| MATRIXX INITIATIVES INC ITEM 1A RISK FACTORS We may fail to compete effectively, particularly against, larger more established pharmaceutical and health products companies, or low cost generic drug manufacturers, causing our business and operating results to suffer The consumer health products industry is highly competitive |
| We compete with companies with sales in the United States 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 and new 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 |
| Our business is subject to seasonality that may cause our quarterly operating results to fluctuate materially and cause the market price of our stock to decline Sales of our existing Zicam products are seasonal in nature and are dependent upon the severity of the cough and cold season, and sales at retail generally increase as the level of population suffering from colds rises |
| During the third quarter the Company usually realizes increased sales volume as retailers stock our products and order displays to prepare for the upcoming cough and cold season |
| Additional sales (re-orders) to retailers are highly dependent upon the incidence of illness within the population |
| Retail consumption of our products is highest during the cough and cold season, which usually runs from October through March |
| If there is a mild cold/flu season, however, revenues from sales of our Zicam products will be adversely affected |
| Because it is difficult to anticipate the length and severity of the cold/flu season, we cannot estimate the fluctuation of our sales from quarter to quarter in a fiscal year or the impact of the cold/flu season year to year |
| If our operating results fall below financial analysts’ or investors’ expectations due to cold/flu seasonality factors, the market price of our common stock may decline |
| We may continue to incur significant costs resulting from product liability claims or securities litigation We are subject to significant liability should use or consumption of our products cause injury, illness or death |
| From late 2003 through December 2005, numerous lawsuits were filed against us alleging that our Zicam Cold Remedy product caused the permanent loss or diminishment of the sense of smell and taste (two of which have been filed as class action lawsuits, although one of the class action suits has been dismissed) relating to our Zicam Cold Remedy product |
| 9 _________________________________________________________________ [61]Table of Contents Various defendants in the lawsuits, including manufacturers and retailers, have sought indemnification or other recovery from us for damages related to the lawsuits |
| Although we carry product liability insurance, there is no assurance that our insurance will be adequate to cover liability in connection with these product liability lawsuits, or that product liability insurance will continue to be available to us at an economically reasonable cost |
| Product liability claims, such as those described in this Form 10-K for our 2005 fiscal year, even if 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 claims, 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 |
| In addition, any adverse decision in such litigation could require significant damages to be paid or result in adverse publicity, either of which could materially adversely affect our results of operations and financial condition |
| Separately, the Company and three of its officers are also subject to two class action lawsuits (which have been consolidated) alleging violations of securities laws |
| Any adverse decision in such litigation could materially adversely affect our results of operations and financial condition |
| Because a significant portion of our business depends substantially on a small group of large national retailers, our sales, operating margins and income would be adversely affected by any disruption of our relationship with these retailers, or any other material adverse change in such retailers’ businesses |
| We are highly dependent on a small group of large national retailers for our product distribution, such that our top 15 customers accounted for more than 80prca of our net sales in 2005 |
| Particularly, Wal-Mart, Walgreens and CVS together accounted for more than 40prca of our net sales in 2005 |
| Should any of our top customers encounter financial difficulties, or stop carrying our products for any reason, or should our current relationship with any of our top customers adversely change in any way, the resulting loss of business, exposure on uncollectible receivables and unusable inventory could have a material adverse impact on our financial position and results of operations |
| In addition, our results could be affected by fluctuations in buying patterns and inventory levels of these top customers |
| We believe that growth in the over-the-counter healthcare products market is driven, in part, by factors beyond our control, such as media attention and adverse publicity |
| In the event of future unfavorable scientific results or media attention, sales of our products could be materially adversely affected |
| In addition, if issues arise concerning the efficacy or safety of any of our products, or if any of our products receive additional adverse publicity, our operating results and prospects could be materially adversely affected |
| Our future growth will depend in part upon our ability to develop and achieve sales of our new products, including our new brand, Nasal Comfort Although we believe that each of our products offers unique benefits to consumers, we cannot be certain that any of the products will achieve or continue to enjoy widespread acceptance by the market |
| While we are working to increase the market presence of all of our products, including new products, we cannot be certain that demand for our products will grow |
| If products under the new brand do not achieve consumer acceptance, operating results could be materially adversely affected |
| 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 entirely on the development, production and sale of over-the-counter pharmaceutical products 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 products such as the Zicam products |
| 10 _________________________________________________________________ [62]Table of Contents 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; • we may be unable to produce sufficient product inventories to meet customer demand; • existing or proposed products do not achieve broad market acceptance; • existing or proposed products do not attain broad distribution or retail shelf space; or • proprietary rights held by third parties preclude us from developing or marketing existing or proposed products |
| Our inability to develop and commercialize our existing products or any new products, including our Nasal Comfort product, 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 these products assist in reducing the duration and severity of the common cold (in the case of Zicam Cold Remedy 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 our products |
| We have obtained scientific data for our product claims; however, we cannot be certain that the scientific data we have obtained in support of our claims will be deemed acceptable to the FDA, FTC or other regulatory bodies |
| If any regulatory body requests supporting information and we are unable to provide support that is acceptable, either the FDA or FTC 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 or if these regulations change in the future, 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 |
| If the FDA came to believe that any of our products caused harm to consumers, we could be required to stop selling that product or subject the product to a recall |
| 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 |
| On March 10, 2005, the National Advertising Division (NAD) of the Council of Better Business Bureaus, an investigative arm of the advertising industry’s voluntary self-regulation program, issued a press release announcing the results of a review of Matrixx’s advertising claims |
| The NAD determined, among other things, that Matrixx’s claims that its product, Zicam® Cold Remedy Nasal Gel, resolves colds 3X faster when taken at the first sign of a cold, that using the product results in a less severe cold, and the promise that these benefits are clinically proven, were substantiated by competent and reliable scientific evidence |
| 11 _________________________________________________________________ [63]Table of Contents 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 US 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 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 cost-effective or otherwise suitable arrangements for manufacturing 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 |
| We may experience product backlogs We have established inventory plans to support sales expectations for all of our products |
| However, we cannot be certain that these measures will be sufficient to prevent backlogs of products in the future |
| Any such future backlogs will potentially result in higher production costs, higher freight costs to expedite shipment of raw materials and finished goods, fines from certain retailers, cancelled orders and lost revenue |
| These in turn could materially affect our results of operations and financial condition |
| Loss of key personnel We have a limited number of employees and our success depends on the continued services of our senior management and key employees as well as our ability to attract additional members to our management team with experience in the consumer health products industry |
| The unexpected loss of the services of any of our management or other key personnel, or our inability to attract new management when necessary, could have a material adverse effect upon our operations |
| To protect against various potential liabilities, we maintain a variety of insurance programs |
| Significant increases in the cost or decreases in the availability of such insurance could adversely impact our financial condition |
| We maintain insurance, including property, general and product liability, and directors’ and officers’ liability, to protect against potential loss exposures |
| In addition to the risks associated with product liability insurance discussed above, we cannot predict whether deductible or retention amounts associated with all of our insurance programs will increase, or whether insurance coverage, generally speaking, will be reduced in the future |
| To the extent that losses occur, there could be an adverse affect on our financial results depending on the nature of the loss and the level of insurance coverage we have maintained |
| From time to time, we may reevaluate and change the types and levels of insurance coverage that we purchase |
| 12 _________________________________________________________________ [64]Table of Contents 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 2cmam000cmam000 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 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, the outcome of litigation against the Company, and general economic and stock market conditions |
| The stock market has experienced, and it may continue to experience, significant price and volume fluctuations |
| Historically, these fluctuations particularly affect the market prices of equity securities of small capitalization companies, like Matrixx |
| Often, the effect on the price of such securities is disproportionate to the operating performance of such companies |
| In our case, such fluctuations may adversely affect 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 |