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 JUNE 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 of (I.R.S. Employer
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 9,432,451 shares of the registrant's common stock, no par value,
outstanding as of August 5, 2002.
MATRIXX INITIATIVES, INC.
FORM 10-Q
INDEX
PART I FINANCIAL INFORMATION Page
----
Item 1. Condensed Consolidated Balance Sheet
as of June 30, 2002 and December 31, 2001 1
Condensed Consolidated Statements of
Operations for the three months ended June
30, 2002 and 2001 3
Condensed Consolidated Statements of
Operations for the six months ended June
30, 2002 and 2001 4
Condensed Consolidated Statements of
Cash Flows for the six months ended
June 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 21
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES
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
June 30, 2002 December 31, 2001
------------- -----------------
Current Assets:
Cash and cash equivalents $ 13,277,967 $ 7,342,985
Restricted cash -- 1,503,150
Accounts receivable:
Trade, net allowance for doubtful accounts of $540,232 and $468,389 746,777 4,461,156
Inventories 1,182,068 1,580,912
Marketable securities -- 10,656,380
Prepaid expenses and other 407,030 508,462
Interest receivable 16,370 --
Notes receivable 200,000 200,000
------------ ------------
Total Current Assets 15,830,212 26,253,045
------------ ------------
Property and Equipment, at cost:
Office furniture and equipment 404,533 94,277
Leasehold improvements 38,200 2,112
------------ ------------
Total Property and Equipment 442,733 96,389
Less accumulated depreciation (25,708) (33,245)
------------ ------------
Net Property and Equipment 417,025 63,144
------------ ------------
Other Assets:
Deposits and other 288,424 32,400
Debt issuance costs, net of accumulated amortization of $2,917 32,083 --
Patents, net of accumulated amortization of $38,159 and $4,619 1,085,441 1,118,981
Goodwill 15,039,836 15,039,836
------------ ------------
Total Other Assets 16,445,784 16,191,217
------------ ------------
Total Assets $ 32,693,021 $ 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
June 30, 2002 December 31, 2001
------------- -----------------
Current Liabilities:
Accounts payable and accrued expenses $ 345,634 $ 5,928,985
Sales returns and allowances 166,602 1,031,897
Notes payable -- 1,000,000
Current portion of long-term debt 5,086,091 4,923,882
------------ ------------
Total Current Liabilities 5,598,327 12,884,764
------------ ------------
Long-Term Debt, net of current portion above:
Financial institutions and other 7,762,806 10,177,525
Less current portion above (5,086,091) (4,923,882)
------------ ------------
Total Long-Term Debt 2,676,715 5,253,643
------------ ------------
Minority interest in consolidated affiliate -- --
------------ ------------
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, 9,432,351 and 9,432,251 shares issued 9,432 9,432
Additional paid in capital 35,486,892 35,485,963
Accumulated deficit (11,016,489) (11,073,960)
------------ ------------
24,479,835 24,421,435
Less common stock held in treasury, at cost
(9,600 and 8,100 shares) (61,856) (52,436)
------------ ------------
Total Stockholders' Equity 24,417,979 24,368,999
------------ ------------
Total Liabilities and Stockholders' Equity $ 32,693,021 $ 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 June 30,
---------------------------
2002 2001
----------- -----------
Net sales $ 1,825,696 $ 1,373,330
Cost of sales 524,887 482,371
----------- -----------
Gross Profit 1,300,809 890,959
Operating expenses 2,218,134 3,625,970
Research and development 95,698 182,589
----------- -----------
Income (Loss) From Operations (1,013,023) (2,917,600)
----------- -----------
Other Income (Expense):
Interest and other income 310,635 36,930
Interest and other expense (169,006) (39,397)
----------- -----------
Total Other Income (Expense) 141,629 (2,467)
----------- -----------
Income (Loss) Before Provision For Income Taxes
and Minority Interest (871,394) (2,920,067)
Provision for income taxes -- --
Minority interest in earnings (loss) of
consolidated affiliate -- (986,045)
----------- -----------
Net Income (Loss) From Continuing Operations (871,394) (1,934,022)
Loss from discontinued operations -- (368,007)
----------- -----------
Net Income (Loss) $ (871,394) $(2,302,029)
=========== ===========
Net Income (Loss) Per Share of Common Stock:
Basic:
Weighted Average Number of Common Shares Outstanding 9,422,659 9,219,018
Net Income (Loss) Per Share of Common Stock:
Continuing operations $ (0.09) $ (0.21)
Discontinued operations -- (0.04)
----------- -----------
Net Loss $ (0.09) $ (0.25)
=========== ===========
Diluted:
Weighted Average Number of Common Shares Outstanding 9,422,659 9,219,018
Net Income (Loss) Per Share of Common Stock:
Continuing operations $ (0.09) $ (0.21)
Discontinued operations -- (0.04)
----------- -----------
Net Loss $ (0.09) $ (0.25)
=========== ===========
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)
Six months ended June 30,
--------------------------
2002 2001
----------- -----------
Net sales $ 6,893,207 $ 7,845,520
Cost of sales 1,772,123 2,095,691
----------- -----------
Gross Profit 5,121,084 5,749,829
Operating expenses 5,099,183 8,091,066
Research and development 122,243 234,191
----------- -----------
Income (Loss) From Operations (100,342) (2,575,428)
----------- -----------
Other Income (Expense):
Interest and other income 424,328 64,913
Interest and other expense (351,218) (64,909)
----------- -----------
Total Other Income (Expense) 73,110 4
----------- -----------
Income (Loss) Before Provision For Income Taxes
and Minority Interest (27,232) (2,575,424)
Provision for income taxes (84,702) --
Minority interest in earnings (loss) of
consolidated affiliate -- (743,500)
----------- -----------
Net Income (Loss) From Continuing Operations 57,470 (1,831,924)
Loss from discontinued operations -- (124,052)
----------- -----------
Net Income (Loss) $ 57,470 $(1,955,976)
=========== ===========
Net Income (Loss) Per Share of Common Stock:
Basic:
Weighted Average Number of Common Shares Outstanding 9,422,672 9,157,033
Net Income (Loss) Per Share of Common Stock:
Continuing operations $ 0.01 $ (0.20)
Discontinued operations -- (0.01)
----------- -----------
Net Loss $ 0.01 $ (0.21)
=========== ===========
Diluted:
Weighted Average Number of Common Shares Outstanding 9,435,173 9,157,033
Net Income (Loss) Per Share of Common Stock:
Continuing operations $ 0.01 $ (0.20)
Discontinued operations -- (0.01)
----------- -----------
Net Loss $ 0.01 $ (0.21)
=========== ===========
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)
Six months ended June 30,
----------------------------
2002 2001
------------ ------------
Cash Flows From Operating Activities:
Net income (loss) $ 57,470 $ (1,955,976)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Depreciation 14,718 217,198
Amortization 33,540 --
Amortization of imputed interest on notes payable 335,281 --
Compensation from issuance of warrants -- 25,830
Minority interest in earnings of consolidated affiliate -- (743,500)
Loss on disposal of property and equipment 20,104 --
Other 929 --
Changes in assets and liabilities:
Restricted cash 1,503,150 1,166,048
Accounts receivable 3,714,379 3,158,036
Interest receivable (16,370) --
Employee receivable -- (6,938)
Inventories 398,844 1,041,915
Prepaid expenses and other 101,432 15,906
Accounts payable and accrued expenses (5,965,537) (945,086)
Sales returns and allowances (865,295) (388,849)
Customer deposits -- 168,560
Deferred revenue -- (936,141)
------------ ------------
Net Cash Provided (Used) By Operating Activities (667,355) 817,003
------------ ------------
Cash Flows From Investing Activities:
Maturity of marketable securities 10,656,380 --
Capital expenditures (388,703) (1,156,458)
Deposits and other (256,024) (96,124)
------------ ------------
Net Cash Provided (Used) By Financing Activities 10,011,653 (1,252,582)
------------ ------------
Cash Flows From Financing Activities:
Principal payments on notes payable (3,367,813) (2,956)
Debt issuance costs (32,083) --
Issuance of common stock upon exercise of options and warrants -- 1,159,413
Purchase of treasury stock (9,420) --
------------ ------------
Net Cash Provided (Used) By Financing Activities (3,409,316) 1,156,457
------------ ------------
Net Increase in Cash and Cash Equivalents 5,934,982 720,878
Cash and Cash Equivalents at Beginning of Period 7,342,985 3,485,204
------------ ------------
Cash and Cash Equivalents at End of Period $ 13,277,967 $ 4,206,082
============ ============
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ 412,371 $ 85,225
Income taxes -- --
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 six months ended June 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 six months ended June
30, 2002 and 2001, respectively. Options, warrants and other incremental
shares to purchase 563,000 and 719,960 shares of common stock at June 30,
2002 and 2001 respectively, were not included in the computation of diluted
earning per share because their effect would be anti-dilutive.
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- -------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net income (loss) applicable
to common shareholders $ (871,394) $(2,302,029) $ 57,470 $(1,955,976)
=========== =========== =========== ===========
Weighted average common
shares outstanding - Basic 9,422,659 9,219,018 9,422,672 9,157,033
Dilutive securities -- -- 12,501 --
----------- ----------- ----------- -----------
Weighted average common
shares outstanding - Diluted 9,422,659 9,219,018 9,435,173 9,157,033
=========== =========== =========== ===========
Net income (loss) per common share:
Basic $ (0.09) $ (0.25) $ 0.01 $ (0.21)
Diluted $ (0.09) $ (0.25) $ 0.01 $ (0.21)
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D.)
(Unaudited)
3. Inventories consisted of the following at June 30, 2002:
Raw materials and packaging $ 450,331
Finished goods 819,434
Less reserve for obsolescence (87,697)
-----------
Total $ 1,182,068
===========
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 will require 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.
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.
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D.)
(Unaudited)
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 regular 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
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
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D.)
(Unaudited)
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 JUNE 30, 2002 COMPARED TO THE
THREE MONTHS ENDED JUNE 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 JUNE 30,
-------------------------------------------
2002 2001
------------------- -------------------
Net sales $ 1,825,696 100% $ 1,373,330 100%
Cost of sales 524,887 29 482,371 35
----------- ---- ----------- ----
Gross profit 1,300,809 71 890,959 65
Operating expenses 2,218,134 121 3,625,970 264
Research and development 95,698 5 182,589 13
----------- ---- ----------- ----
Income (loss) from operations (1,013,023) (55) (2,917,600) (212)
Interest and other income 310,635 17 36,930 2
Interest expense 169,006 9 39,397 3
----------- ---- ----------- ----
Income (loss) before income
taxes and minority interest $ (871,394) (47)% $(2,920,067) (213)%
=========== ==== =========== ====
NET SALES. Net Zicam sales for the three months ended June 30, 2002
increased almost 33% above the prior year level to approximately $1.826 million.
Due to the seasonality of the Company's products, second quarter sales are the
weakest of the year. During both of these periods, sales of Zicam Allergy Relief
accounted for approximately 60% of total unit sales and sales of Zicam Cold
Remedy accounted for the remainder. Increases in sales of both products
contributed to an overall increase in net sales, primarily as a result of a
modest increase in advertising spending during the second quarter of 2002 for
Zicam Allergy Relief.
10
The Company announced during the second quarter of 2002 the introduction 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. Sales of these products will commence in the third quarter,
assuming all quality and regulatory requirements can be met. We expect these
products to add significantly to sales in the two remaining quarters of the
year.
COST OF SALES. Cost of sales increased approximately $43,000 due to the
increased number of units sold. However, the increase in cost was mitigated
somewhat by a lower cost of materials associated with the Company's two
products, such that the cost of sales as a percentage of net sales was reduced
from 35 % in 2001 to 29 % in 2002.
GROSS PROFIT. Gross profit on the sale of Zicam products increased to
approximately $1.3 million or approximately $409,000, or 46 %, above the second
quarter of 2001. The increase in gross profit reflects the increase in unit
sales as well as a higher average price realized due to less discounting
relative to the year earlier period.
OPERATING EXPENSES. Operating expenses for the second quarter of 2002
decreased 38.8% to approximately $2.2 million from $3.6 million in the same
period of the prior year. The decrease is primarily due to expenses of
approximately $1.9 million incurred in 2001 related to costs of patent
litigation that was settled in that period. This decrease was offset in part by
an increase in advertising expenses in 2002, costs associated with the Company's
recent reincorporation and name change and other corporate restructuring
activities. Operating expenses in future periods will vary largely in connection
with the level of advertising expenditures.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses in the
three months ended June 30, 2002 reflect costs associated with the five new
Zicam products that the Company is introducing in the third quarter of 2002.
Expenses in the prior year period primarily reflect clinical work on Zicam Cold
Remedy product as well as expenses associated with the nicotine gum development
in conjunction with its agreement, subsequently terminated, with Swedish Match.
INTEREST AND OTHER INCOME. Interest and other income increased from $36,930
in the second quarter of 2001 to $310,635 in the second quarter of 2002 due
primarily to royalty income of approximately $236,000 received from Wrigley in
connection with 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 believe that the royalty amount received reflects a higher
level of introductory shipments of product that would normally be expected
during the introduction of any new consumer product, and therefore, is not
necessarily indicative of amounts to be received in the future. 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 $130,000 for the
second quarter of 2002 over the comparable quarter in 2001 due to the imputed
interest of approximately $169,000 accrued under the note that we issued to
11
Zensano, Inc. in connection with our acquisition of Zensano's 40% interest in
Zicam in December 2001. Our first payment under the note of $2.75 million
(including $382,187 of imputed interest) was made at the end of June 2002.
Additional payments of $2.75 million are required in each of November 2002, June
2003 and November 2003.
INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST. We recorded a net
loss of approximately $871,000, which represents an improvement of almost $2.0
million, or 70% above the prior year, primarily due to the decrease in operating
expenses and the increase in gross profit from sales. We expect that our
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. Specifically, we have
announced the introduction of five new products and are currently selling these
products to retailers. Shipments of these products will begin in the third
quarter of 2002. The success of these products will have a significant impact on
our financial results in future quarters. Additionally, we plan to increase our
advertising spending for the fourth quarter of 2002 above the prior year, which
will further affect operating expenses and financial results for the remainder
of the 2002 fiscalyear.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO THE SIX
MONTHS ENDED JUNE 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:
SIX MONTHS ENDED JUNE 30,
-------------------------------------------
2002 2001
------------------- -------------------
Net sales $ 6,893,207 100% $ 7,845,520 100%
Cost of sales 1,772,123 26 2,095,691 27
----------- ---- ----------- ----
Gross profit 5,121,084 74 5,749,829 73
Operating expenses 5,099,183 73 8,091,066 103
Research and development 122,243 2 234,191 3
----------- ---- ----------- ----
Income (loss) from operations (100,342) (1) (2,575,428) (33)
Interest and other income 424,328 6 64,913 1
Interest expense 351,218 5 64,909 1
----------- ---- ----------- ----
Income (loss) before income
taxes and minority interest $ (27,232) 0% $(2,575,424) (33)%
=========== ==== =========== ====
NET SALES. Net Zicam sales for the six months ended June 30, 2002 decreased
to approximately $6.9 million or 12 % below the same period of the 2001.
Approximately 60% of the sales in each period related to Zicam Cold Remedy and
the remainder to Zicam Allergy Relief. Decreases in sales for both products
contributed to the decline in sales for the two periods. The decline in sales
for our products primarily resulted from a very weak cold season industry-wide
during the first quarter of 2002 compared to a relatively strong cold season for
the same period in the prior year. In response to the weak market in first
quarter of 2002, we adjusted our advertising strategy for 2002 to reduce our
12
expenditures in the first quarter to conserve resources for later in the year.
The decrease in advertising support further contributed to the decline in sales
of both products during the first quarter of 2002.
COST OF SALES. The cost of sales declined primarily due to the decrease in
unit sales and to a lesser extent, decreases in the cost of materials.
GROSS PROFIT. Gross profit declined by 11% to $5.1 million from $5.7
million the year earlier, due entirely to the decrease in unit sales between the
two periods.
OPERATING EXPENSES. Operating expenses declined 37% or almost $3.0 million
due largely to an expense of $1.9 million incurred in the 2001 period related to
the legal and settlement cost associated with a patent infringement lawsuit and
lower advertising expenses in the first quarter of 2002 as compared to the first
quarter of 2001.
INTEREST AND OTHER INCOME. Interest and other income increased to
approximately $424,000 for the six months ended June 30, 2002 as compared to
approximately $65,000 in the year earlier period. The increase was due primarily
to royalty income of approximately $236,000 received from Wrigley and interest
income of $161,000 due to the higher level of invested cash in 2002 resulting
from the sale of our chewing gum assets to Wrigley in July 2001. The royalty
payment, received in June 2002, is for 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 believe that the royalty amount received
reflects a higher level of introductory shipments of product that would normally
be expected during the introduction of any new consumer product, and therefore,
is not necessarily indicative of amounts to be received in the future. 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 $351,000 for
the six months ended June 30, 2002 from approximately $65,000 in the year
earlier period. The increase is entirely attributable to imputed interest of
$335,000 accrued under the note that we issued to Zensano, Inc. in connection
with our acquisition of Zensano's 40% interest in Zicam 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. The loss in the
first six months of 2002 decreased by more than $2.5 million as compared to the
same period in 2001 due primarily to the decline in operating expenses which
offset a decrease in gross profit. 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. Specifically, we have announced the introduction of
five new products and are currently selling these products to retailers.
Shipments of these products will begin in the third quarter of 2002. The success
of these products will have a significant impact on our financial results in
future quarters. Additionally, we plan to increase our advertising spending for
the fourth quarter of 2002 above the prior year, which will further affect
operating expenses and future financial results for the remainder of the 2002
fiscal year.
13
LIQUIDITY AND CAPITAL RESOURCES
Our working capital decreased from approximately $13.4 million at December
31, 2001 to approximately $10.2 million at June 30, 2002, primarily due to our
initial payment of $2.75 million on the note that we issued to Zensano in
conjunction with our acquisition in December 2001 of Zensano's 40% interest in
Zicam LLC. During the six month period ended June 30, 2002, we experienced a
decrease in cash from operating activities of approximately $667,000, due
primarily to a reduction in accounts payable of $6.0 million and sales returns
and allowances of $0.9 million, offset in part by a reduction in accounts
receivable of $3.7 million, restricted cash of $1.5 million, inventories of $0.4
million and the amortization of imputed interest on notes payable of $0.3
million.
Investing activities provided cash of approximately $10.0 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 by
the capital expenditures of $0.4 million for a new corporate information system
and an increase in deposits of $0.3 million.
Cash from financing activities used $3.4 million of cash due to our payment
in June 2002 of $2.75 million to Zengen 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. Due to a
greater than expected loss for the three months ended June 30, 2002, we have
requested, and expect to receive, a waiver of the earnings covenant contained in
the bank credit facility requirement for the second quarter.
We believe that our existing capital resources will be sufficient to fund
our operations and 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.
14
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 attributable to the 40% Zicam interest that we acquired from Zensano in
December 2001. Under SFAS No. 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
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. We will
review and establish similar reserves for the five new products that we are
introducing in the third quarter of 2002. We will establish a higher sales
returns allowance on these and any other new products that we introduce until
such products achieve market acceptance. Should the actual level of product
returns vary significantly from our estimates, our operating and financial
results would be significantly affected.
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
15
forward-looking statements. Forward looking statements contained herein and in
documents 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 and
income, including interest income;
* our expectations regarding the impact on our earnings of the
seasonality of sales, revenues and expenses;
* 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 below entitled "Risk Factors", describe factors that could contribute
to or cause actual results to differ materially from our expectations. 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
reference to reflect changed assumptions, the occurrence of unanticipated events
or changes to future operating results over time.
16
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.
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
17
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
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.
18
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
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.
19
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.
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.
20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary market risk exposure throughout 2001 and the first six 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 June 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 June 30,
2002) or commodity price risk.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At our 2002 annual meeting of stockholders, held on June 18, 2002, our
stockholders reelected all of the following director nominees: Edward Faber,
William Egan, Carl Johnson, Edward Walsh, William Yuan, and Michael Zeher.
At the same meeting our stockholders also approved the Delaware
reincorporation and name change of Gum Tech International, Inc., by way of a
merger of the Company with and into its subsidiary, Matrixx Initiatives., Inc.
Votes cast in respect of this matter were as follows:
Votes For Votes Against Abstentions
--------- ------------- -----------
5,819,057 162,256 20,493
21
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 Registration Rights Agreement dated July 20, 2001 by and
between the Registrant and Wm. Wrigley Jr. Company (2)
4.02 Rights Agreement dated as of July 22, 2002 by and between
the Registrant and Corporate Stock Transfer, Inc. (3)
10.01 *Amended and Restated Gum Tech International, Inc. 2001
Long-Term Incentive Plan(4)
10.02 Credit Agreement dated as of May 29, 2002 by and among Gum
Tech Internation, Inc., Gel Tech, L.L.C. and Comerica
Bank-California
10.03 *Summary of Matrixx Initiatives, Inc. Director Restricted
Stock Purchase Program
99.1 Certification Pursuant to 18 U.S.C Section 1350
99.2 Certification Pursuant to 18 U.S. C. Section 1350
- ----------
*Indicates management compensatory contract, plan or arrangement.
(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 Report on Form 10-K for the
fiscal year ended December 31, 2001, file number 000-27646.
(3) Incorporated by reference to the Registrant's registration statement on
Form 8-A filed July 23, 2002, file number 000-27646.
(4) Incorporated by reference to the Registrant's definitive proxy statement on
Schedule 14A, filed October 17 2001, file number 000-27646.
22
B. REPORTS ON FORM 8-K
On June 19, 2002, the Registrant filed a Report on Form 8-K to report
its reincorporation in Delaware and the change of its name from Gum
Tech International, Inc. to Matrixx Initiatives, Inc., both of which
actions were effectuated on June 18, 2002 through the merger of Gum
Tech International, Inc. with and into its wholly-owned Delaware
subsidiary, Matrixx Initiatives, Inc.
On July 23, 2002, the Registrant filed a Report on Form 8-K to report
the adoption of a shareholder rights plan in the form of a Rights
Agreement between the Registrant and Corporate Stock Transfer, Inc.,
as Rights Agent.
23
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 and
Chief Financial Officer
August 14, 2002
24