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Matrixx Initiatives Inc. (Nasdaq: MTXX)

Matrixx Initiatives Inc. (MTXX), through its subsidiaries, engages in the development, production, marketing and sale of over-the-counter (OTC) healthcare products that utilize innovative drug delivery systems. It offers Zicam Cold Remedy Chewables, Zicam Cold Remedy RapidMelts, Zicam Cold Remedy Oral Mist, Zicam Cold Remedy RapidMelts + Vitamin C, and Zicam Cold Remedy RapidMelts + Vitamin C and Echinacea, which are oral cold remedy products that deliver a dose of ionic zinc to the oral mucosa. The Company also provides Zicam Allergy Relief, a homeopathic nasal gel formula to control allergy symptoms for sufferers of hay fever and upper respiratory allergies, and Zicam Sinus Relief that provides the benefit of the product with the aromatic strength of a cooling menthol/eucalyptus blend. In addition, it offers Zicam Cough Spray products to deliver cough relief and soothe throat irritation, including Zicam Cough Max, a liquid spray formulation that provides relief. Further, MTXX offers Zicam Multi-Symptom Cold and Flu Relief products, which utilize a spoon dosing delivery to provide relief of cold and flu symptoms, and Xcid, a creamy antacid product.

MTXX sells products directly to food, drug, mass market and wholesale warehouse retailers in the United States, as well as to distributors that sell to retail establishments under the Zicam, Nasal Comfort and Xcid brands. The Company was founded in 1991 and is based in Scottsdale, Arizona.

*year-ending March, 31.
Source: Reuters.com, SEC Filings.

Financial Summary

In June, shares of MTXX sunk 70% in just one day after the FDA sent a warning letter to the Company on its Zicam cold products and ordered it to suspend shipments of these products, as well as to pull them off the market. That was the biggest percentage decline in one day since the Company’s IPO in April 1996. Since June, shares of MTXX have seen volatile trading on rumors the Zicam product will be reformulated and returned to the market. However, according to the Company, those are just rumors without merit. MTXX shares fell again in August when the Company reported a wider fiscal first-quarter loss because of hefty charges for its recalled nasal cold remedies. The penny stock has traded between $4.39 and $19.74 over the last 52 weeks.

For the first quarter ended June 30, 2009, the Company reported net sales of $6.9 million and a net loss of $22.8 million, or $2.49 per diluted share, which includes a $9.0 million charge for the recall of Cold Remedy Nasal Gel and Cold Remedy Swabs as well as charges of approximately $23.9 million for the impairment of goodwill and certain tangible and intangible assets (discussed below). This compares to net sales of $8.5 million and a net loss of $(2.3) million, or $(0.24) per diluted share, for the quarter ended June 30, 2008.

At June 30, 2009, the Company had $37.4 million in cash and certificates of deposit. In light of recent events, MTXX did not attempt to renew its $8.0 million line of credit that expired in early July. The Company did not have any borrowings under the line at its expiration. The Company considers it has enough capital to continue operating for at least the next 12 months.

In May 2009, prior to the Warning Letter received from FDA, the Company was anticipating 2010 revenue to increase 5% above the $111.6 million achieved in fiscal 2009. The Company also was expecting net income and earnings per share to increase 10% to 15% above the $13.9 million, or $1.46 per diluted share, recognized in fiscal 2009. Meanwhile, the withdrawal of the products, which accounted for approximately 40% of the Company’s net sales in fiscal 2009, will have a significant adverse impact on the business and the guidance for fiscal 2010.

Analyst Consensus

Analysts polled by Thomson Reuters consider the “Hold” strategy for MTXX.

Source: http://markets.ft.com/tearsheets/analysis.asp?s=mtxx

Investment Highlights

On June 16, the Company received a Warning Letter from the FDA stating that three of the Company’s over-the-counter products – Zicam Cold Remedy Nasal Gel, Gel Swabs and Kids Size swabs – could cause “long-lasting or permanent” loss of smell. The FDA has received more than 130 reports of people losing their sense of smell after using zinc- based Zicam nasal spray and swabs. Although the Company disagrees with the FDA’s allegations, the Company announced it would cooperate with the FDA and immediately suspended shipments of these two products upon receipt of the FDA’s warning letter and then announced a voluntary nationwide withdrawal of Zicam Cold Remedy Nasal Gel and Zicam Cold Remedy Gel Swabs that same day. The Company is in the process of preparing a submission to the FDA and it intends to present comprehensive scientific and medical data and analyses demonstrating that these products are safe. Since Zicam Cold Remedy products were first introduced in the market in 1999, more than 35 million retail units representing more than 1 billion doses have been sold. The products accounted for about 40% of MTXX’s $111.6 million in sales for the fiscal year ended March 31, 2009.

Due to the impact and publicity of the FDA Warning Letter and the recall of Cold Remedy Nasal Gel and Cold Remedy Swabs, the Company performed an impairment assessment as of June 30, 2009, that resulted in the Company recording impairment charges in that quarter to reduce the carrying amount of goodwill and other tangible and intangible assets. These charges include: a non-cash impairment charge of $15.0 million related to the goodwill associated with the zincum gluconium nasal gel products; a non-cash impairment charge of $3.9 million to write down the inventory value of nasal Cold Remedy products and other nasal application inventory; an impairment charge of $4.3 million ($3.4 million of which is non-cash) for a new swab manufacturing line that was recently built to produce nasal swab product; and $616,000 for the unamortized amount of Cold Remedy nasal gel patent. The charge totaled approximately $23.9 million ($14.6 million after-tax).

A number of entities announced that a lawsuit seeking class action status has been filed in the United States District Court for the District of Arizona on behalf of those who purchased the securities of Matrixx Initiatives, Inc. between December 22, 2007, and June 15, 2009, inclusive (the Class Period). The complaints charge that the Company and certain of its officers and directors violated federal securities laws.

Together with its new advertising agency, the Company is currently testing new copy concepts, which will then be used to develop new advertising, which will focus on MTXX’s Cold Remedy Oral products in general, and MTXX’s two new oral products, which are branded as Zicam Zavors and Zicam Liqui-Loz. Together with other five oral products that are in the marketplace, the Company’s goal is to retain as many of current Zicam Cold Remedy Oral users, while getting as many of former nasal users to switch to the oral form.

The Company’s products are marketed within the cold, allergy and sinus, cough and flu relief market groups of the cough/cold category. In the United States, the common cold leads to 75 million to 100 million physician visits annually at a conservative cost estimate of $7.7 billion per year. The economic impact of colds is estimated to be about $40 billion per year, with $20 billion from lost work. These colds result in approximately 15 million lost workdays each year in the United States. Americans spend $2.9 billion on nonprescription, or over-the-counter drugs and another $400 million on prescription medicines for symptomatic relief.

In late August, MTXX’s board of directors named William J. Hemelt as president and CEO. Hemelt was also elected to the Company’s board of directors. Hemelt served as the Company’s acting president, COO and CFO since October 31, 2008. Hemelt, 55, joined the Company in June 1998 as its CFO, treasurer, and secretary. He assumed additional responsibilities as executive vice president of Operations in 2001, and served as secretary until February 2005 and treasurer until July 2007. From 1980 to 1997, he held a variety of financial positions with Arizona Public Service Company, Arizona’s largest utility, including six years as treasurer and four years as controller.

Technical Analysis

Source: http://stockcharts.com/h-sc/ui

The Company is trading above its 13-day moving average. This is considered to be the sign of a bullish trend. There is added weight to this indication because the moving average is rising and suggests that there has been buying interest in this small cap stock.

The MACD for MTXX currently indicates a strong bullish signal for two reasons. First, the MACD is above the signal line, a 9-day moving average. Second, the MACD is above 0, which implies that the underlying moving averages are trending higher.

MTXX is trading within its Bollinger Bands. This is a normal condition and suggests that the penny stock is neither overbought nor oversold relative to the recent price action.

Comparative Analysis

MTXX is traded with premium to peer 2010 P/E multiples. The FDA Warning Letter has had a material adverse impact on the Company’s business and generated negative publicity. The recall of MTXX’s flagship products has required the Company to take impairment charges, record reserves for customer returns and withdraw the Company’s sales and earnings guidance for the year. In fiscal 2010, the Company intends to focus on growing sales in its core Cold Remedy and Allergy/Sinus franchise and it plans to introduce new innovative Cold Remedy products. MTXX will also continue to invest in new product development to support further growth in future years.

Source: Thomson Reuters; Yahoo! Finance.

Insider Trading Activity

Net Share Purchase Activity

Data provided by Thomson Financial

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