ 27,932,672     $ 16,944,189  
Accounts receivable:
               
Trade, net of allowance for doubtful accounts of $209,377 and $429,031
    12,051,847       8,256,929  
Other receivable
    39,363        
Insurance receivable
    75,000       2,200,000  
Inventories
    11,530,060       15,458,928  
Prepaid expenses
    1,743,521       584,771  
Interest receivable
    73,904       84,191  
Income tax receivable
          1,370,277  
Deferred tax asset
    1,739,490       3,361,605  
     
Total Current Assets
    55,185,857       48,260,890  
     
 
               
Property and Equipment, at cost:
               
Office furniture and computer equipment
    1,560,403       1,356,931  
Machine tooling and manufacturing equipment
    5,330,728       5,225,020  
Laboratory furniture and equipment
    437,267       339,343  
Leasehold improvements
    514,674       350,576  
     
 
    7,843,072       7,271,870  
Less accumulated depreciation
    (2,753,222 )     (1,925,598 )
     
 
               
Net Property and Equipment
    5,089,850       5,346,272  
     
 
               
Other Assets:
               
Deposits
    379,205       221,963  
Other assets
    110,034       82,770  
Restricted cash
    500,000       500,000  
Debt issuance costs, net of accumulated amortization of $5,398 and $48,061
    8,997       7,171  
Patents, net of accumulated amortization of $582,670 and $446,002
    1,834,791       1,692,115  
Goodwill
    15,039,836       15,039,836  
     
 
               
Total Other Assets
    17,872,863       17,543,855  
     
 
               
Total Assets
  $ 78,148,570     $ 71,151,017  
     
 
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
 
               
Current Liabilities:
               
Accounts payable
  $ 1,307,881     $ 2,584,553  
Accrued expenses
    4,433,841       3,162,814  
Sales commissions
    533,384       372,206  
Sales returns and allowances
    1,271,791       2,391,290  
Legal liability
    1,100,000       1,045,000  
Accrued taxes
    1,927,025        
     
 
               
Total Current Liabilities
    10,573,922       9,555,863  
     
 
               
Deferred tax liability
    2,022,427       1,160,328  
     
 
               
Total Liabilities
    12,596,349       10,716,191  
 
               
Commitments and Contingencies
               
 
               
Stockholders’ 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, 10,175,412 and 10,079,317 shares issued
    10,175       10,079  
Additional paid-in capital
    50,960,220       49,122,216  
Retained earnings
    22,126,374       11,698,835  
     
 
    73,096,769       60,831,130  
Less common stock held in treasury, at cost (547,769 and 53,800 shares)
    (7,544,548 )     (396,304 )
     
Total Stockholders’ Equity
    65,552,221       60,434,826  
     
Total Liabilities and Stockholders’ Equity
  $ 78,148,570     $ 71,151,017  
     
The accompanying notes are an integral part of these consolidated financial statements.

7


 

MATRIXX INITIATIVES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEAR ENDED MARCH 31, 2008, THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006 (UNAUDITED),
AND THE YEARS ENDED DECEMBER 31, 2006 AND 2005
                                         
    Year ended     Three months ended March 31,     Years ended December 31,  
    March 31,             (Unaudited)              
    2008     2007     2006     2006     2005  
               
Net sales
  $ 100,972,384     $ 19,045,754     $ 17,675,959     $ 96,230,780     $ 90,460,595  
Cost of sales
    34,532,099       7,047,655       5,865,211       32,445,499       28,201,154  
               
 
                                       
Gross Profit
    66,440,285       11,998,099       11,810,748       63,785,281       62,259,441  
 
                                       
Selling, general and administrative expenses
    46,520,327       8,730,650       10,692,507       51,946,219       54,196,370  
Research and development
    4,108,354       1,137,671       1,126,846       4,684,837       4,069,367  
               
 
                                       
Income From Operations
    15,811,604       2,129,778       (8,605 )     7,154,225       3,993,704  
               
 
                                       
Other Income (Expense):
                                       
Interest and other income
    653,422       203,374       173,911       501,845       417,724  
Interest expense
                      (116,639 )      
               
 
                                       
Total Other Income
    653,422       203,374       173,911       385,206       417,724  
               
 
                                       
Income Before Provision For Income Taxes
    16,465,026       2,333,152       165,306       7,539,431       4,411,428  
 
                                       
Provision for income taxes
    6,037,487       623,921       68,546       2,612,803       1,332,936  
               
 
                                       
Net Income
  $ 10,427,539     $ 1,709,231     $ 96,760     $ 4,926,628     $ 3,078,492  
               
 
                                       
Net Income Per Share of Common Stock:
                                       
Basic:
                                       
Weighted Average Number of Common Shares Outstanding
    9,704,579       9,749,162       9,565,963       9,620,362       9,486,288  
Net Income Per Share of Common Stock
  $ 1.07     $ 0.18     $ 0.01     $ 0.51     $ 0.32  
 
                                       
Diluted:
                                       
Weighted Average Number of Common Shares Outstanding
    10,001,307       10,031,008       10,027,666       9,965,786       9,769,922  
Net Income Per Share of Common Stock
  $ 1.04     $ 0.17     $ 0.01     $ 0.49     $ 0.32  
The accompanying notes are an integral part of these consolidated financial statements.

8


 

MATRIXX INITIATIVES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE YEAR ENDED MARCH 31, 2008, THE THREE MONTHS ENDED MARCH 31, 2007 AND THE YEARS ENDED
DECEMBER 31, 2006 AND 2005
                                                                 
    Series A                     Additional                     Total  
    Preferred Stock     Common Stock     Paid In     Treasury     Retained     Stockholders’  
    Shares     Amount     Shares     Amount     Capital     Stock     Earnings     Equity  
Balance at December 31, 2004
        $       9,520,198     $ 9,520     $ 42,527,862     $ (396,304 )   $ 1,984,484     $ 44,125,562  
 
Issuance of common stock upon exercise of stock options
                23,134       23       184,106                   184,129  
 
Issuance of restricted stock pursuant to the Company’s restricted stock bonus program
                56,197       56       641,052                   641,108  
 
Income tax benefit from the exercise of stock options
                            80,344                   80,344  
 
Net income
                                        3,078,492       3,078,492  
 
                                               
 
Balance at December 31, 2005
                9,599,529       9,599       43,433,364       (396,304 )     5,062,976       48,109,635  
 
Issuance of common stock upon exercise of stock options
                244,965       245       2,479,671                   2,479,916  
 
Issuance of restricted stock pursuant to the Company’s restricted stock program
                103,258       104       1,342,960                   1,343,064  
 
Income tax benefit from the exercise of stock options
                            1,077,402                   1,077,402  
 
Stock option expense pursuant to SFAS 123R
                            150,800                   150,800  
 
Net income
                                        4,926,628       4,926,628  
 
                                               
 
Balance at December 31, 2006
                9,947,752       9,948       48,484,197       (396,304 )     9,989,604       58,087,445  
 
Issuance of common stock upon exercise of stock options
                27,333       27       251,790                   251,817  
 
Issuance of restricted stock pursuant to the Company’s restricted stock program
                104,232       104       287,819                   287,923  
 
Income tax benefit from the exercise of stock options
                            80,717                   80,717  
 
Stock option expense pursuant to SFAS 123R
                            17,693                   17,693  
 
Net income
                                        1,709,231       1,709,231  
 
                                               
 
Balance at March 31, 2007
                10,079,317       10,079       49,122,216       (396,304 )     11,698,835       60,434,826  
(Continued)

9


 

MATRIXX INITIATIVES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE YEAR ENDED MARCH 31, 2008, THE THREE MONTHS ENDED MARCH 31, 2007 AND THE YEARS ENDED
DECEMBER 31, 2006 AND 2005
(CONTINUED)
                                                                 
    Series A                     Additional                     Total  
    Preferred Stock     Common Stock     Paid In     Treasury     Retained     Stockholders’  
    Shares     Amount     Shares     Amount     Capital     Stock     Earnings     Equity  
Issuance of common stock upon exercise of stock options
        $       59,767     $ 60     $ 611,083     $     $     $ 611,143  
 
Issuance of restricted stock pursuant to the Company’s restricted stock program
                58,760       58       1,294,506                   1,294,564  
 
Purchase of treasury stock
                                  (7,463,393 )           (7,463,393 )
 
Retirement of treasury stock
                (22,432 )     (22 )     (315,127 )     315,149              
 
Income tax benefit from the exercise of stock options
                            231,401                   231,401  
 
Stock option expense pursuant to SFAS 123R
                            16,141                   16,141  
 
Net income
                                        10,427,539       10,427,539  
 
                                               
 
Balance at March 31, 2008
        $       10,175,412     $ 10,175     $ 50,960,220     $ (7,544,548 )   $ 22,126,374     $ 65,552,221  
 
                                               
The accompanying notes are an integral part of these consolidated financial statements.

10


 

MATRIXX INITIATIVES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2006
(UNAUDITED)
                                                                 
    Series A                     Additional                     Total  
    Preferred Stock     Common Stock     Paid In     Treasury     Retained     Stockholders’  
    Shares     Amount     Shares     Amount     Capital     Stock     Earnings     Equity  
Balance at December 31, 2005
        $       9,599,529     $ 9,599     $ 43,433,364     $ (396,304 )   $ 5,062,976     $ 48,109,635  
 
Issuance of common stock upon exercise of stock options
                117,765       118       1,256,264                   1,256,382  
 
Issuance of restricted stock pursuant to the Company’s restricted stock program
                100,188       100       923,871                   923,971  
 
Stock option expense pursuant to SFAS 123R
                            54,967                   54,967  
 
Net income
                                        96,760       96,760  
 
                                               
 
Balance at March 31, 2006
        $       9,817,482     $ 9,817     $ 45,668,466     $ (396,304 )   $ 5,159,736     $ 50,441,715  
 
                                               
The accompanying notes are an integral part of these consolidated financial statements.

11


 

MATRIXX INITIATIVES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED MARCH 31, 2008, THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006 (UNAUDITED),
AND THE YEARS ENDED DECEMBER 31, 2006 AND 2005
                                         
    Year ended     Three months ended March 31,     Years ended December 31,  
    March 31,             (Unaudited)              
    2008     2007     2006     2006     2005  
Cash Flows From Operating Activities
                                       
Net income
  $ 10,427,539     $ 1,709,231     $ 96,760     $ 4,926,628     $ 3,078,492  
Adjustments to reconcile net income to net cash provided (used) by operating activities:
                                       
Depreciation
    1,057,299       491,520       138,429       630,599       345,761  
Amortization
    149,130       40,346       48,448       170,691       83,415  
Provision for bad debts
    (219,654 )     18,335       (277,443 )     (232,219 )     87,675  
Deferred income taxes
    2,484,214       539,333       (9,348 )     1,540,738       (88,142 )
Common stock issued for compensation
    1,542,106       386,333       978,938       2,571,266       641,108  
Changes in assets and liabilities:
                                       
Accounts receivable
    (3,614,627 )     15,598,763       20,667,204       6,312,460       (17,655,917 )
Insurance receivable
    2,125,000       (797,033 )           3,397,033       (4,800,000 )
Interest receivable
    10,287       (37,937 )     (43,401 )     78,279       (66,875 )
Income tax receivable
    1,370,277                   (1,370,277 )      
Inventories
    3,928,868       1,326,416       (2,723,980 )     (7,982,209 )     (1,561,701 )
Prepaid expenses and other
    (1,186,014 )     169,532       81,644       58,767       (8,254 )
Accounts payable
    (1,276,672 )     (12,729,552 )     (4,303,561 )     6,572,454       4,042,335  
Accrued expenses
    3,359,230       (3,175,957 )     (3,459,475 )     (4,546,972 )     3,471,133  
Legal liability
    55,000       (126,500 )     (12,000,000 )     (12,073,500 )     13,245,000  
Sales returns and allowances
    (1,119,499 )     (340,830 )     (1,206,721 )     (1,148,432 )     1,275,292  
               
 
                                       
Net Cash Provided (Used) By Operating Activities
    19,092,484       3,072,000       (2,012,506 )     (1,094,694 )     2,089,322  
               
 
                                       
Cash Flows From Investing Activities
                                       
Capital expenditures
    (800,877 )     (310,750 )     (67,193 )     (4,997,736 )     (1,867,296 )
Deposits and other
    (436,586 )     (16,500 )     (38,974 )     802,846       (788,119 )
Restricted cash
                      4,500,000        
               
 
                                       
Net Cash Provided (Used) By Investing Activities
    (1,237,463 )     (327,250 )     (106,167 )     305,110       (2,655,415 )
               
 
                                       
Cash Flows From Financing Activities:
                                       
Proceeds from borrowing
                      4,000,000        
Principal payments on notes payable
                      (4,000,000 )      
Debt issuance costs
    (14,288 )           (2,939 )     (9,381 )     (45,851 )
Issuance of common stock
    611,143       251,817       1,256,382       2,479,916       184,129  
Purchase of treasury stock
    (7,463,393 )                        
               
 
                                       
Net Cash (Used) Provided By Financing Activities
    (6,866,538 )     251,817       1,253,443       2,470,535       138,278  
               
 
                                       
Net Increase (Decrease) in Cash and Cash Equivalents
    10,988,483       2,996,567       (856,230 )     1,680,951       (427,815 )
 
                                       
Cash and Cash Equivalents at Beginning of Period
    16,944,189       13,947,622       12,266,671       12,266,671       12,694,486  
               
 
                                       
Cash and Cash Equivalents at End of Period
  $ 27,932,672     $ 16,944,189     $ 11,401,441     $ 13,947,622       12,266,671  
               
 
                                       
Supplemental Disclosure of Cash Flow Information:
                                       
Cash paid during the period for:
                                       
Interest
  $     $     $     $ 115,222     $  
Income taxes
                860,790       2,021,243       814,164  
 
Supplemental Disclosure of Noncash Financing Activities:
                                       
Retirement of treasury stock
  $ 315,149     $     $     $     $  
The accompanying notes are an integral part of these consolidated financial statements.

12


 

MATRIXX INITIATIVES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
   Organization
     Gum Tech International, Inc. (the “Company”) was incorporated in Utah on February 4, 1991 to develop, market and distribute specialty chewing gum products for branded and private label customers, as well as products marketed under the Company’s brand. The Company sold its gum operations in July 2001. On June 18, 2002, the Company completed its previously announced plans to reincorporate in Delaware and change its name to Matrixx Initiatives, Inc. (“Matrixx” or the “Company”). The reincorporation and name change were effectuated through a merger of the Company (then Gum Tech International, Inc.) with and into its wholly-owned Delaware subsidiary, Matrixx Initiatives, Inc. The timing of the merger (including the resulting reincorporation and name change) immediately followed the receipt of approval of the Company’s shareholders at its regularly scheduled annual meeting held on such date. The authorized capital stock of Matrixx consists of (i) 30,000,000 shares of common stock, $.001 par value, (“common stock”), and (ii) 2,000,000 shares of preferred stock, $.001 par value. Upon the effectiveness of the merger, each share of Gum Tech International, Inc. common stock issued and outstanding immediately before the merger was extinguished and converted into one issued and outstanding share of Matrixx common stock. All dollar amounts have been retroactively restated for the change in the capital structure.
     The Company’s sole business segment in the fiscal year ended March 31, 2008, three-month transition period ended March 31, 2007, and calendar years 2006 and 2005, was developing, marketing and selling over the counter products with an emphasis on those that utilize unique or novel delivery systems through a wholly-owned subsidiary, Zicam, LLC. During 2005, we formed Zicam Swab Products, LLC (ZSP) to purchase the dry handle swab technology from a third party. During 2006, we formed Matrixx Oral Care, LLC (MOC), subsequently renamed Zicare, LLC (Zicare), to pursue development of an over-the-counter oral care product. In May 2008, we formed Zicam Canada, Inc. to commercialize sales of Zicam products in Canada.
   Principles of Consolidation
     The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Zicam, ZSP, and Zicare. All significant intercompany accounts and transactions have been eliminated.
   Change of Fiscal Year
     Because of the extreme seasonality in the Company’s business, on February 9, 2007, the Company’s Board of Directors approved a change in the Company’s fiscal year end from December 31 to March 31 in order to better align the Company’s operations and financial results with the entire cold season. The three month period ended March 31, 2007 was the Company’s transition period and the Company’s new fiscal year began April 1, 2007 and ended March 31, 2008. All comparative presentations for the three-months ended March 31, 2006 are unaudited.
   Cash and Cash Equivalents
     For purposes of the consolidated financial statements, the Company considers all highly liquid investments with an original maturity of three months or less at the date of purchase to be cash equivalents. Cash deposits in each institution are insured in limited amounts by the Federal Deposit Insurance Corporation (FDIC).
   Accounts Receivable and Allowance for Doubtful Accounts
     Accounts receivable are recorded at the invoice amount and do not bear interest. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable; however, changes in circumstances relating to accounts receivable may result in a requirement for additional allowances in the future. The Company determines the allowance based on historical write-off experience, current market trends and, for larger accounts, the ability to pay outstanding balances. Past due balances over 90 days and other higher risk amounts are reviewed individually and collectively. In addition, the Company maintains a reserve for all invoices by applying a percentage based on historical trends. Account balances are charged against the allowance after all collection efforts have been exhausted and the potential for recovery is considered remote. During fiscal 2008, we determined that our allowance for bad debt exceeded the amount of loss

13


 

MATRIXX INITIATIVES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
that would likely be incurred and we reduced the allowance amount by approximately $250,000, which reduced selling, general and administrative (“SG&A”) expenses by an equal amount.
   Inventories
     Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out pricing method.
   Property and Equipment
          Depreciation of the primary asset classifications is calculated based on the following estimated useful lives using the straight-line method.
         
Classification   Useful Life in Years
Machine tooling and manufacturing equipment
    3-7  
Office furniture and computer equipment
    3-5  
Laboratory equipment and furniture
    3-5  
Leasehold improvements
    2-5  
     For the twelve months ended March 31, 2008 depreciation of property and equipment was $1,075,299. In addition, for the three months ended March 31, 2007 and 2006 and the years ended December 31, 2006 and 2005, depreciation of property and equipment charged to selling, general and administrative expenses was $491,520, $138,429, $630,599, and $345,761, respectively.
   Long-Lived Assets
     When facts and circumstances indicate that the carrying value of long-lived assets may be impaired, an evaluation of the recoverability is performed by comparing the carrying value of the assets to the estimated undiscounted net future cash flows. A forecast showing lack of long-term profitability, a significant decline in market share, or a current period operating or cash flow loss combined with a history of operating or cash flow losses are conditions, among others, that would trigger an impairment assessment of the carrying amount of enterprise goodwill.
     Upon indication that the carrying value of such assets may not be recoverable, the Company recognizes an impairment loss by a charge against current operations. If an impairment exists, an impairment charge would be determined by comparing the carrying amount of the assets to the applicable estimated future cash flows, discounted at a risk-adjusted rate or market appraisals. In addition, the remaining amortization period for the impaired asset would be reassessed and revised if necessary.
   Intangible Assets
     In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), goodwill is assessed at least annually for impairment using the fair value methodology. The Company completed its annual assessment in the quarter ended September 30, 2007. There were no impairments recorded in any period presented.
     The original Cold Remedy patent is being amortized using the straight-line method over the remaining term of the patent at the date of purchase of 16.75 years. The estimated aggregate amortization expense for the Company’s Cold Remedy patent is $67,081 on an annual basis for each of the next five years. Amortization expense for the Cold Remedy patent was $67,081 for the year ended March 31, 2008; $16,770 for the three months ended March 31, 2007 and 2006; and, $67,081 for each of the years ended December, 31, 2006 and 2005. The patent acquired on October 31, 2005 related to the Zicam Cold Remedy dry handle swab products is being amortized using the straight-line method over the remaining term of the patent, which, at the date of purchase was 14.88 years. The estimated aggregate amortization expense for the Zicam Cold Remedy dry handle swab patent is $76,200 on an annual basis for each of the next five years. Amortization expense was $69,588 for the year ended March 31, 2008, $15,743 for the three months ended March 31, 2007 and 2006, and $62,971 and $10,495 for the years ended December 31, 2006 and 2005, respectively.

14


 

MATRIXX INITIATIVES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
     The Company recorded $8,748 in calendar 2006 for debt issuance costs related to the $500,000 letter of credit associated with the product liability insurance policy that began in April 2006. The Company recorded $23,327 in 2005 for debt issuance costs related to the $5.0 million letter of credit established for the self-structured product liability insurance policy that began in April 2004. These costs are amortized over one year. The Company amortizes the debt issuance costs associated with the Company’s Comerica Bank credit facility over the term of the facility. Debt issuance costs of $14,395 were recorded in fiscal 2008 for the renewal of the credit facility with a term through June 30, 2009. The Company recorded $12,569 in amortization expense during the year ended March 31, 2008, $7,832 in the three months ended March 31, 2007, and $31,893 in calendar year 2006 for amortization of expenses related to the Company’s Comerica Bank credit facility. The Company recorded $31,287 in 2005 for amortization of expenses related to the letter of credit and the credit facility.
     Goodwill is considered to have an indefinite life and, therefore, it is not amortized, but instead is tested for impairment at least annually. There was no impairment recorded in the year ended March 31, 2008, three months ended March 31, 2007, or in calendar years 2006 or 2005.
   Revenue Recognition
     The Company recognizes revenue from product sales when the risks and rewards of ownership have transferred to the customer. Transfer of risks and rewards is considered to have occurred upon shipment of the finished product. Sales incentives, promotional allowances and returns are estimated and recognized as a reduction from revenue at the date of shipment based upon historical activity and current agreements with customers. The Company evaluates these estimates on a monthly basis and revises them as necessary.
   Stock-Based Compensation
     Effective January 1, 2006, the Company adopted SFAS No. 123R (Revised 2004), “Share-Based Payment, which revises SFAS No. 123, “Accounting for Stock-Based Compensation”, and supersedes Accounting Principles Boards Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS No. 123R requires the Company to measure the cost of services received in exchange for equity instruments based on the grant-date fair value of the award, with that cost recognized to expense over the requisite service or vesting period. SFAS No. 123R allows for the use of the Black-Scholes or a lattice option-pricing model to value such equity instruments. The Company uses the Black-Scholes option-pricing model in valuing such equity instruments. Upon adoption, the Company transitioned to SFAS No. 123R using the Modified Prospective Application (MPA) transition method, whereby compensation cost is recognized for new awards and awards modified after the effective date, and to that portion of outstanding awards for which part or all of the requisite service will be rendered on or after the effective date. Prior periods’ stock-based compensation for option plan activity is still presented on a pro forma basis. As a result of the adoption of SFAS No. 123R, in calendar year 2006 the Company recognized pre-tax charges of $150,800 as compensation expense, approximately $93,000 after tax, related to unvested options as of January 1, 2006. In addition, for the three months ended March 31, 2007 and 2006 the Company recognized pre-tax charges of $17,700 and $55,000, respectively, approximately $11,000 and $34,000 after tax, respectively. During the fiscal year ended March 31, 2008, the Company recognized pre-tax charges of $16,000, approximately $9,800 after tax. The earnings per share impact in all of those periods was immaterial. The Company does not expect to recognize any additional charges in association with stock options as the Company anticipates future equity compensation will be in the form of restricted stock grants instead of options. These charges do not affect the Company’s cash position.
     On February 7, 2005, the Company’s Compensation Committee approved a new executive stock ownership requirement and approved the immediate vesting of all outstanding stock options previously granted under the Company’s option plans, including those granted to executive officers and directors, for which the option exercise price was above the closing price on February 7, 2005.
     The following table details the effect on net income and earnings per share as if compensation expense had been recorded for the year ended December 31, 2005 based on the fair value method under SFAS No. 123. The reported and pro forma net income and earnings per share for the three months ended March 31, 2007 and year ended December 31, 2006 is the same since share-based compensation expense is calculated under the provisions of SFAS No. 123R.

15


 

MATRIXX INITIATIVES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
         
Net income applicable to common shareholders, as reported
  $ 3,078,492  
Add 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
    1,546,183  
 
     
Proforma Net Income
  $ 1,532,309  
 
     
Net income per share of common stock:
       
Basic:
       
As reported
  $ 0.32  
Pro forma
  $ 0.16  
Diluted
       
As reported
  $ 0.32  
Pro forma
  $ 0.16  
     The fair value for options was estimated at the date of grant using the Black-Scholes option pricing model with the following assumptions for the year ended December 31, 2005:
         
    2005  
Risk-free interest rate
    3.66 %
Expected life
  5.00 years
Expected volatility
    61.40 %
Expected dividend yield
    0 %
     The Company has granted restricted stock to directors, officers, and management employees as part of its overall compensation plan. Compensation expense is based on the fair value of the shares on the date of their grant (as determined by the closing stock price on the grant date), and is amortized on a straight-line basis over the requisite service period. Stock-based compensation expense recognized in the year ended March 31, 2008, for restricted stock awards previously granted, was approximately $1.2 million, or $750,000 after tax. During the three-month transition period ended March 31, 2007, the Company recognized approximately $281,900, or approximately $173,000 after tax, for compensation expense related to restricted stock awards. During the year ended December 31, 2006 compensation expense for restricted stock awards was approximately $736,000. Also, during the year ended March 31, 2008, 4,544 shares of restricted stock were issued to two directors, in lieu of cash, under the Directors Restricted Stock Purchase Program for quarterly director compensation.
Comprehensive Income
     Comprehensive income consists of net income (loss) and other gains and losses affecting stockholders’ equity that, under accounting principles generally accepted in the United States of America, are excluded from net income (loss). Such items consist primarily of unrealized gains and losses on marketable equity securities and foreign translation gains and losses. The Company has not had any such items in the prior three years and, consequently, net income (loss) and comprehensive income (loss) are the same.
Shipping and Handling Costs
     Shipping and handling costs are expensed as incurred and included in cost of sales.
Income Taxes
     Deferred income taxes are provided for temporary differences between the financial reporting and tax basis of assets and liabilities using enacted tax laws and rates for the years when the differences are expected to reverse.

16


 

MATRIXX INITIATIVES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Research and Development
     Research and development costs are expensed as incurred.
Marketing and Advertising
     The Company expenses marketing and advertising costs as incurred. Marketing expense was: $29,123,368 and $29,854,733 for the years ended March 31, 2008 and 2007, respectively; $5,014,921 and $6,698,927 for the three months ended March 31, 2007 and 2006, respectively; and $31,538,778 and $25,002,100 for the years ended December 31, 2006 and 2005, respectively.
Net Income Per Share of Common Stock
     Basic earnings per share is calculated using the weighted average number of common shares outstanding. Diluted earnings per share is computed on the basis of the weighted average number of common shares outstanding plus the dilutive effect of outstanding stock options using the treasury stock method.
     The schedule below summarizes the elements included in the calculation of basic and diluted earnings per common share for the year ended March 31, 2008, three months ended March 31, 2007 and 2006, and the years ended December 31, 2006 and 2005. Options, warrants and other incremental shares to purchase 177,000, 232,000, and 264,752 shares of common stock at March 31, 2008 and 2007, and December 31, 2005, respectively, were excluded from the computation of diluted earnings per share because their effect would be anti-dilutive. The shares were anti-dilutive because the share exercise price exceeded the average market price of the common stock during the period. There were no anti-dilutive shares at December 31, 2006 or March 31, 2006.
                                         
    Year Ended March 31,     Three Months Ended March 31,     Years Ended December 31,  
    2008     2007     2006     2006     2005  
Net income applicable to common shareholders
  $ 10,427,539     $ 1,709,231     $ 96,760     $ 4,926,628     $ 3,078,492  
 
                             
Weighted average common shares outstanding — Basic
    9,704,579       9,749,162       9,565,963       9,620,362       9,486,288  
 
                                       
Dilutive securities
    296,728       281,846       461,703       345,424       283,634  
 
                             
Weighted average common shares outstanding — Diluted
    10,001,307       10,031,008       10,027,666       9,965,786       9,769,922  
 
                             
Net Income per common share:
                                       
Basic
  $ 1.07     $ 0.18     $ .01     $ 0.51     $ 0.32  
Diluted
  $ 1.04     $ 0.17     $ .01     $ 0.49     $ 0.32  
Estimates
     The preparation of the Company’s consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Recently Issued Accounting Standards
     In July 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes” (FIN 48), effective for fiscal years beginning after December 15, 2006. The interpretation applies to tax positions within the scope of SFAS No. 109, Accounting for Income Taxes. Interpretation 48 is a two-step process for recognition and evaluation of uncertain tax positions. It requires the Company to assess whether a tax position is “more-likely-than-not” to be sustained based on its technical merits and then to determine the amount of the tax position to be recognized in the financial statements. The Company implemented FIN 48 beginning January 1, 2007. Adoption of FIN 48 did not have a material impact on our earnings,

17


 

MATRIXX INITIATIVES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
financial position, or cash flows. As of March 31, 2008, the Company believes that all of its tax positions are more likely than not to be sustained based on their technical merits.
     In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS 157), effective for fiscal years beginning after November 15, 2007. SFAS 157 provides guidance on how to measure assets and liabilities that use fair value, and expands disclosure about fair value measurement. SFAS 157 will apply whenever another GAAP standard requires (or permits) assets or liabilities to be measured at fair value but does not expand the use of fair value to any new circumstances. The Company has adopted SFAS 157 as of April 1, 2008. Adoption of SFAS 157 did not have a material impact on our earnings, financial position, or cash flows.
     In September 2006, the U.S. Securities and Exchange Commission issued Staff Accounting Bulletin No. 108 (SAB 108), “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.” SAB 108 provides guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements in determining whether the current year’s financial statements are materially misstated. SAB 108 is effective for fiscal years ending after November 15, 2006. The Company has adopted SAB 108 as of December 31, 2006, and its adoption did not have an impact on the Company’s consolidated financial statements.
     In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities: Including an amendment of FASB Statement No. 115” (SFAS 159). SFAS 159 permits entities to measure many financial instruments and certain other items at fair value with changes in fair value reported in earnings. The FASB issued SFAS 159 to mitigate earnings volatility that arises when financial assets and liabilities are measured differently, and to expand the use of fair value measurement for financial instruments. SFAS 159 is effective as of the beginning of the first fiscal year that begins after November 15, 2007. We adopted SFAS 159 beginning April 1, 2008. Adoption of SFAS 159 did not have a material impact on our earnings, financial position, or cash flows.
     In December 2007, the FASB issued SFAS No. 141R, “Business Combinations Statement 141R,” a replacement of SFAS No. 141. SFAS 141R is effective for fiscal years beginning on or after December 15, 2008 and applies to all business combinations. SFAS 141R provides that, upon initially obtaining control, an acquirer shall recognize 100% of the fair values of acquired assets, including goodwill, and assumed liabilities, with only limited exceptions, even if the acquirer has not acquired 100% of its target. Additionally, SFAS 141R changes current practice, in part, as follows: (1) contingent consideration arrangements will be fairly valued at the acquisition date and included on that basis in the purchase price consideration; (2) transaction costs will be expensed as incurred, rather than capitalized as part of the purchase price; (3) pre-acquisition contingencies, such as legal issues, will generally have to be accounted for in purchase accounting at fair value; and (4) in order to accrue for a restructuring plan in purchase accounting, the requirements in SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” would have to be met at the acquisition date. While there is no expected impact to our consolidated financial statements on the accounting for acquisitions completed prior to April 1, 2009, the adoption of SFAS 141R on April 1, 2009 could materially change the accounting for business combinations consummated subsequent to that date.
     In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133” (“SFAS 161”), which modifies and expands the disclosure requirements for derivative instruments and hedging activities. SFAS 161 requires that objectives for using derivative instruments be disclosed in terms of underlying risk and accounting designation and requires quantitative disclosures about fair value amounts and gains and losses on derivative instruments. It also requires disclosures about credit-related contingent features in derivative agreements. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. SFAS 161 encourages, but does not require, comparative disclosures for earlier periods at initial adoption. The adoption of SFAS 161 is not expected to have a material impact on our consolidated financial condition or results of operations.

18


 

MATRIXX INITIATIVES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
2. Inventories
     Inventories consist of the following at March 31, 2008 and 2007:
                 
    March 31,     March 31,  
    2008     2007  
Raw materials and packaging
  $ 3,887,906     $ 4,391,903  
Finished goods
    7,642,154       11,067,025  
 
           
Total
  $ 11,530,060     $ 15,458,928  
 
           
3. Current Notes Payable
     The Company has an $8.0 million credit facility with Comerica Bank that was renewed in July 2007, until July 2009. The interest rate under the renewed credit facility is prime minus 0.25% (or 5.0% at March 31, 2008) collateralized by accounts receivable, inventory, property and equipment, intangible assets and other assets of the Company. The line also contains various financial covenants regarding liquidity, tangible net worth, and other financial ratios. Also, the Company cannot incur a loss for any two consecutive quarters and the Company cannot incur a loss for any fiscal year. The Company is also restricted from paying dividends without the lender’s consent. We did not have any borrowings under the credit facility during the year ended March 31, 2008, or three months ended March 31, 2007. In July 2006, we borrowed $4 million under the facility to support our working capital requirements in the third calendar quarter of 2006. We repaid the debt in the quarter ended December 31, 2006. We are in compliance with the earnings and financial covenants contained in the credit facility.
4. Reserves
     The following schedules summarize the activity in the reserves for sales returns and allowances and allowance for doubtful accounts for the year ended March 31, 2008, three months ended March 31, 2007, and each of the years ended 2006 and 2005:
                                 
            Additions            
    Balance at   Charged to           Balance at
    Beginning of   Costs and           End of
Description   Period   Expenses   Deductions   Period
Reserves for Sales Returns and Allowances
                               
December 31, 2005
  $  2,605,260     $  11,796,458     $  10,521,166     $  3,880,552  
December 31, 2006
    3,880,552       14,871,924       16,020,356       2,732,120  
March 31, 2007
    2,732,120       2,909,400       3,250,230       2,391,290  
March 31, 2008
    2,391,290       15,432,925       16,699,644       1,124,571  
                                 
            Additions            
    Balance at   Charged to           Balance at
    Beginning of   Costs and           End of
Description   Period   Expenses   Deductions   Period
Allowance for Doubtful Accounts
                               
December 31, 2005
  $ 555,240     $ 92,568     $ 4,893     $ 642,915  
December 31, 2006
    642,915       97,286       329,505       410,696  
March 31, 2007
    410,696       18,827       492       429,031  
March 31, 2008
    429,031       20,676       240,330       209,377  
5. Income Taxes
     The components of the provision for income taxes for the year ended March 31, 2008, three months ended March 31, 2007 and 2006, and the years ended December 31, 2006, and 2005, are as follows:

19


 

MATRIXX INITIATIVES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
                                         
    Year Ended March 31,     Three Months Ended March 31,     Years Ended December 31,  
    2008     2007     2006     2006     2005  
Current:
                                       
Federal
  $ 2,094,047     $ 66,041     $ 60,281     $ 881,511     $ 1,107,248  
State
    390,167       18,548       8,265       190,554       394,137  
 
                             
Total
    2,484,214       84,589       68,546       1,072,065       1,501,385  
 
                             
 
                                       
Deferred:
                                       
Federal
    3,013,768       504,901             1,137,312       131,506  
State
    539,505       34,431             403,426       36,943  
 
                             
Total
    3,553,273       539,332             1,540,738       168,449  
 
                             
 
                                       
Total Provision For Income Taxes
  $ 6,037,487     $ 623,921     $ 68,546     $ 2,612,803     $ 1,332,936  
 
                             
     The provision for income taxes reconciles to the amount computed by applying the federal statutory rate to income before the provision for income taxes as follows:
                                         
    Year Ended March 31,     Three Months Ended March 31,     Years Ended December 31,  
    2008     2007     2006     2006     2005  
Federal statutory rate
    34 %     34 %     34 %     34 %     34 %
State income taxes, net of federal benefits
    5       5       5       5       5  
Current period tax credits
    (1 )                   (2 )     (11 )
Charitable contributions
    (1 )     (12 )           (3 )      
Other
                2             2  
Net operating loss carryover
                             
 
                             
Total
    37 %     27 %     41 %     34 %     30 %
 
                             
     The components of deferred tax assets and liabilities as of March 31, 2008 and 2007 are as follows:
                 
    2008     2007  
Current deferred tax assets
               
Net operating loss carryforwards
  $     $ 555,600  
Reserves and accrued expenses
    718,800       1,165,000  
Charitable contributions carryforward
          1,047,300  
Accrued legal liabilities
    423,500       402,300  
Reserve for bad debts
    80,600       165,200  
Research and development credit
          140,000  
Inventory valuation reserve
    516,590       733,205  
 
           
Total current deferred tax assets
    1,739,490       4,208,600  
 
               
Current deferred tax liabilities
               
Accrued receivable
          (847,000 )
 
           
 
Net current deferred tax assets
  $ 1,739,490     $ 3,361,605  
 
           
 
Non-current deferred tax assets
               
Restricted stock compensation
    828,500       980,200  
Other
          18,062  
 
           
Total non-current deferred tax assets
  $ 828,500     $ 998,262  
 
               
Non-current deferred tax liabilities
               
Amortization of intangible assets
    (2,463,827 )     (2,058,900 )
Depreciation
    (387,100 )     (99,690 )
 
           
Total non-current deferred tax liabilities
    (2,850,927 )     (2,158,590 )
 
           
 
               
Net non-current deferred tax liabilities
  $ (2,022,427 )   $ (1,160,328 )
 
       

20


 

MATRIXX INITIATIVES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
     The Company records a valuation allowance for certain temporary differences for which it is more likely than not that it will not receive future tax benefits. The Company assesses its past earnings history and trends, sales backlog and projections of future net income. As of March 31, 2008 and 2007, the Company did not record a valuation allowance.
     The Company’s policy is to classify income tax penalties and interest as income taxes in its financial statements. During the year ended March 31, 2008, the Company did not incur any penalties or interest. At March 31, 2008, the Company did not have any unrecognized tax benefits.
     The tax benefits associated with employee exercises of non-qualified stock options and disqualifying dispositions of stock acquired with incentive stock options reduced income taxes currently payable. The Company has determined that it is more likely than not that the amounts will be realized and has recorded benefits charged to additional paid-in-capital for the year ended March 31, 2008, three months ended March 31, 2007, and the years ended December 31 2006 and 2005 of $231,401, $80,717, $1,077,402, and $80,344, respectively.
     At December 31, 2006, the Company had a $1.4 million loss carryforward due to the settlement of the consolidated Arizona litigation in 2006. The Company exhausted this carryforward in fiscal year 2008.
6. Preferred Stock
     The authorized preferred stock of the Company consists of 2,000,000 shares, $0.001 par value. The preferred stock may be issued in separate series from time to time as the Board of Directors of the Company may determine by resolution, unless the nature of a particular transaction and applicable statutes require shareholder approval. The rights, preferences and limitations of each series of preferred stock may differ, including without limitation, the rate of dividends, method and nature of payment of dividends, terms of redemption, amounts payable on liquidation, sinking fund provisions (if any), conversion rights (if any), and voting rights.
7. Stockholders’ Equity
Stock Repurchase Plan
     In April 2004, the Company’s Board of Directors authorized a Common Stock Repurchase Program for up to 1.0 million shares of the Company’s common stock. During fiscal 2008, the Company purchased 493,969 shares of common stock on the open market at an aggregate cost of $7,148,245. In addition, the Company repurchased 22,432 shares of common stock at an aggregate cost of $315,148, from employees and directors to satisfy tax withholding requirements associated with vested restricted stock. No common stock was repurchased during the three months ended March 31, 2007 or the years ended December 31, 2006 and 2005.
Shareholder Rights Plan
     In July 2002, the Board of Directors of the Company adopted a shareholder rights plan in the form of a Rights Agreement dated as of July 22, 2002 by and between the Company and Corporate Stock Transfer, Inc., as Rights Agent (the “Rights Agreement”). On July 12, 2002, the Board of Directors of the Company declared a dividend of one preferred share purchase right (a “Right”) for each outstanding share of common stock. The dividend was paid on July 22, 2002 to the Company’s stockholders of record on that date. The Rights also apply to, and will be issued in the same proportion in connection with, all future common stock issuances until the Distribution Date (defined below) or the expiration or earlier redemption or exchange of the Rights. Each Right permits the registered holder thereof to purchase from the Company, at any time after the Distribution Date, one one-thousandth of a share of the Company’s Series A Junior Participating Preferred Stock for a purchase price of $50.79 per such one one-thousandth of a share, subject to certain possible adjustments provided for in the Rights Agreement. The Board of Directors of the Company has authorized the issuance of up to 20,000 shares of Series A Junior Participating Preferred Stock upon the exercise of Rights.
     Initially the Rights will be attached to all certificates representing shares of common stock then outstanding, and no separate Rights certificates will be distributed. The Rights will separate from the common stock upon the earlier

21


 

MATRIXX INITIATIVES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
to occur of (i) 10 days after the public announcement of a person’s or group of affiliated or associated persons having acquired beneficial ownership of 15% or more of the outstanding common stock (such person or group being an “Acquiring Person”), or (ii) 10 business days (or such later date as the Company’s Board may determine) following the commencement of, or announcement of an intention to make, a tender offer or exchange offer for the common stock, the consummation of which would result in a person or group’s becoming an Acquiring Person (the earlier of such dates being the “Distribution Date”). The Rights are not exercisable until the Distribution Date. If any person (or group of persons) becomes an Acquiring Person, except in a tender or exchange offer which is for all outstanding common stock at a price and on terms which a majority of the Company’s Board determines to be adequate and in the best interests of the Company, its shareholders and other relevant constituencies (other than such Acquiring Person, its affiliates and associates), each holder of a Right will thereafter be entitled to acquire, for each Right so held, one share of common stock for a purchase price equal to 50% of the then current market price for such share of common stock. All Rights beneficially owned by an Acquiring Person or any affiliate or associate thereof will be null and void and not exercisable. The Rights expire on July 22, 2012 provided that, prior to a person (or group of persons) becoming an Acquiring Person, the Company may redeem the Rights for $0.01 per Right. All of the provisions of the Rights Agreement may be amended before the Distribution Date by the Board of Directors of the Company for any reason it deems appropriate. After the Distribution Date, the provisions of the Rights Agreement may be amended by the Board in order to cure any ambiguity, defect or inconsistency, to make changes which do not adversely affect the interest of Rights (excluding the interest of any Acquiring Person) or, subject to certain limitations, to shorten or lengthen any time period under the Rights Agreement.
Directors Restricted Stock Purchase Program
     In 2002, the Company established a Director Restricted Stock Purchase Program (the “Program”). Under the Program the number of shares to which the Director will be entitled is equal to the cash portion of compensation payable to him/her for Directors fees by the Company that he/she wishes to apply to the purchase of shares under the Program divided by 80% of the closing price of the Company’s stock price on the date the cash consideration would be paid. Shares issued under the Program are restricted until the first to occur of (i) the expiration of three years from the date the shares are issued, (ii) a change in control of the Company, and (iii) the Director’s death, disability, or mandatory retirement.
8. Stock Options
2001 Long-Term Incentive Plan
     In November 2001, the Company adopted the 2001 Long-Term Incentive Plan (the “2001 Plan”). The 2001 Plan provides for the grant of incentive stock options, non-qualified options, restricted common stock, performance based awards, tandem awards and substitute awards. In May 2005, shareholders approved an amendment to the 2001 Plan increasing the number of shares authorized for issuance under the Plan from 1,000,000 shares to 1,500,000 shares.
     The following table contains information on the stock options under the Company’s 2001 Plan for the year ended March 31, 2008. The outstanding options expire from October 2008 to July 2011.
                                 
            Weighted-     Weighted-Average        
            Average     Remaining Contractual     Aggregate Intrinsic  
Options   Shares     Exercise Price     Term     Value  
Options outstanding at March 31, 2007
    653,901     $ 12.47                  
Granted
    -                          
Exercised
    (59,767 )     10.23                  
Cancelled
    (45,000 )     17.90                  
 
                               
 
                             
Options outstanding at March 31, 2008
    549,134     $ 12.27     2.88 years   $ 1,881,576  
 
                             
 
Exercisable at March 31, 2008
    549,134     $ 12.27     2.88 years   $ 1,881,576  
 
                             

22


 

MATRIXX INITIATIVES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
     No options were granted in the year ended March 31, 2008, three months ended March 31, 2007 or calendar 2006. The weighted average fair value of options granted was $6.05 in 2005.
     The total intrinsic value of options exercised during the year ended March 31, 2008, three months ended March 31, 2007 and 2006 and the fiscal years ended December 31, 2006 and 2005 was $569,000, $210,000, $1.6 million, $3.0 million, and $197,000, respectively. The total fair value of shares vested during the fiscal years ended December 31, 2006 and 2005 was $1.5 million and $6.2 million, respectively. No shares vested during the year ended March 31, 2008 or three months ended March 31, 2007.
     Cash received from the exercise of options for the year ended March 31, 2008 was approximately $611,000. The related tax benefit realized was approximately $231,000.
     A summary of the Company’s restricted stock awards is presented below:
                 
          Weighted-Average Grant-  
    Shares     Date Fair Value  
Nonvested at March 31, 2007
    260,620     $ 16.68  
Granted
    61,510       15.77  
Vested
    (118,301 )     14.67  
Forfeited
    (2,750 )     20.58  
 
             
Nonvested at March 31, 2008
    201,079     $ 17.45  
 
             
     The weighted average fair value of restricted stock awards granted for the three months ended March 31, 2007 and 2006, and the years ended December 31, 2006 and 2005 was $16.51, $21.66, $21.51, and $11.41, respectively.
     As of March 31, 2008, the Company had approximately $1.9 million of unrecognized compensation expense related to non-vested restricted stock awards that is expected to be recognized over a weighted-average period of approximately 19 months.
     The fair value of the Company’s restricted stock awards was determined using the closing price of the Company’s shares on the respective grant dates.
   Other Stock Option Information
     The following table summarizes information about the Company’s stock-based compensation plan at March 31, 2008:
                                         
    Options Outstanding   Options Exercisable
            Weighted                
            Average   Weighted            
            Remaining   Average           Weighted
        Range of   Number   Contractual Life   Exercise   Number   Average
   Exercise Prices   Outstanding   in Years   Price   Exercisable   Exercise Price
$  7.00 — $10.00
    205,134       2.36     $ 8.39       205,134     $ 8.39  
$10.00 — $13.00
    167,000       3.63     $ 11.05       167,000     $ 11.05  
$17.00 — $19.00
    177,000       2.79     $ 17.92       177,000     $ 17.92  
Compensation Expense
     Effective January 1, 2006, the Company adopted SFAS No. 123R (Revised 2004), “Share-Based Payment”, which revises SFAS No. 123, “Accounting for Stock-Based Compensation", and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees". SFAS No. 123R requires the Company to measure the cost of services received in exchange for equity instruments based on the grant-date fair value of the award, with the cost recognized over the requisite service or vesting period.
     As a result of its adoption of SFAS No. 123R, the Company recognizes compensation expense related to unvested options as of January 1, 2006. For the year ended December 31, 2006, the Company recognized

23


 

MATRIXX INITIATIVES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
compensation expense of $150,800, approximately $93,000 after tax. For the three months ended March 31, 2007 and 2006, the Company recognized compensation expense of $17,700, approximately $11,000 after tax, and, $55,000, approximately $34,000 after tax, respectively. For the year ended March 31, 2008, the Company recognized compensation expense of $16,000, approximately $10,000 after tax. The amounts were calculated in prior periods using the Black-Scholes option pricing model. The Company does not expect to recognize any additional expense in fiscal 2009 relating to the aforementioned stock options.
     The Company issues shares of its restricted common stock to employees, pursuant to the Company’s restricted stock program, and the Company records compensation expense for the value of the shares issued over the requisite service period. In early 2005, the Company granted 24,197 shares valued at $259,633, or $10.73 per share, and throughout 2005, the Company granted 4,000 shares of restricted stock, with a value of $46,000. The Company recorded $841,650 in compensation expense for shares of restricted stock to be granted to employees in early 2006. During the three months ended March 31, 2007 and 2006, the Company recorded compensation expense of $102,766 and $37,477, respectively, related to its restricted stock program. In fiscal 2008, ended March 31, 2008, the Company recognized $664,296 in compensation expense related to its restricted stock program.
9. Commitments and Contingencies
Leases
     The Company leases its office facilities under a long-term leasing arrangement. The following is a schedule of future minimum lease payments at March 31, 2008 under the Company’s operating leases that have initial or remaining non-cancelable lease terms in excess of one year:
         
Year Ending      
March 31,   Leases  
2009
  $ 416,127  
2010
    523,257  
2011
    537,703  
2012
    517,374  
2013
    459,229  
Thereafter
    115,649  
 
     
Total Minimum Lease Payments
  $ 2,569,339  
 
     
     Rental expense charged to operations for the year ended March 31, 2008, three months ended March 31, 2007 and 2006, and the years ended December 31, 2006 and 2005 was $329,858, $80,765, $43,833, $136,189, and $147,188, respectively.
   Officer Indemnification
     Under its organizational documents, the Company’s officers, employees, and directors are indemnified against certain liability arising out of the performance of their duties to the Company. The Company also has an insurance policy for its directors and officers to insure them against liabilities arising from the performance of their duties required by their positions with the Company. The Company’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Company that have not yet occurred.
   Litigation
     The Company is involved in various product liability claims and other legal proceedings. The Company’s legal expense continues to have a significant impact on the results of operations as the Company defends itself against the various claims.
     For the fiscal year ended March 31, 2008, litigation expense decreased to approximately $2.5 million (net of $560,000 for insurance reimbursements), compared to $4.1 million for the twelve months ended March 31, 2007 (net of $1.6 million for insurance reimbursements). For the three-month transition period ended March 31, 2007, litigation expense was approximately $1.0 million, reduced by reimbursement of approximately $1.6 million from our insurance carriers for litigation expense incurred prior to 2006. For the fiscal year ended December 31, 2006,

24


 

MATRIXX INITIATIVES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
litigation expense was approximately $6.0 million. In the fiscal year ended December 31, 2005, litigation expense was $6.2 million, reduced by reimbursement of approximately $2.0 million from our principal insurance carrier, resulting in net legal expense of approximately $4.2 million. In addition, net income and earnings per share for fiscal 2005 reflect the recording of approximately $8.5 million to settle the Arizona litigation and to create a reserve for any future payments related to the product liability litigation ($12 million settlement plus $1.3 million for the reserve, less $4.8 million expected to be covered by insurance). Various defendants in the lawsuits, including manufacturers and retailers, have sought indemnification or other recovery from us for damages related to the lawsuits.
     Among the principal matters pending to which the Company is a party are the following:
Product Liability
     Litigation relating to Zicam Cold Remedy nasal gel arises from claims that the product causes the permanent loss or diminishment of the sense of smell or smell and taste. The Company believes the studies that have been conducted and reviewed by independent medical and scientific experts and other evidence support our contention that these claims are unfounded.
     From late 2003 through March 2008, numerous lawsuits were filed against us alleging that our Zicam Cold Remedy product caused the permanent loss or diminishment of the sense of smell or smell and taste. On January 19, 2006, we entered into an agreement to settle claims made by approximately 90% of the plaintiffs (approximately 340 individuals) in all of the Zicam Cold Remedy product liability lawsuits pending against the Company at that time. This settlement related to the Arizona consolidated litigation, In Re Consolidated Zicam Product Liability Cases, Superior Court of Arizona (Maricopa County). The settlement documents acknowledge that Matrixx has denied and continues to deny any liability to the plaintiffs. Those plaintiffs who were eligible and elected to participate in the settlement program dismissed their claims with prejudice and provided written releases of their claims against the Company in return for their participation. Of the plaintiffs who did not participate in the settlement program, all have dismissed their claims as of July 31, 2007. Matrixx paid $11.9 million to fund awards to be made under the settlement program. In addition, Matrixx paid $100,000 to cover the administration of the settlement program by plaintiffs’ counsel. The Company recognized a charge of approximately $4.3 million (after tax) in the fourth quarter of 2005 to cover the portion of the settlement program costs not expected to be covered by insurance.
     Additionally, beginning on March 25, 2008, the case Bruno vs. Matrixx Initiatives, Inc. (filed July 7, 2006, in the Superior Court of the Sate of California, County of San Diego, Case No. 868821) was tried before a jury. On April 3, 2008 the jury delivered a unanimous verdict in favor of the Company. The Company cannot predict the timing of any additional trials with respect to the product liability lawsuits. Also, plaintiffs’ law firms may continue to solicit potential claimants through the Internet and other media; as a result, additional lawsuits may be filed against us.
Litigation Reserves
     We record accruals for such contingencies to the extent that we conclude their occurrence is probable and the related damages are estimable. If a range of liability is probable and estimable and no amount within the range appears to be a better estimate than any other amount within the range, we accrue the minimum of such probable range. Many claims involve highly complex issues relating to causation, label warnings, scientific evidence, actual damages and other matters. Often these issues are subject to substantial uncertainties and, therefore, the probability of loss and an estimation of damages are difficult to ascertain. Consequently, we cannot reasonably estimate the maximum potential exposure or the range of possible loss in excess of amounts accrued for these contingencies. Therefore, as of March 31, 2008, the Company maintained a reserve of approximately $1.1 million for any future payment of settlement or losses related to the cold remedy litigation. This reserve was based on certain assumptions some of which are described below, and was the amount that the Company believed that it could reasonably estimate would be spent to resolve the remaining cases that have been filed. Some of the significant factors that were considered in the amount of the reserve were as follows: the actual costs incurred by the Company up to that time in resolving several claims; the development of the Company’s legal defense strategy and structure in light of the recent settlement; and the number of cases that remain pending against the Company. There are events, such as the dismissal of any cases, the outcome of a trial, or rulings on pending evidentiary motions, that may have an impact on the Company’s conclusions as to the adequacy of the reserves for the pending product liability lawsuits. Litigation is

25


 

MATRIXX INITIATIVES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
inherently unpredictable, and excessive verdicts do occur. Although we believe we have substantial defenses in these matters, we could in the future incur judgments or enter into settlements of claims that could have a material adverse effect on our results of operations in any particular period. The Company will continue to review the adequacy of the associated reserves on a quarterly basis.
Securities Litigation Matters
     Two class action lawsuits were filed in April and May 2004 against the Company, our President and Chief Executive Officer, Carl J. Johnson, and our Executive Vice President and Chief Financial Officer, William J. Hemelt, alleging violations of federal securities laws. On January 18, 2005, the cases were consolidated and the court appointed James V. Sircusano as lead plaintiff. The amended complaint also includes our Vice President of Research and Development, Timothy L. Clarot, as a defendant and was filed March 4, 2005. The consolidated case is Sircusano, et al. vs. Matrixx Initiatives, Inc., et al., in the United States District Court, District of Arizona, Case No. CV04-0886 PHX DKD. Among other things, the lawsuit alleges that between October 2003 and February 2004, we made materially false and misleading statements regarding our Zicam Cold Remedy product, including failing to adequately disclose to the public the details of allegations that our products caused damage to the sense of smell and of certain of the product liability lawsuits described above. We believe the claims made in this lawsuit are without merit and are vigorously defending ourself in this matter. We filed a motion to dismiss this lawsuit and on March 8, 2006, the Company received an Order dated December 15, 2005 granting the motion to dismiss the case, without prejudice. In accordance with and subject to the provisions of the Company’s Certificate of Incorporation, Messrs. Johnson, Hemelt, and Clarot will be indemnified by the Company for their expenses incurred in defending these lawsuits and for any other losses which they may suffer as a result of these lawsuits. The Company has submitted this matter to its insurance carriers and may incur charges up to the deductible amount of $1 million. If any liability were to result from these lawsuits, which is not covered by insurance, we believe our financial results could be materially impacted.
Third-Party Manufacturers
     The Company’s third-party manufacturers are subject to reporting, facility inspection, and governmental review. In general, subsequent discovery of previously unrecognized problems or failure to comply with applicable regulatory requirements could result in restrictions on manufacturing or marketing of the Company’s products, product recalls or withdrawal, fines, seizure of product, as well as withdrawal or suspension of regulatory approvals. The manufacturer of several of our products is in the process of responding to observations made by the FDA during a routine facility inspection. The Company does not know how the conclusions of this review process might impact our products or business, but the review could result, with regard to those products manufactured at the facility, in any or all of the above consequences, including the possibility of a product recall.
10. Employee Benefit Plan
     Effective January 1, 2004, the Company adopted a Qualified 401(k) Retirement Account Plan, meeting the Safe Harbor Provisions of the IRS. The Company makes matching contributions relative to each employee’s Salary Reduction Contributions for the year of up to 4% of the employee’s compensation for the Plan year. For the year ended March 31, 2008, three months ended March 31, 2007 and 2006 and the years ended December 31, 2006 and 2005, the Company made matching contributions of $107,241, $33,128, $24,309, $85,813, and $96,103, respectively. Each employee is fully vested at all times in his or her contribution and the Company’s matching contributions.
11. Concentration of Credit Risk and Major Customers
     Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments and accounts receivable. The Company places its cash equivalents with high credit quality financial institutions and limits its credit exposure with any one financial institution. The Company’s cash in its banks exceeds the federally insured limits. The Company provides credit in the normal course of business to many of the nation’s top drug stores and mass merchandisers. The Company’s accounts receivable are due from customers located throughout the United States. The Company performs periodic credit evaluations of its customers’ financial condition and generally requires no collateral. The Company maintains reserves for potential credit losses, and such losses have not exceeded management’s expectations.
     The Company’s sales are from products marketed under the Zicam, Nasal Comfort, and Xcid brand names, with a majority of its sales attributable to its Cold Remedy products, which subjects the Company to significant financial exposure. If future sales of these products decrease, and in particular sales of its Cold Remedy products, the Company’s operations could be materially adversely affected.
     The Company currently relies on third-party manufacturers to produce its products, and has identified alternative suppliers for some of its products. However, the Company has not made any purchases from these alternative suppliers.

26


 

MATRIXX INITIATIVES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
     Sales to major customers, which comprised 10% or more of net sales, for the year ended March 31, 2008, three months ended March 31, 2007 and 2006, and the years ended December 31, 2006 and 2005 were as follows:
                                         
    Year ended   3 months ended   3 months ended   Year ended   Year ended
    March 31, 2008   March 31, 2007   March 31, 2006   December 31, 2006   December 31, 2005
Wal-Mart
    23.5 %     12.1 %     29.9 %     26.3 %     20.5 %
Walgreens
    13.3 %     *       *       12.6 %     14.6 %
CVS
    11.8 %     11.9 %     *       12.3 %     *  
 
*   Less than 10%
12. Fair Value of Financial Instruments
     Disclosures about Fair Value of Financial Instruments for the Company’s financial instruments are presented in the table below. These calculations are subjective in nature and involve uncertainties and significant matters of judgment and do not include income tax considerations. Therefore, the results cannot be determined with precision and cannot be substantiated by comparison to independent market values and may not be realized in actual sale or settlement of the instruments. There may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used could significantly affect the results. The following table presents a summary of the Company’s financial instruments as of March 31, 2008 and 2007:
                                 
    March 31, 2008   March 31, 2007
    Carrying   Estimated   Carrying   Estimated
    Amount   Fair Value   Amount   Fair Value
Fiancial Assets
                               
Cash and cash equivalents
  $ 27,932,672     $ 27,932,672     $ 16,944,189     $ 13,947,622  
Restricted cash
  $ 500,000     $ 500,000     $ 500,000     $ 500,000  
Financial Liabilities
                               
Long-term debt
                       
     The carrying amounts for cash and cash equivalents, receivables, accounts payable and accrued expenses approximate fair value because of the short maturities of these instruments.
13. Selected Quarterly Financial Data (Unaudited)
     Selected unaudited quarterly financial data for the year ended March 31, 2008, transition period ended March 31, 2007, and year ended December 31, 2006 are summarized below:
                                 
    Fiscal Year 2008 Quarters Ended:
    June 30, 2007   Sept. 30, 2007   Dec. 31, 2007   March 31, 2008
Net sales
  $ 8,573,428     $ 28,575,748     $ 30,801,567     $ 33,021,641  
Gross profit
    5,738,074       18,999,407       19,741,404       22,001,400  
Net income (loss) from operations
    (1,971,194 )     10,172,715       (1,176,811 )     8,786,894  
Net income (loss) per basic share
    (0.11 )     0.65       (0.07 )     0.60  
Net income (loss) per diluted share
    (0.11 )     0.63       (0.07 )     0.59  
Net income (loss)
    (1,062,906 )     6,409,228       (635,161 )     5,715,568  

27


 

MATRIXX INITIATIVES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
         
    Transition Period
Ended:
    March 31, 2007
Net sales
  $ 19,045,754  
Gross profit
    11,998,099  
Net income (loss) from operations
    2,129,778  
Net income (loss) per basic share
    0.18  
Net income (loss) per diluted share
    0.17  
Net income (loss)
    1,709,231  
                                 
    Fiscal Year 2006 Quarters:  
    March 31, 2006     June 30, 2006     Sept. 30, 2006     Dec. 31, 2006  
Net sales
  $ 17,675,959     $ 8,206,133     $ 34,121,357     $ 36,227,332  
Gross profit
    11,810,748       5,801,426       22,967,447       23,205,681  
Net income (loss) from operations
    (8,606 )     (3,640,175 )     11,908,178       (1,105,172 )
Net income (loss) per basic share
    0.01       (0.19 )     0.74       (0.05 )
Net income (loss) per diluted share
    0.01       (0.19 )     0.72       (0.05 )
Net income (loss)
    96,760       (1,857,796 )     7,150,370       (462,705 )

28


 

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES (cont.)
(a)2. Financial Statement Schedules
     Financial statement schedules have been omitted because either they are not required or are not applicable, or because the information has been included in the consolidated financial statements or notes thereto contained in this Annual Report on Form 10-K/A.
(a)3. Exhibits
     
Exhibit No.   Title
3.1
  Certificate of Incorporation and Amendments thereto of the Registrant (1)
 
   
3.2
  Bylaws of the Registrant (11)
 
   
4.1
  Rights Agreement dated as of July 22, 2002 by and between the Registrant and Corporate Stock Transfer, Inc. (2)
 
   
10.1
  Confidentiality and Non-Competition Agreement among the Registrant, Gel Tech, L.L.C. (now Zicam, LLC), Zensano, Inc., Zengen, Inc. and certain other individuals (4)
 
   
10.2
  *2001 Stock Incentive Plan (5)
 
   
10.2.1
  *Form of Matrixx Initiatives, Inc. 2001 Long-Term Incentive Plan Grant of Incentive Stock Option (7)
 
   
10.2.2
  *Form of Matrixx Initiatives, Inc. 2001 Long-Term Incentive Plan Restricted Stock Program Agreement (14)
 
   
10.2.3
  Form of Matrixx Initiatives, Inc. 2001 Long-Term Incentive Plan Restricted Stock Program Agreement (Directors) (13)
 
   
10.2.4
  First Amendment to the Matrixx Initiatives, Inc. 2001 Long-Term Incentive Plan Restricted Stock Program Agreements between the Registrant and Edward Walsh dated October 18, 2006 (13)
 
   
10.2.5
  First Amendment to the Matrixx Initiatives, Inc. 2001 Long-Term Incentive Plan Restricted Stock Program Agreements between the Registrant and Edward Faber dated October 18, 2006 (13)
 
   
10.3
  *Summary of Matrixx Initiatives, Inc. Director Restricted Stock Purchase Program (3)
 
   
10.4
  Manufacturing Agreement with BioZone Laboratories (6)
 
   
10.5
  Amended and Restated Credit Agreement dated September 27, 2005 among the Registrant, Zicam, LLC and Comerica Bank (9)
 
   
10.6.1
  Amendment Number One to Amended and Restated Credit Agreement and Waiver dated March 9, 2006 among the Registrant, Zicam LLC and Comerica Bank (15)
 
   
10.6.2
  Amendment Number Two to Amended and Restated Credit Agreement dated June 27, 2007 among the Registrant, Zicam LLC and Comerica Bank (15)
 
   
10.6.3
  Replacement Secured Promissory Note dated June 27, 2007 among the Registrant, Zicam, LLC and Comerica Bank (15)
 
   
10.6.4
  Amended and Restated Security Agreement dated September 27, 2005 among the Registrant, Zicam, LLC and Comerica Bank (9)
 
   
10.6.5
  Security Agreement and Collateral Assignment of Limited Liability Company Interests dated September 27, 2005 between Registrant and Comerica Bank (9)

29


 

     
Exhibit No.   Title
10.6.6
  Amended and Restated Intellectual Property Security Agreement dated September 27, 2005 between Registrant and Comerica Bank (9)
 
   
10.6.7
  Amended and Restated Intellectual Property Security Agreement dated September 27, 2005 between Zicam, LLC and Comerica Bank (9)
 
   
10.6.8
  Security Agreement dated June 27, 2007 between Matrixx Oral Care, LLC and Comerica Bank (15)
 
   
10.7
  Form of Change of Control Agreement between Registrant and Registrant’s Executive Officers (15)
 
   
10.8
  Asset Purchase Agreement dated as of October 31, 2005 by and among Viridian Packaging Solutions, LLC, Beutlich, L.P., Frederic J. Beutlich and Zicam Swab Products, LLC (10)
 
   
10.9
  Settlement Agreement dated January 19, 2006 among the Registrant and the various plaintiffs in the consolidated products liability litigation (12)
 
   
10.10
  *Amended and Restated Employment Agreement dated October 18, 2006 among Registrant and Carl J. Johnson (13)
 
   
10.11
  *Insurance Agreement dated October 18, 2006 between the Registrant and William J. Hemelt (13)
 
   
21
  **Subsidiaries of the Registrant
 
   
23.1
  **Consent of Mayer Hoffman McCann P.C., independent registered public accounting firm
 
   
31.1
  **Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
   
31.2
  **Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
   
32.1
  ***Certification of CEO pursuant to 18 U.S.C. Section 1350
 
   
32.2
  ***Certification of CFO pursuant to 18 U.S.C. Section 1350
 
*   Indicates management compensatory contract, plan or arrangement.
 
**   Filed with this Form 10-K/A.
 
***   Furnished with this Form 10-K/A.
 
(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 000-31404.
 
(3)   Incorporated by reference to the Registrant’s Report on Form 10-Q for the quarter ended June 30, 2006, file number 001-31404.
 
(4)   Incorporated by reference to the Registrant’s Report on Form 8-K filed December 14, 2001, file number 000-27646.
 
(5)   Incorporated by reference to the Registrant’s definitive proxy statement on Schedule 14A, filed April 8, 2005, file number 001-31404.
 
(6)   Incorporated by reference to the Registrant’s Report on Form 8-K filed October 28, 2004, file number 001-31404.

30


 

(7)   Incorporated by reference to the Registrant’s Report on Form 8-K filed February 11, 2005 file number 001-31404.
 
(9)   Incorporated by reference to the Registrant’s Report on Form 8-K filed November 7, 2005, file number 001-31404.
 
(10)   Incorporated by reference to the Registrant’s Report on Form 8-K filed November 3, 2005, file number 001-31404.
 
(11)   Incorporated by reference to the Registrant’s Report on Form 8-K filed July 25, 2006, file number 001-31404.
 
(12)   Incorporated by reference to the Registrant’s Report on Form 8-K filed January 19, 2006, file number 001-31404.
 
(13)   Incorporated by reference to the Registrant’s Report on Form 10-Q for the period ended September 30, 2006, file number 001-31404.
 
(14)   Incorporated by reference to the Registrant’s Report on Form 8-K filed May 13, 2008, file number 001-31404.
 
(15)   Incorporated by reference to the Registrant’s Report on Form 10-Q for the period ended June 30, 2007, file number 001-31404.

31


 

SIGNATURES
     Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, in Phoenix, Arizona, on July 3, 2008.
         
  MATRIXX INITIATIVES, INC.
 
 
  By:   /s/ Carl J. Johnson    
  Carl J. Johnson   
  President and Chief Executive Officer   
 

32


 

Exhibit Index
     
Exhibit No.   Title
 
   
21
  **Subsidiaries of the Registrant
 
   
23.1
  **Consent of Mayer Hoffman McCann P.C., independent registered public accounting firm
 
   
31.1
  **Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
   
31.2
  **Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
   
32.1
  **Certification of CEO pursuant to 18 U.S.C. Section 1350.
 
   
32.2
  **Certification of CFO pursuant to 18 U.S.C. Section 1350.
 
**   Filed with this Form 10-K/A.
 
***   Furnished with this Form 10-K/A.

33

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