CV Technologies catches the financial flu.

Maker of the popular cold and flu remedy Cold-fX, CV Technologies Inc. was on a roll last year. Former NHL star Mark Messier had signed on as ambassador for the Edmonton-based firm's muchanticipated U.S. launch, and the NHL had signed a deal to help promote Cold-fX in Canada and the United States. In October, the stock (TSX: CVQ) peaked at $4.46.

But the combined star power of Messier and the NHL has not had the desired result. The U.S. launch has been a bust; retailers have been returning millions of dollars worth of unsold inventory. The company has had to restate its financial results, and earlierreported profits have turned into losses. On April 19, with the stock down to $1.50, regulators halted trading. In early July the stock was still on ice. When trading resumes, the share price may melt to pennies.

In Canada, Cold-fX — which is derived from ginseng — is marketed as a natural health product. The product label claims that two capsules per day can prevent colds and flus by boosting the immune system, and a stepped-up dosage of up to nine capsules per day can provide “immediate relief” from cold and flu symptoms. In the United States, CV Technologies has Food and Drug Administration clearance to sell the product as a “new dietary ingredient,” which means it is safe to use, not that it necessarily works. The company is not permitted to make any claims about its ability to prevent colds and flus, or to alleviate symptoms./

The decision to take Cold-fX into the United States was a huge gamble. With the help of Canadian pitchman Don Cherry, CV Technologies had developed its Canadian franchise into a cash cow. Confident it could duplicate its success south of the border, the company — led by the supremely self-assured president and CEO Jacqueline Shan — embarked on a multimillion-dollar marketing campaign with Messier at centre ice.

In December, the first results came in. They showed the company had managed to build sales, but at an extremely high cost. During the quarter ending Sept. 30, sales had increased 93% to $13.9 million (including $5.6 million sold to U.S. retailers). But due to heavy marketing expenditures, net profits had dropped from $3.3 million to a mere $506,000.

The trend continued during the quarter ending Dec. 31, when the U.S. campaign was in full gear. Revenues jumped by one-third to $25.2 million (of which $3 million was U.S. sales), but net earnings plunged from a profit of $4.4 million to a loss of $1.6 million.

These figures actually understated the damage to the bottom line. In March, the firm revealed previously reported U.S. revenues had consisted mainly of sales to retailers to stock their shelves; sales to consumers had been “disappointing.” This meant that retailers would be returning a lot of unsold inventory, which “could have a serious impact on the company's cash position and working capital.” Accordingly, the firm would restate its financial results.

The uncertainty was too much for regulators. On April 19, the Alberta Securities Commission issued a cease-trade order. Ontario and B.C. regulators followed suit.

Meanwhile, insider reports revealed that Norm Oliver, the company's senior vice-president of sales and marketing, had sold more than $4 million worth of stock during 2005 and 2006. Of this, $1.3 million had been sold during the quarter ending Dec. 31, while the U.S. launch was well underway. This raised the question: given his position, wouldn't he have known that the U.S. launch was fizzling? This question has never been answered, but on March 26, CV Technologies announced that Oliver was “no longer associated with the company.” No reason was given.

Underlying these issues is the lingering question: Does the product work? To shore up its claims, the firm is conducting its largest-ever trial, which was supposed to be completed last fall, but has been delayed for a year. Meanwhile, RBC Capital Markets analyst Philippa Flint said in a research report that the company's scientific evidence “leaves much to be desired.”

On June 14, the company issued amended statements. For the six months ending Dec. 31, it reversed nearly all the $8.6 million in U.S. sales it had originally reported, increasing its earlier reported loss to $6.6 million from $1.1 million. Results for the quarter ending March 31 — released for the first time — showed that sales had declined by $3.1 million to $7.9 million (of which only $366,000 was U.S. sales) over the same quarter the previous year. CV Technologies attributed the decline to a mild cold and flu season. Net earnings fell from a profit of $987,000 during the same quarter last year, to a loss of $3.3 million.

With this season's cold and flu season over, Flint doesn't expect things to pick up until December, and even then, it will be early next year before shareholders will get a sense of whether sales and profits will rebound. She rates the stock Underperform with a risk rating of Speculative. When trading resumes, former insiders such as Oliver, who still holds hundreds of thousands of cheap options, and ex-vicechairman Bruce Buchanan, a heavy seller before the trading halt and still the company's largest shareholder, could rain a lot of paper on the market, giving shareholders the cold of their lives.