UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO _______
Commission File number 0-27646
MATRIXX INITIATIVES, INC.
(Name of registrant as specified in its charter)
DELAWARE 87-0482806
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
2375 EAST CAMELBACK ROAD, SUITE 500
PHOENIX, AZ 85016
(Address of principal executive offices)
(602) 387-5353
(Issuer's telephone number)
Check whether the issuer (1) has 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 [X] No [ ]
There were 9,432,751 shares of the registrant's common stock, $.001 par value,
outstanding as of October 31, 2002.
MATRIXX INITIATIVES, INC.
FORM 10-Q
INDEX
PART I FINANCIAL INFORMATION Page
Item 1. Condensed Consolidated Balance Sheet
as of September 30, 2002 and December 31, 2001 1
Condensed Consolidated Statements of
Operations for the three months ended
September 30, 2002 and 2001 3
Condensed Consolidated Statements of
Operations for the nine months ended
September 30, 2002 and 2001 4
Condensed Consolidated Statements of
Cash Flows for the nine months ended
September 30, 2002 and 2001 5
Notes to Condensed Consolidated
Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 23
Item 4. Controls and Procedures 23
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURES 25
CERTIFICATIONS 26
UNLESS OTHERWISE INDICATED IN THIS FILING, "MATRIXX", "ZICAM LLC", "US", "WE,"
"OUR", "THE COMPANY" AND SIMILAR TERMS REFER TO MATRIXX INITIATIVES, INC. AND
ITS SUBSIDIARIES. ZICAM IS A REGISTERED TRADEMARK OF THE COMPANY'S SUBSIDIARY,
ZICAM LLC (FORMERLY GEL TECH L.L.C.) AND THE MATRIXX NAME AND LOGO ARE
TRADEMARKS OF MATRIXX INITIATIVES, INC.
MATRIXX INITIATIVES, INC. AND SUBSIDIARY
(formerly Gum Tech International, Inc.)
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
September 30, December 31,
2002 2001
------------ ------------
Current Assets:
Cash and cash equivalents $ 12,358,460 $ 7,342,985
Restricted cash -- 1,503,150
Accounts receivable:
Trade, net allowance for doubtful accounts
of $590,280 and $468,389 4,203,159 4,461,156
Inventories 1,425,184 1,580,912
Marketable securities -- 10,656,380
Prepaid expenses and other 686,475 508,462
Notes receivable -- 200,000
------------ ------------
Total Current Assets 18,673,278 26,253,045
------------ ------------
Property and Equipment, at cost:
Office furniture and equipment 536,526 94,277
Leasehold improvements 39,314 2,112
------------ ------------
Total Property and Equipment 575,840 96,389
Less accumulated depreciation (51,020) (33,245)
------------ ------------
Net Property and Equipment 524,820 63,144
------------ ------------
Other Assets:
Deposits and other 271,475 32,400
Debt issuance costs, net of accumulated
amortization of $11,667 23,333 --
Patents, net of accumulated amortization of
$54,929 and $4,619 1,068,671 1,118,981
Goodwill 15,039,836 15,039,836
------------ ------------
Total Other Assets 16,403,315 16,191,217
------------ ------------
Total Assets $ 35,601,413 $ 42,507,406
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
1
MATRIXX INITIATIVES, INC. AND SUBSIDIARY
(formerly Gum Tech International, Inc.)
CONDENSED CONSOLIDATED BALANCE SHEETS
(Continued)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, December 31,
2002 2001
------------- -------------
Current Liabilities:
Accounts payable and accrued expenses $ 2,005,327 $ 5,928,985
Sales returns and allowances 262,755 1,031,897
Notes payable -- 1,000,000
Current portion of long-term debt 5,169,189 4,923,882
------------- -------------
Total Current Liabilities 7,437,271 12,884,764
------------- -------------
Long-Term Debt, net of current portion above:
Financial institutions and other 7,889,636 10,177,525
Less current portion above (5,169,189) (4,923,882)
------------- -------------
Total Long-Term Debt 2,720,447 5,253,643
------------- -------------
Commitments and contingencies -- --
Stockholders' Equity:
Preferred stock: $.001 value, 2,000,000 shares
authorized, none issued and outstanding -- --
Common stock: $.001 par value, 30,000,000 shares
authorized, 9,432,651 and 9,432,251 shares issued 9,432 9,432
Additional paid in capital 35,489,875 35,485,963
Accumulated deficit (9,993,756) (11,073,960)
------------- -------------
25,505,551 24,421,435
Less common stock held in treasury, at
cost (9,600 and 8,100 shares) (61,856) (52,436)
------------- -------------
Total Stockholders' Equity 25,443,695 24,368,999
------------- -------------
Total Liabilities and Stockholders' Equity $ 35,601,413 $ 42,507,406
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
2
MATRIXX INITIATIVES, INC. AND SUBSIDIARY
(formerly Gum Tech International, Inc.)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended September 30,
--------------------------------
2002 2001
------------ ------------
Net sales $ 5,078,596 $ 2,718,194
Cost of sales 1,668,153 751,402
------------ ------------
Gross Profit 3,410,443 1,966,792
Operating expenses 2,524,927 1,539,991
Research and development 149,885 352,038
------------ ------------
Income (Loss) From Operations 735,631 74,763
------------ ------------
Other Income (Expense):
Interest and other income 174,585 190,286
Interest and other expense (126,830) (26,665)
------------ ------------
Total Other Income (Expense) 47,755 163,621
------------ ------------
Income (Loss) Before Provision For Income Taxes
and Minority Interest 783,386 238,384
Provision for income taxes (239,348) --
Minority interest in earnings (loss) of
consolidated affiliate -- 339,638
------------ ------------
Net Income (Loss) From Continuing Operations 1,022,734 (101,254)
------------ ------------
Discontinued Operations:
Loss from discontinued operations -- (208,870)
Gain on disposal of gum operations, net of
income taxes of $400,000 -- 17,642,562
------------ ------------
Total Gain From Discontinued Operations -- 17,433,692
------------ ------------
Net Income (Loss) $ 1,022,734 $ 17,332,438
============ ============
Net Income (Loss) Per Share of Common Stock:
Basic:
Weighted Average Number of Common Shares Outstanding 9,422,872 9,391,067
Net Income (Loss) Per Share of Common Stock:
Continuing operations $ 0.11 $ (0.01)
Discontinued operations -- 1.86
------------ ------------
Net Income $ 0.11 $ 1.85
============ ============
Diluted:
Weighted Average Number of Common Shares Outstanding 9,461,205 9,391,067
Net Income (Loss) Per Share of Common Stock:
Continuing operations $ 0.11 $ (0.01)
Discontinued operations -- 1.86
------------ ------------
Net Income $ 0.11 $ 1.85
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
3
MATRIXX INITIATIVES, INC. AND SUBSIDIARY
(formerly Gum Tech International, Inc.)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Nine months ended September 30,
-------------------------------
2002 2001
------------ ------------
Net sales $ 11,971,803 $ 10,563,714
Cost of sales 3,440,276 2,847,093
------------ ------------
Gross Profit 8,531,527 7,716,621
Operating expenses 7,624,110 9,631,057
Research and development 272,128 586,229
------------ ------------
Income (Loss) From Operations 635,289 (2,500,665)
------------ ------------
Other Income (Expense):
Interest and other income 598,913 255,199
Interest and other expense (478,048) (91,574)
------------ ------------
Total Other Income (Expense) 120,865 163,625
------------ ------------
Income (Loss) Before Provision For Income Taxes
and Minority Interest 756,154 (2,337,040)
Provision for income taxes (324,050) --
Minority interest in earnings (loss) of
consolidated affiliate -- (403,861)
------------ ------------
Net Income (Loss) From Continuing Operations 1,080,204 (1,933,179)
------------ ------------
Discontinued Operations:
Loss from discontinued operations -- (332,922)
Gain on disposal of gum operations, net of
income taxes of $400,000 -- 17,642,562
------------ ------------
Total Gain From Discontinued Operations -- 17,309,640
------------ ------------
Net Income (Loss) $ 1,080,204 $ 15,376,461
============ ============
Net Income (Loss) Per Share of Common Stock:
Basic:
Weighted Average Number of Common Shares Outstanding 9,422,739 9,235,821
Net Income (Loss) Per Share of Common Stock:
Continuing operations $ 0.11 $ (0.21)
Discontinued operations -- 1.87
------------ ------------
Net Income $ 0.11 $ 1.66
============ ============
Diluted:
Weighted Average Number of Common Shares Outstanding 9,443,362 9,235,821
Net Income (Loss) Per Share of Common Stock:
Continuing operations $ 0.11 $ (0.21)
Discontinued operations -- 1.87
------------ ------------
Net Income $ 0.11 $ 1.66
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
4
MATRIXX INITIATIVES, INC. AND SUBSIDIARY
(formerly Gum Tech International, Inc.)
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended September 30,
-------------------------------
2002 2001
------------ ------------
Cash Flows From Operating Activities:
Net income (loss) $ 1,080,204 $ 15,376,461
Adjustments to reconcile net income (loss) to net cash
(used) by operating activities:
Depreciation 40,030 220,659
Amortization 50,310 --
Amortization of imputed interest on notes payable 462,111 --
Amortization of debt issuance costs 11,667 --
Compensation from issuance of warrants -- 25,830
Accrued interest -- (119,479)
Minority interest in earnings of consolidated affiliate -- (403,861)
Gain on disposal of gum operations -- (17,642,562)
Loss on disposal of property and equipment 20,104 --
Other 3,912 --
Changes in assets and liabilities:
Restricted cash 1,503,150 1,187,114
Accounts receivable 257,997 1,481,461
Employee receivable -- 911
Inventories 155,728 1,310,459
Prepaid expenses and other (178,013) 70,792
Accounts payable and accrued expenses (4,305,845) (2,568,001)
Sales returns and allowances (769,142) (130,297)
Customer deposits and other -- (56,286)
Deferred revenue -- (936,141)
------------ ------------
Net Cash (Used) By Operating Activities (1,667,787) (2,182,940)
------------ ------------
Cash Flows From Investing Activities:
Maturity of marketable securities 10,656,380 --
Capital expenditures (521,810) (1,161,023)
Deposits and other (239,075) 305,277
Notes receivable 200,000 (200,000)
Cost of sale of gum operations -- (1,527,722)
Proceeds from sale of gum operations -- 24,000,000
------------ ------------
Net Cash Provided By Financing Activities 10,095,495 21,416,532
------------ ------------
Cash Flows From Financing Activities:
Principal payments on notes payable (3,367,813) (2,956)
Debt issuance costs (35,000) --
Issuance of common stock upon exercise of
options and warrants -- 2,661,289
Purchase of treasury stock (9,420) (6,530)
------------ ------------
Net Cash Provided (Used) By Financing Activities (3,412,233) 2,651,803
------------ ------------
Net Increase in Cash and Cash Equivalents 5,015,475 21,885,395
Cash and Cash Equivalents at Beginning of Period 7,342,985 3,485,204
------------ ------------
Cash and Cash Equivalents at End of Period $ 12,358,460 $ 25,370,599
============ ============
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ 412,371 $ 111,890
Income taxes -- 325,000
The accompanying notes are an integral part of these
consolidated financial statements.
5
MATRIXX INITIATIVES, INC.
(FORMERLY GUM TECH INTERNATIONAL, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The accompanying financial information of Matrixx Initiatives, Inc. is
prepared in accordance with the rules prescribed for filing condensed
interim financial statements and, accordingly, does not include all
disclosures that may be necessary for complete financial statements
prepared in accordance with generally accepted accounting principles. The
disclosures presented are sufficient, in management's opinion, to make the
interim information presented not misleading. All adjustments, consisting
of normal recurring adjustments, which are necessary so as to make the
interim information not misleading, have been made. Results of operations
for the nine months ended September 30, 2002 are not necessarily indicative
of results of operations that may be expected for the year ending December
31, 2002. It is recommended that this financial information be read with
the complete financial statements included in Matrixx's Annual Report on
Form 10-K for the year ended December 31, 2001 previously filed with the
Securities and Exchange Commission.
2. As of December 31, 1997, Matrixx adopted Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings Per Share", which specifies the method
of computation, presentation and disclosure of earnings per share. SFAS No.
128 requires the presentation of two earnings per share amounts, basic and
diluted. Basic earnings per share is calculated using the average number of
common shares outstanding. Diluted earnings per share is computed on the
basis of the 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 net income per common share for the three months and nine
months ended September 30, 2002 and 2001, respectively. Options, warrants
and other incremental shares to purchase 197,000, 419,500, 719,960 and
719,960 shares of common stock for the three and nine month periods ended
at September 30, 2002 and 2001, respectively, were not included in the
computation of diluted earning per share because their effect would be
anti-dilutive.
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D.)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net income (loss) applicable
to common shareholders $ 1,022,734 $ (101,254) $ 1,080,204 $(1,933,179)
=========== =========== =========== ===========
Weighted average common
shares outstanding - Basic 9,422,872 9,391,067 9,422,739 9,235,821
Dilutive securities 38,333 -- 20,623 --
----------- ----------- ----------- -----------
Weighted average common
shares outstanding - Diluted 9,461,205 9,391,067 9,443,362 9,235,821
=========== =========== =========== ===========
Net income (loss) per common share:
Basic $ 0.11 $ (0.01) $ 0.11 $ (0.21)
Diluted $ 0.11 $ (0.01) $ 0.11 $ (0.21)
3. Inventories consisted of the following at September 30, 2002:
Raw materials and packaging $ 495,546
Finished goods 1,023,990
Less reserve for obsolescence (94,352)
-----------
Total $ 1,425,184
===========
4. Recently Issued Accounting Standards
In June 2001, the Financial Accounting Standard Board ("FASB") issued SFAS
No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other
Intangible Assets". SFAS No. 141 requires business combinations initiated
after June 30, 2001 to be accounted for using the purchase method of
accounting. It also specifies the types of acquired intangible assets that
are required to be recognized and reported separately from goodwill. SFAS
No. 142 requires that goodwill and certain intangibles no longer be
amortized, but instead tested for impairment at least annually. SFAS No.
142 is required to be applied starting with fiscal years beginning after
December 15, 2001, with early application permitted in certain
circumstances. The Company adopted SFAS No. 142 on January 1, 2002 which
did not result in any impairment of goodwill or other intangible assets
upon adoption.
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D.)
(Unaudited)
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS No. 143 establishes accounting standards for
recognition and measurement of a liability for the costs of asset
retirement obligations. Under SFAS No. 143, the costs of retiring an asset
will be recorded as a liability when the retirement obligation arises, and
will be amortized to expense over the life of the asset. The Company
adopted SFAS No. 143 on January 1, 2002 which did not result in any impact
on the Company's financial statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets and discontinued operations. The Company adopted SFAS No.
144 on January 1, 2002 which did not result in any impact on the Company's
financial statements.
5. Recent Developments
On June 18, 2002, the Company completed its previously announced plans to
reincorporate in Delaware and change its name to "Matrixx Initiatives,
Inc.". 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.
On July 12, 2002, the Board of Directors of Matrixx adopted a shareholder
rights plan in the form of a Rights Agreement dated as of July 22, 2002 by
and between Matrixx and Corporate Stock Transfer, Inc., as Rights Agent
(the "Rights Agreement"). On July 12, 2002, the Board of Matrixx 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 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
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D.)
(Unaudited)
possible adjustments provided for in the Rights Agreement. The Board of
Directors of Matrixx 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 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 Matrixx 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 Matrixx 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
Matrixx 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 no
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. A copy of the Rights
Agreement was filed with the Securities and Exchange Commission on July 23,
2002.
On July 12, 2002, the name of the Company's wholly owned subsidiary Gel
Tech L.L.C. was changed to Zicam LLC.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
In Fiscal 2001 we undertook a significant change in our strategic plan and
related business operations by exiting the chewing gum business and refocusing
on the development, production and sale of healthcare products utilizing
innovative delivery systems for over-the-counter pharmaceuticals, including our
two Zicam products. In July 2001, we sold substantially all of our assets and
business related to our chewing gum operations to the Wm. Wrigley Jr. Company
("Wrigley"). In December 2001, we acquired the remaining 40% of Gel Tech, L.L.C.
making Gel Tech a wholly-owned subsidiary of the Company. (In July 2002, the
name of Gel Tech, L.L.C. was changed to Zicam, LLC). Our financial results
reflect our former chewing gum operations as discontinued operations, and
consequently these operations are not reflected in the following discussion and
analysis. We owned 60% of Zicam prior to December 5, 2001 and 100% on and
subsequent to that date, and report Zicam's financial results on a consolidated
basis.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO
THE THREE MONTHS ENDED SEPTEMBER 30, 2001
Certain information is set forth below for our operations expressed in
dollars and as a percentage of net sales for the periods indicated:
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------
2002 2001
-------------------- --------------------
Net sales $5,078,596 100% $2,718,194 100%
Cost of sales 1,668,153 33 751,402 28
---------- ------ ---------- ------
Gross profit 3,410,443 67 1,966,792 72
Operating expenses 2,524,927 50 1,539,991 56
Research and development 149,885 3 352,038 13
---------- ------ ---------- ------
Income (loss) from operations 735,631 14 74,763 3
Interest and other income 174,585 3 190,286 7
Interest expense 126,830 2 26,665 1
---------- ------ ---------- ------
Income (loss) before income
taxes and minority interest $ 783,386 15% $ 238,384 9%
========== ====== ========== ======
NET SALES. Net Zicam sales for the three months ended September 30, 2002
increased almost 87% above the prior year level to approximately $5.078 million.
During the three months ended September 30, 2002, Matrixx began initial
shipments to retailers of five new Zicam products: Zicam Cold Remedy Swabs,
Zicam Kids Size Cold Remedy Swabs, Zicam Extreme Congestion Relief, Zicam Sinus
Relief, and Zicam Nasal Moisturizer. The sales of the new products contributed
approximately $1.1 million to the increase in net sales, while an increase in
sales of existing products (Zicam Cold Remedy, Zicam Cold Remedy Twin Pak and
Zicam Allergy Relief) contributed the remaining increase of $1.3 million. Sales
of the new products are net of approximately $0.6 million in one time
10
distribution costs related to the new product introductions. Sales of existing
products increased 32% above the prior year. Net sales of existing products also
improved due to a higher average price relative to the prior year due to a
higher accrual for retail promotion expense in the earlier period, which is
deducted from sales revenues in the computation of net sales.
Sales of the swab products were limited by our contract manufacturer's
inability to increase production sufficiently to meet the demand for the swab
products. Based on our current sales forecast for the next few months, we
anticipate that our contract manufacturer's additional production capacity
should eliminate the backlog of orders that currently exists for the two
products in the fourth quarter of 2002. We have not lost any customer orders as
a result of the backlog. None of our other products are currently in a backlog
situation.
Although the five new products, in particular both Swab products, have been
generally well received by retail customers, we have not achieved the level of
distribution for these products achieved by the original Zicam Cold Remedy
product. Our sales in future periods will be impacted by our ability to secure
placement for all five products in additional retail outlets. Moreover, the
level of sales in future periods will be impacted by product acceptance of all
seven of our Zicam products by the consuming public.
COST OF SALES. Cost of sales increased approximately $917,000, or 122%,
above the prior year level principally due to the increased number of units
sold. In addition, the cost of sales was impacted by the higher unit cost of the
swab products, which included certain start-up costs associated with initial
shipments of the swab products, and a higher cost of freight associated with
expediting the delivery of the new products. Reductions in the average cost of
Zicam Cold and Allergy products partially offset these increases.
GROSS PROFIT. Gross profit on the sale of Zicam products in the third
quarter of 2002 increased approximately $1.4 million, or 73.4%, above the prior
year level due to the increase in the number of units sold. The gross margin on
products sold in the third quarter of 2002 declined to 67 % from 72% in the same
period of 2001 due to the initial distribution costs associated with the
introduction of the new products and the higher production costs associated with
the new products.
OPERATING EXPENSES. Operating expenses for the third quarter of 2002
increased to $2,525,000, or approximately $985,000 above the prior year period.
This 64% increase reflects a higher level of marketing expenses, of
approximately $776,000, higher sales commission expense of almost $140,000 due
to the higher level of sales, increased investor relations expense of almost
$100,000, including annual meeting costs incurred in this period (compared to
similar costs for our previous annual meeting held in the fourth quarter of
2001) and higher quality control costs of $79,000 arising from the new product
introductions. Offsetting these increased costs were a decrease in legal
expenses from the prior year period which included the costs associated with the
settlement of a major patent lawsuit. Operating expenses in future periods will
vary largely in connection with the level of advertising expenditures. The
advertising campaign for the 2002-2003 cold season began in mid-October and is
estimated at a total cost of $8-10 million during the October- March cold
season.
11
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses of
almost $150,000 in the three months ended September 30, 2002 reflect costs
associated with the five new Zicam products that the Company introduced in 2002.
Expenses of over $350,000 in the prior year period were primarily associated
with our nicotine gum development undertaken in conjunction with an agreement
with Swedish Match, which was terminated in that period.
INTEREST AND OTHER INCOME. Interest and other income in the third quarter
of 2002 amounted to $174,585, or approximately $16,000 below the prior year
income amount of $190,286. Approximately $121,000 of the income in the 2002
period was royalty income and most of the difference, or approximately $54,000
was interest income. Virtually all of the income in the 2001 period was interest
income. Interest income decreased due to a reduced cash position between the two
periods due to the payments made to date in conjunction with our acquisition of
the remaining interest in Zicam, LLC in December 2001.
The royalty income is based on a dental gum product sold by Wrigley that is
subject to a royalty agreement between Matrixx and Wrigley. We entered into the
royalty agreement with Wrigley in conjunction with the sale of our gum assets to
Wrigley in July 2001. We are unable to predict the success or future sales of
the Wrigley gum product, and therefore, cannot estimate the amount or timing of
any future royalty payments.
INTEREST EXPENSE. Interest expense increased approximately $100,000 for the
third quarter of 2002 over the comparable quarter in 2001 due entirely to the
imputed interest accrued under the note that we issued to Zensano, Inc. in
connection with our acquisition of Zensano's 40% interest in Zicam, LLC in
December 2001. Our first payment of $2.75 million under the note was made at the
end of June 2002. Additional payments of $2.75 million are required in November
2002, June 2003 and November 2003. Interest expense in 2001 reflects the
interest on the Company's bank borrowings during that period. We did not have
any borrowings outstanding under our bank facility during the third quarter of
2002.
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST. We recorded income before
income taxes and minority interest of approximately $783,000 in the third
quarter of 2002, which represents an improvement of almost $545,000, or 229%,
above the prior year level of $238,000. The increase is primarily due to the
increased sales from existing and new products, which offset a higher level of
operating expenses. We expect our earnings in future periods will be
significantly impacted by the seasonality of our sales, the acceptance of all of
our products by the public and the timing and amount of advertising expenses.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO
THE NINE MONTHS ENDED SEPTEMBER 30, 2001
Certain information is set forth below for our operations expressed in
dollars and as a percentage of net sales for the periods indicated:
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NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------
2002 2001
-------------------- ---------------------
Net sales $11,971,803 100% $10,563,714 100%
Cost of sales 3,440,276 29 2,847,093 27
----------- ------ ----------- ------
Gross profit 8,531,527 71 7,716,621 73
Operating expenses 7,624,110 64 9,631,057 91
Research and development 272,128 2 586,229 6
----------- ------ ----------- ------
Income (loss) from operations 635,289 5 (2,500,665) (24)
Interest and other income 598,913 5 255,199 3
Interest expense 478,048 4 91,574 1
----------- ------ ----------- ------
Income (loss) before income
taxes and minority interest $ 756,154 6% $(2,337,040) (22)%
=========== ====== =========== ======
NET SALES. Net Zicam sales for the nine months ended September 30, 2002
increased to approximately $12.0 million or 13 % above the same period in 2001.
Most of the increase is attributable to sales of the new products which we
introduced in the third quarter of 2002. Sales of existing products contributed
to the increase, but were negatively impacted by a relatively mild cold season
in the first quarter of 2002.
COST OF SALES. The cost of sales for the nine months ended September 30,
2002 increased approximately $600,000, or nearly 21%, over the same period in
2001. The increase was primarily due to the increase in unit sales, higher costs
incurred with the initial production of the new products introduced in the third
quarter of 2002 and higher freight costs incurred to expedite the shipments of
finished goods. A decrease in the costs of the Company's cold and allergy
products due to lower manufacturing costs and cost of materials partially offset
this increase.
GROSS PROFIT. Gross profit for the first three quarters of 2002 increased
to approximately $8.5 million, or 11% above the same period in 2001. The
increase is due to the higher sales level which was offset in part by the higher
unit cost of sales, and is reflected in a decrease in gross profit percentage of
sales from 73% to 71%.
OPERATING EXPENSES. Operating expenses for the first three quarters of 2002
declined 21% or almost $2.0 million from the prior year level due largely to an
expense of $1.9 million incurred in the 2001 period related to legal and
settlement costs associated with a patent infringement lawsuit. Operating
expenses in future periods will largely vary in conjunction with the expense of
our advertising program.
RESEARCH AND DEVELOPMENT. Research and development expenses of
approximately $272,000 for the nine months ended September 30, 2002 reflect
costs associated with the five new Zicam products that were introduced in the
third quarter of 2002. Expenses in the prior year period primarily reflect costs
associated with our nicotine gum development undertaken in conjunction with an
agreement with Swedish Match, which was terminated in the third quarter of 2001.
13
INTEREST AND OTHER INCOME. Interest and other income for the nine months
ended September 30, 2002 period amounted to approximately $599,000, or
approximately $344,000 above the amount for the comparable period in 2001.
Approximately $356,000 of the 2002 amount is royalty income and the remainder is
largely interest income on our invested cash. Virtually all of the 2001 income
was interest income. The level of interest income is largely due to the
Company's invested cash position arising from its sale of the gum business in
July 2001 to Wrigley, reduced in the 2002 period by payments made in conjunction
with our acquisition of the remaining interest in Zicam, LLC in December 2001.
The royalty income is due to a dental gum product sold by Wrigley. We
entered into the royalty agreement with Wrigley in conjunction with the sale of
our gum assets to Wrigley in July 2001. We are unable to predict the success or
future sales of the Wrigley gum product, and therefore, cannot estimate the
amount or timing of any future royalty payments.
INTEREST EXPENSE. Interest expense increased to approximately $478,000 for
the nine months ended September 30, 2002 from approximately $92,000 in the same
period of 2001. The increase is entirely attributable to imputed interest
accrued under the note that we issued to Zensano, Inc. in connection with our
acquisition of Zensano's 40% interest in Zicam, LLC in December 2001. The first
of four payments of $2.75 million each under the note was made in June 2002,
with subsequent payments due in November 2002, June 2003 and November 2003.
INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST. Our income before
income taxes and minority interest in the first nine months of 2002 was almost
$0.8 million, an increase of more than $3.1 million from the net loss of $2.3
million reported in the comparable period of 2001. The increase is due to a
higher gross profit resulting from higher net sales and a decrease in operating
expenses. We expect that earnings in future periods will continue to be
significantly impacted by the seasonality of our sales, revenues and expenses
associated with new product introductions and the timing and amount of
advertising. The success of the five new products which we began shipping in the
third quarter of 2002 will have a significant impact on our financial results in
future periods.
LIQUIDITY AND CAPITAL RESOURCES
Our working capital decreased from approximately $13.4 million at December
31, 2001 to approximately $11.2 million at September 30, 2002, primarily due to
our initial payment of $2.75 million for the note we issued to Zensano, Inc. in
conjunction with our acquisition in December 2001 of Zensano's 40% interest in
Zicam, LLC. During the nine month period ended September 30, 2002, we
experienced a decrease in cash from operating activities of approximately $1.7
million, due primarily to a reduction in accounts payable of $4.3 million and
sales returns and allowances of $0.8 million, offset in part by net income of
$1.1 million, a reduction in accounts receivable of $0.3 million, restricted
cash of $1.5 million, and the amortization of imputed interest on notes payable
of $0.5 million.
Investing activities provided cash of approximately $10.1 million due
largely to the maturity of marketable securities that were reinvested in
securities that are classified as cash equivalents of $10.7 million, offset in
part by a capital expenditure of $0.5 million for a new corporate information
system.
14
Cash from financing activities used $3.4 million of cash due to our payment
in June 2002 of $2.75 million to Zengen, Inc. under the above-described note
that we originally issued to its subsidiary, Zensano, and the repayment in
February 2002 of borrowings under our $1.0 million bank credit facility. We
expanded our bank credit arrangement in May 2002 with Comerica Bank - California
to provide for an increase in our direct borrowing capacity to $2.5 million with
more favorable borrowing rates and terms. We do not currently have any
borrowings outstanding under the facility and, due to our cash position, do not
anticipate borrowing under the facility to meet our immediate working capital
requirements. We requested and received from Comerica Bank-California a waiver
of the earnings covenant contained in the bank credit facility for the second
quarter of 2002. We are in compliance with the earnings covenant for the third
quarter of 2002.
We believe that our existing capital resources will be sufficient to fund
our operations and currently anticipated capital requirements for the next
twelve months.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our consolidated financial statements and accompanying notes have been
prepared in accordance with generally accepted accounting principles applied on
a consistent basis. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods.
We continually evaluate the accounting policies and estimates that we use
to prepare our consolidated financial statements. In general, management's
estimates are based on historical experience, on information from third party
professionals and on various other assumptions that are believed to be
reasonable under the facts and circumstances. Actual results could differ from
those estimates made by management.
We believe that our critical accounting policies and estimates include the
accounting for intangible assets and goodwill, accounting for income taxes, and
accounting for returns and allowances associated with our products.
INTANGIBLE ASSETS AND GOODWILL. We recorded approximately $15.0 million in
goodwill in respect of the 40% Zicam, LLC interest that we acquired from
Zensano, Inc. in December 2001. Under SFAS 142, goodwill must be tested annually
to identify a potential impairment and the amount of any impairment loss, if
any. Factors that could affect this analysis would be significant loss of market
share, a general decline in Zicam product sales, higher than expected increases
in expenses and various other matters. Any change in key assumptions about the
business or prospects of Zicam, LLC, or any change in market conditions or other
externalities affecting Zicam, LLC, could result in an impairment charge, and
such a charge could have a material adverse effect on our financial condition
and results of operations.
ACCOUNTING FOR INCOME TAXES. With the exception of 2001 (in which we sold our
gum assets to Wrigley at a sizeable gain), we have experienced significant
operating losses. Despite the sizeable gain associated with the sale of our gum
assets to Wrigley in 2001, we still possess a sizeable tax loss carry-forward
15
which can be used to reduce taxable income in future years. Due to our history
of operating losses, we have recorded a deferred tax valuation allowance to
offset the deferred tax asset arising from our tax loss carry-forward. Should we
determine that due to improvement in our financial outlook, we are more likely
than not to realize the tax benefit associated with our tax loss carry-forwards,
we will record the deferred tax asset through the recording of a one-time income
adjustment. We would then record income taxes in subsequent operating periods
based on our estimated effective income tax rate.
ACCOUNTING FOR CUSTOMER RETURNS AND ALLOWANCES. We recognize revenues on the
sale of our products when they are shipped from our warehouse facility, and at
that time record a provision for estimated product returns. The estimate for
product returns is based on our historical experience of sales to retailers and
is reviewed regularly to ensure that it reflects the liability associated with
product returns. To date, our sales returns experience has been consistent with
our estimate for returns, except for returns of outdated products arising from
excessive production during the introduction of Zicam Cold Remedy in the
1999-2000 cold season. Currently, we are recording a provision of 3% of gross
sales for our Zicam Cold Remedy and Zicam Allergy Relief products for potential
returns and allowances.
In establishing the appropriate reserve level for the five new products
introduced in the third quarter of 2002, we reviewed the similarities and
differences of the five products relative to Zicam Cold Remedy and Zicam Allergy
Relief for which we now have almost three years of product return experience.
Based on that review, we will record a 7% provision of gross sales for these
products. We will review the return provision regularly and adjust these reserve
amounts as actual product return experience continues to develop. Should the
actual level of product returns vary significantly from our estimates, our
operating and financial results would be significantly affected. In addition, we
expect that a higher sales returns allowance will be recorded in the future for
any other new products that we introduce until such products achieve market
acceptance.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS AND RISK FACTORS
FORWARD-LOOKING STATEMENTS
This Report on Form 10-Q, including documents incorporated herein by
reference, contains forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. The words "believe", "expect",
"estimate", "anticipate", "intend", "may", "might", "will", "would", "could",
"project" and "predict", or similar words and phrases generally identify
forward-looking statements. Forward looking statements contained herein and in
document incorporated by reference herein include, but are not limited to
statements regarding:
* our expectations regarding future sales and costs thereof, including
the sales and costs of our five new products, operating expenses
(including anticipated advertising expenditures) and income, including
interest income;
16
* our expectations regarding the impact on our earnings of the
seasonality of sales, revenues and expenses, the acceptance of our
products by the public and the timing and amount of our advertising;
* our right to receive royalty payments from Wrigley based on our 2001
royalty agreement with Wrigley;
* our expectation that our contract manufacturer's production capacity
will be sufficient to eliminate our Zicam backlog orders in the fourth
quarter of 2002;
* our expectation that we will not need to borrow under our credit
facility with Comerica Bank- California to meet our immediate working
capital requirements; and
* our belief that our existing capital resources will be sufficient to
fund our operations and capital requirements for the next twelve
months and our expectation regarding the need for further borrowings.
We may make additional written or oral forward-looking statements from time
to time in filings with the Securities and Exchange Commission or in public news
releases. Such additional statements may include, but not be limited to,
projections of revenues, income or loss, capital expenditures, acquisitions,
plans for future operations, financing needs or plans, the impact of inflation
and plans relating to our products or services, as well as assumptions relating
to the foregoing. Forward-looking statements are inherently subject to risks and
uncertainties, some of which cannot be predicted or quantified. Future events
and actual results could differ materially from those set forth in, contemplated
by, or underlying our forward-looking statements.
Statements in this Form 10-Q, including those set forth below under the
subheading entitled "Risk Factors", describe factors that could contribute to or
cause actual results to differ materially from our expectations or that could
detrimentally affect the value of our outstanding stock. Other such factors
include (i) fluctuations in seasonal demand for our Zicam products, (ii) lack of
market acceptance for or uncertainties concerning the efficacy of the Zicam
products, (iii) difficulties in increasing production to meet unexpectedly high
demand in the short term, (iv) financial difficulties encountered by one or more
of our principal customers, (v) difficulties in obtaining additional capital for
marketing, research and development, and other expenses, (vi) oversupply of
product inventory to retailers resulting in unsold product returns, (vii)
material litigation involving patent and contractual claims, product liabilities
and consumer issues and (viii) difficulties and delays in introducing,
manufacturing and marketing our new products or the failure of required
stability studies for such products.
Forward-looking statements contained in this Form 10-Q speak only as of the
date of this Form 10-Q or, in the case of any document incorporated by
reference, the date of that document. We do not undertake, and we specifically
disclaim any obligation, to publicly update or revise any forward-looking
statement contained in this Form 10-Q or in any document incorporated herein by
17
reference to reflect changed assumptions, the occurrence of unanticipated events
or changes to future operating results over time.
RISK FACTORS
OUR NEW BUSINESS FOCUS MEANS WE HAVE A LIMITED OPERATING HISTORY ON WHICH TO
ASSESS OUR CURRENT AND PROSPECTIVE PERFORMANCE
Although we have been in operations for a number of years, the significant
change of direction and focus in our business that we made in 2001 by exiting
the chewing gum business and refocusing on the development, production and sale
of healthcare products utilizing innovative delivery systems presents a limited
operating history upon which you may evaluate our current and prospective
performance. The possibility of our future success must be considered relative
to the problems, challenges, complications and delays frequently encountered in
connection with the development and operation of a new business, and the
development and marketing of relatively new healthcare products such as our
Zicam products.
WE INCURRED SIGNIFICANT LOSSES IN PREVIOUS YEARS AND MAY NOT BECOME PROFITABLE
We have recorded losses (excluding the income recorded in connection with
the sale in July 2001 of substantially all of our chewing gum assets to Wrigley)
in each of the last several years. While a significant portion of these losses
were attributable to our former chewing gum operations that we sold to Wrigley,
we cannot be certain that the change in our business focus in 2001 to healthcare
products will result in our becoming profitable in the foreseeable future or
over the longer term. Our need for continued expenditures for product research
and development and marketing, among other things, will make it difficult for us
to reduce our operating expenses in order to deal with lack of sales growth or
unanticipated reductions in existing sales. Our failure to balance expenditures
in any period with sales could have an adverse effect on our results of
operations.
IF OUR ZICAM PRODUCTS DO NOT GAIN WIDESPREAD MARKET ACCEPTANCE, OUR ANTICIPATED
SALES AND RESULTS OF OPERATIONS WILL SUFFER
Although studies have indicated that Zicam Cold Remedy can significantly
reduce the duration and severity of the common cold, we cannot be certain that
the product will achieve widespread acceptance by the market. To date, Zicam
Allergy Relief has not achieved the market success presently enjoyed by Zicam
Cold Remedy. We recently introduced, and intend to actively promote, five new
Zicam products, including Zicam Cold Remedy Swabs, Zicam Kids Size Cold Remedy
Swabs, Zicam Extreme Congestion Relief, Zicam Sinus Relief and Zicam
Moisturizer. If any unanticipated problem arises concerning the efficacy of
Zicam Cold Remedy, Zicam Allergy Relief or any of these new products, or if one
or more of these products fails to achieve widespread market acceptance for any
other reason, our operating results and prospects would be materially adversely
affected.
18
UNANTICIPATED PROBLEMS ASSOCIATED WITH PRODUCT DEVELOPMENT AND COMMERCIALIZATION
COULD ADVERSELY AFFECT OUR OPERATING RESULTS
Our successful development of existing and new products is subject to the
risks of failure and delay inherent in the development and commercialization of
products based on innovative technologies. These risks include the possibilities
that:
* we may experience unanticipated or otherwise negative research and
development results;
* existing or proposed products may be found to be ineffective or
unsafe, or may otherwise fail to receive required regulatory
clearances or approvals;
* we may find that existing or proposed products, while effective, are
uneconomical to commercialize or market;
* existing or proposed products do not achieve broad market acceptance;
or
* proprietary rights held by third parties preclude us from developing
or marketing existing or proposed products.
Our inability to develop and commercialize our existing products or any new
products on a timely basis and within our financial budgets could have a
material adverse effect on our operating results and future prospects.
OUR INABILITY TO PROVIDE SCIENTIFIC PROOF FOR PRODUCT CLAIMS MAY ADVERSELY
AFFECT OUR SALES.
The marketing of our Zicam products involves claims that certain of these
products assist in reducing the duration of the common cold (in the case of
Zicam Cold Remedy and the related Zicam Cold Remedy Swab products) and
controlling allergy symptoms (in the case of Zicam Allergy Relief). Under FDA
and FTC rules, we are required to obtain scientific data to support any health
claims we make concerning these products. Although we have neither provided nor
been requested to provide any scientific data to the FDA in support of claims
regarding these products, we may be required to do so in the future. In such an
event, we cannot be certain that the scientific data we have obtained in support
of our claims will be deemed acceptable to the FDA or FTC. If the FDA or the FTC
requests any supporting information, and we are unable to provide support that
is acceptable to the FDA or the FTC, either agency could force us to stop making
the claims in question or restrict us from selling the affected products.
FDA AND OTHER GOVERNMENT REGULATION MAY RESTRICT OUR ABILITY TO SELL OUR
PRODUCTS
We are subject to various federal, state and local laws and regulations
affecting our business. Our Zicam products are subject to regulation by the FDA,
including regulations with respect to labeling of products, approval of
ingredients in products, claims made regarding the products, and disclosure of
product ingredients. If we do not comply with these regulations, the FDA could
force us to stop selling the affected products or require us to incur
substantial costs in adopting measures to maintain compliance with these
regulations. Our advertising claims regarding our products are subject to the
jurisdiction of the FTC as well as the FDA. In both cases we are required to
obtain scientific data to support any advertising or labeling health claims we
make concerning our products, although no pre-clearance or filing is required to
19
be made with either agency. If we are unable to provide the required support for
such claims, the FTC may stop us from making such claims or require us to stop
selling the affected products.
WE MAY FAIL TO COMPETE EFFECTIVELY, PARTICULARLY AGAINST LARGER, MORE
ESTABLISHED PHARMACEUTICAL AND HEALTH PRODUCTS COMPANIES, CAUSING OUR BUSINESS
AND OPERATING RESULTS TO SUFFER
The consumer health products industry is highly competitive. We compete
with companies in the United States and abroad that are engaged in the
development of both traditional and innovative healthcare products. Many of
these companies have much greater financial and technical resources and
production and marketing capabilities than we do. As well, many of these
companies have already achieved significant product acceptance and brand
recognition with respect to products that compete directly with our Zicam
products. Our competitors may successfully develop and market superior or less
expensive products which could render our Zicam and other future products less
valuable or unmarketable.
IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY OR IF WE INFRINGE THE
INTELLECTUAL PROPERTY OF OTHERS, OUR FINANCIAL CONDITION AND FUTURE PROSPECTS
COULD BE MATERIALLY HARMED
We rely significantly on the protections afforded by patent and trademark
registrations that we routinely seek from the U.S. Patent and Trademark Office
(USPTO) and from similar agencies in foreign countries. We cannot be certain
that any patent or trademark application that we file will be approved by the
USPTO or other foreign agencies. In addition, we cannot be certain that we will
be able to successfully defend any trademark, trade name or patent that we hold
against claims from, or use by, competitors or other third parties. No
consistent policy has emerged from the USPTO or the courts regarding the breadth
of claims allowed or the degree of protection afforded under biotechnology and
similar patents. Our future success will depend on our ability to prevent others
from infringing on our proprietary rights, as well as our ability to operate
without infringing upon the proprietary rights of others. We may be required at
times to take legal action to protect our proprietary rights and, despite our
best efforts, we may be sued for infringing on the patent rights of others.
Patent litigation is costly and, even if we prevail, the cost of such litigation
could adversely affect our financial condition. If we do not prevail, in
addition to any damages we might have to pay, we could be required to stop the
infringing activity or obtain a license. We cannot be certain that any required
license would be available to us on acceptable terms, or at all. If we fail to
obtain a license, our business might be materially adversely affected. In
addition to seeking patent protection, we rely upon a combination of
non-disclosure agreements, other contractual restrictions and trade secrecy laws
to protect proprietary information. There can be no assurance that these steps
will be adequate to prevent misappropriation of our proprietary information or
that our competitors will not independently develop technology or trade secrets
that compete with our proprietary information.
WE MAY INCUR SIGNIFICANT COSTS RESULTING FROM PRODUCT LIABILITY CLAIMS
We are subject to significant liability should use or consumption of our
products cause injury, illness or death. Although we carry product liability
insurance, there can be no assurance that our insurance will be adequate to
protect us against product liability claims or that insurance coverage will
continue to be available on reasonable terms. A product liability claim, even
one without merit or for which we have substantial coverage, could result in
significant legal defense costs, thereby increasing our expenses and lowering
20
our earnings. Such a claim, whether or not proven to be valid, could have a
material adverse effect on our product branding and goodwill, resulting in
reduced market acceptance of our products. This in turn could materially
adversely affect our results of operations and financial condition.
WE DO NOT HAVE MANUFACTURING CAPABILITIES OF OUR OWN
We currently do not have the physical or human resources to independently
manufacture our Zicam products or any other products that we may develop. We
currently outsource all of our product manufacturing and packaging operations
and intend to continue this outsourcing for the foreseeable future. If we are
unable to enter into suitable arrangements for manufacturing of our Zicam
products or any other products, or if our third party contractors fail to
adequately perform their manufacturing operations, our sales and related
financial results could be materially adversely affected. If, in the future, we
decide to establish our own manufacturing facilities, we will require
substantial additional funds and significant additional personnel to undertake
such operations. We cannot be certain that such funding or a sufficient number
of such qualified persons will be available for such an undertaking.
THE LARGE NUMBER OF SHARES ELIGIBLE FOR IMMEDIATE AND FUTURE SALES MAY DEPRESS
THE PRICE OF OUR STOCK
Sales of substantial amounts of our common stock in the open market or the
availability of a large number of additional shares for sale could adversely
affect the market price of our common stock. Substantially all of our
outstanding shares of common stock, as well as the shares underlying vested but
as yet unexercised warrants and options, have either been registered for public
sale or may be sold under Rule 144 promulgated under the Securities Act of 1933,
as amended. Therefore, all of these shares may be immediately sold by the
holders. A substantial increase in sales of our common stock could depress the
price of our common stock.
OUR BOARD OF DIRECTORS IS AUTHORIZED TO ISSUE SHARES OF PREFERRED STOCK THAT
COULD HAVE RIGHTS SUPERIOR TO OUR OUTSTANDING SHARES OF COMMON STOCK, AND, IF
ISSUED, COULD ADVERSELY IMPACT THE VALUE OF OUR COMMON STOCK
Our certificate of incorporation permits our board of directors, in its
sole discretion, to issue up to 2,000,000 shares of authorized but unissued
preferred stock. These shares may be issued by our board without further action
by our shareholders, and may include any of the following rights (among others)
as our board may determine, which rights may be superior to the rights of our
outstanding common stock:
* voting rights, including the right to vote as a class on particular
matters;
* preferences as to dividends and liquidation rights;
* conversion rights;
* anti-dilution protections; and
* redemption rights.
21
Since our board of directors has the authority to determine, from time to time,
the terms of our authorized preferred stock, there is no limit on the amount of
common stock that could be issuable upon conversion of any future series of
preferred stock that may be issued. The rights of holders of our common stock
will be subject to, and may be adversely affected by, the rights of the holders
of any series of preferred stock that may be issued in the future. In addition,
the market price of our common stock may be adversely affected by the issuance
of any series of preferred stock with voting or other rights superior to those
of our common stock. The issuance of any series of preferred stock could also
have the effect of making it more difficult for a third party to acquire a
majority of our outstanding common stock.
THE PRICE OF OUR STOCK MAY CONTINUE TO BE VOLATILE
The market price of our common stock, which is quoted for trading on the
Nasdaq National Market, has been highly volatile and may continue to be volatile
in the future. Any or a combination of the following factors could cause the
market value of our common stock to decline quickly: Operating results that
differ from market expectations, negative or other unanticipated results of
clinical trials or other testing, delays in product development, technological
innovations or commercial product introductions by our competitors, changes in
government regulations, developments concerning proprietary rights, including
pending or threatened patent litigation, public concerns regarding the safety of
any of our products and general economic and stock market conditions. Since the
Spring of 2000, the stock market has experienced, and it may continue to
experience, significant price and volume fluctuations. These fluctuations have
particularly affected the market prices of equity securities of many small
capitalization companies, like Matrixx, that are not yet profitable or that
experience low or inconsistent earnings. Often, the effect on the price of such
securities is disproportionate to the operating performance of such companies.
In our case, such broad market fluctuations may adversely our stockholders'
ability to dispose of their shares of Matrixx at a price equal to or above the
price at which they purchased such shares.
22
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary market risk exposure throughout 2001 and the first nine months
of 2002 related to our variable rate revolving credit facility with Comerica
Bank. As of the fiscal year ended December 31, 2001, we had an outstanding
balance of $1.0 million against the facility. During fiscal 2001, the average
outstanding balance on a daily basis was approximately $1.0 million. During the
first quarter of 2002 we repaid this outstanding balance. We expanded our bank
credit arrangement in May 2002 to provide an increase in our direct borrowing
capacity to $2.5 million with more favorable borrowing rates and terms. We do
not currently have any borrowings outstanding under the facility, and due to our
cash position, do not anticipate borrowing under the facility to meet our
immediate working capital requirements. However, assuming we did have borrowings
under the new credit facility at the same average level we experienced in 2001
of $1.0 million, a hypothetical interest rate change of 1% would increase our
interest expense approximately $10,000 per year from the expense levels that we
experienced in 2001. Consequently, we believe that moderate interest rate
increases will not have a material adverse impact on our results of operations
or financial position in the foreseeable future.
As of both December 31, 2001 and September 30, 2002, we did not participate
in any market risk-sensitive commodity instruments for which fair value
disclosure would be required under SFAS No. 107. We presently hold approximately
$12 million in short-term U.S. treasury securities which are not subject to
material risk. We believe that we are not subject in any material way to other
forms of market risk, such as foreign currency exchange risk or foreign customer
purchases (of which there were none in 2001 or in the quarter ended September
30, 2002) or commodity price risk.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this quarterly report, we carried
out an evaluation, under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures are effective in timely alerting them to
material information relating to the Company (including our consolidated
subsidiaries) required to be included in our periodic SEC filings. There were no
significant changes in our internal controls or other factors that could
significantly affect these controls subsequent to the date of their evaluation
and there were no corrective actions with regard to significant deficiencies or
material weaknesses.
23
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
Exhibit No. Title
----------- -----
3.01 Certificate of Incorporation of the Registrant(1)
3.02 Bylaws of the Registrant(1)
4.01 Rights Agreement dated as of July 22, 2002 by and between
the Registrant and Corporate Stock Transfer, Inc. (2)
99.1 Certification Pursuant to 18 U.S.C Section 1350
99.2 Certification Pursuant to 18 U.S.C. Section 1350
- ----------
(1) Incorporated by reference to the Registrant's Amendment No.1 to Form 8-A,
file No. 000-27646, as filed on June 18, 2002.
(2) Incorporated by reference to the Registrant's registration statement on
Form 8-A filed July 23, 2002, file number 000-27646.
B. REPORTS ON FORM 8-K
On July 23, 2002, we filed a Current Report on Form 8-K announcing our
adoption of a shareholder rights plan in the form of a Rights Agreement
dated as of July 22, 2002 between Matrixx and Corporate Stock Transfer,
Inc. as Rights Agent.
24
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MATRIXX INITIATIVES, INC.
/s/ Carl J. Johnson
----------------------------------------
Carl J. Johnson
President and
Chief Executive Officer
/s/ William J. Hemelt
----------------------------------------
William J. Hemelt
Executive Vice President,
Chief Financial Officer,
Treasurer and Secretary
November 4, 2002
25
CERTIFICATIONS
I, Carl J. Johnson, President and Chief Executive Officer of Matrixx
Initiatives, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Matrixx Initiatives,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 4, 2002
/s/ Carl J. Johnson
----------------------------------------
Carl J. Johnson
President and Chief Executive Officer
CERTIFICATIONS
I, William J. Hemelt, Executive Vice President, Chief Financial Officer,
Treasurer and Secretary of Matrixx Initiatives, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Matrixx Initiatives,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 4, 2002
/s/ William J. Hemelt
----------------------------------------
William J. Hemelt
Executive Vice President, Chief
Financial Officer, Treasurer & Secretary
EXHIBIT 99.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Matrixx Initiatives, Inc. (the
"Company") on Form 10-Q for the period ending September 30, 2002 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Carl J. Johnson, Chief Executive Officer of the Company, certify, pursuant to
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
(1) the Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ Carl J. Johnson
----------------------------------------
Carl J. Johnson
President and Chief Executive Officer
Dated November 4, 2002
EXHIBIT 99.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Matrixx Initiatives, Inc.
(the "Company") on Form 10-Q for the period ending September 30, 2002 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, William J. Hemelt, Executive Vice President, Chief Financial Officer,
Treasurer and Secretary of the Company, certify, pursuant to U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that:
(1) the Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ William J. Hemelt
----------------------------------------
William J. Hemelt
Executive Vice President, Chief
Financial Officer, Treasurer & Secretary
Dated November 4, 2002