UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 2002
-------------------
OR
( ) THE 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 01-21617
THE QUIGLEY CORPORATION
-----------------------
(Exact name of registrant as specified in its charter)
Nevada 23-2577138
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
(MAILING ADDRESS: PO Box 1349, Doylestown, PA 18901.)
Kells Building, 621 Shady Retreat Road, Doylestown, PA 18901
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(Address of principle executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 345-0919
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(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (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. [X] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's class of
Common Stock, as of the latest practicable date. The number of shares
outstanding of each of the registrant's classes of Common Stock, as of October
25, 2002, was 11,456,617 all of one class of $.0005 par value Common Stock.
TABLE OF CONTENTS
Page No.
PART I - Financial Information
Item 1. Consolidated Financial Statements 3-16
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 17-20
Item 3. Quantitative and Qualitative Disclosure About
Market Risk 21
Item 4. Controls and Procedures 21
PART II - Other Information
Item 1. Legal Proceedings 21
Item 2. Changes in Securities 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a
Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
Certifications 23-24
2
Item 1. Financial Information
THE QUIGLEY CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS September 30, 2002 December 31, 2001
(unaudited)
------------------ -----------------
CURRENT ASSETS:
Cash and cash equivalents $ 11,292,421 $ 9,740,840
Accounts receivable - net of doubtful accounts of $735,766 and $719,301 4,243,491 4,425,291
Inventory 6,346,190 6,507,746
Prepaid expenses and other current assets 672,134 1,507,462
------------ ------------
TOTAL CURRENT ASSETS 22,554,236 22,181,339
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PROPERTY, PLANT AND EQUIPMENT - net 2,332,122 2,201,309
------------ ------------
OTHER ASSETS:
Patent rights - net of accumulated amortization -- 21,940
Excess of cost over net assets acquired -
net of accumulated amortization 327,014 327,014
Other assets 28,849 24,193
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TOTAL OTHER ASSETS 355,863 373,147
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TOTAL ASSETS $ 25,242,221 $ 24,755,795
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 846,529 $ 911,813
Accrued royalties and sales commissions 892,365 1,005,594
Accrued advertising 548,508 668,792
Other current liabilities 1,728,927 969,321
------------ ------------
TOTAL CURRENT LIABILITIES 4,016,329 3,555,520
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COMMITMENTS AND CONTINGENCIES -- --
MINORITY INTEREST IN CONSOLIDATED AFFILIATES -- --
STOCKHOLDERS' EQUITY:
Common stock, $.0005 par value; authorized 50,000,000 shares;
Issued: 16,102,670 and 15,321,206 shares 8,051 7,661
Additional paid-in-capital 32,592,222 28,915,612
Retained earnings 13,813,778 17,465,161
Less: Treasury stock, 4,646,053 shares and 4,646,053 shares, at cost (25,188,159) (25,188,159)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 21,225,892 21,200,275
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 25,242,221 $ 24,755,795
============ ============
See accompanying notes to financial statements
3
THE QUIGLEY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
-------------- ------------- ------------- --------------
SALES:
Sales $ 8,992,228 $ 7,175,724 $ 20,638,300 $ 15,756,212
Co-operative advertising promotions 714,329 232,171 1,121,923 791,472
------------ ------------ ------------ ------------
NET SALES 8,277,899 6,943,553 19,516,377 14,964,740
LICENSING FEES -- 136,364 148,866 1,410,228
------------ ------------ ------------ ------------
TOTAL REVENUE 8,277,899 7,079,917 19,665,243 16,374,968
------------ ------------ ------------ ------------
COST OF SALES 4,841,492 3,483,831 11,203,157 7,139,086
------------ ------------ ------------ ------------
GROSS PROFIT 3,436,407 3,596,086 8,462,086 9,235,882
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Sales and marketing 1,098,012 1,346,886 3,471,813 3,721,366
Administration 2,214,652 1,680,061 6,868,602 5,848,927
Research and development 666,002 447,543 1,897,403 970,575
------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSES 3,978,666 3,474,490 12,237,818 10,540,868
------------ ------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS (542,259) 121,596 (3,775,732) (1,304,986)
INTEREST and OTHER INCOME 41,864 78,507 124,349 349,985
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE TAXES (500,395) 200,103 (3,651,383) (955,001)
------------ ------------ ------------ ------------
INCOME TAXES -- -- -- --
MINORITY INTEREST IN LOSS
OF CONSOLIDATED AFFILIATE -- 113,512 -- 185,264
------------ ------------ ------------ ------------
NET INCOME (LOSS) ($ 500,395) $ 313,615 ($ 3,651,383) ($ 769,737)
============ ============ ============ ============
Per common share:
Basic ($ 0.05) $ 0.03 ($ 0.34) ($ 0.07)
============ ============ ============ ============
Diluted ($ 0.05) $ 0.03 ($ 0.34) ($ 0.07)
============ ============ ============ ============
Weighted average common shares outstanding:
Basic 10,964,597 10,675,153 10,870,393 10,675,153
============ ============ ============ ============
Diluted 10,964,597 10,740,400 10,870,393 10,675,153
============ ============ ============ ============
See accompanying notes to financial statements
4
THE QUIGLEY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONDENSED)
(Unaudited)
Nine Months Ended
September 30, September 30,
2002 2001
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NET CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES ($ 1,279,195) ($ 3,296,430)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (419,224) (320,544)
Net cost of assets acquired -- (133,338)
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NET CASH USED IN INVESTING ACTIVITIES (419,224) (453,882)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercises of options and warrants 3,250,000 --
Repurchase of Common Stock -- (30,131)
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NET CASH FLOWS FROM FINANCING ACTIVITIES 3,250,000 (30,131)
------------ ------------
NET INCREASE/(DECREASE) IN CASH 1,551,581 (3,780,443)
CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD 9,740,840 11,365,843
------------ ------------
CASH & CASH EQUIVALENTS, END OF PERIOD $ 11,292,421 $ 7,585,400
============ ============
See accompanying notes to financial statements
5
THE QUIGLEY CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND BUSINESS
The Quigley Corporation (the "Company"), organized under the laws of the state
of Nevada, is engaged in the development, manufacturing, and marketing of health
and homeopathic products that are being offered to the general public. For the
fiscal periods presented, the majority of the Company's revenues come from the
Company's proprietary "Cold-Eeze(R)" products and the Health and Wellness
business segment.
Darius International Inc., a wholly owned subsidiary of The Quigley Corporation,
was formed in January 2000 to introduce new products to the marketplace through
a network of independent distributors. Darius is a direct selling organization
specializing in proprietary health and wellness products, which commenced
shipping product to customers in the third quarter of 2000.
Effective July 1, 2000, The Quigley Corporation acquired a 60% ownership
position in Caribbean Pacific Natural Products, Inc. an Orlando, Florida-based
company. Caribbean Pacific Natural Products, Inc. is a developer and marketer of
all-natural sun-care and skincare products for luxury resorts, theme parks and
spas.
The formation of Darius International Inc., and the majority ownership in
Caribbean Pacific Natural Products, Inc., provide diversification to the Company
in both the method of product distribution and the broader range of products
available to the marketplace.
In January 2001, the Company formed an Ethical Pharmaceutical Unit which is now
Quigley Pharma Inc., a wholly-owned subsidiary of the Company, that is under the
direction of its Executive Vice President and Chairman of its Medical Advisory
Committee. The formation of the Company's Ethical Pharmaceutical Unit follows
the Patent Office of The United States Commerce Department confirming the
assignment to the Company of a Patent Application for the "Method and
Composition for the Topical Treatment of Diabetic Neuropathy." In September
2001, the Patent Office confirmed the assignment to the Company of a Patent
Application entitled the "Medicinal Composition and Method of Using it" (for
Treatment of Sialorrhea and other Disorders) for a prescription product to
relieve sialorrhea (drooling) in patients suffering from Amyotrophic Lateral
Sclerosis (ALS), otherwise known as Lou Gehrig's Disease. In November 2001, the
Company was assigned a Patent Application entitled "Composition and Method for
Prevention, Reduction and Treatment of Radiation Dermatitis" with the Patent
Office of The United States Commerce Department. The establishment of a
dedicated pharmaceutical subsidiary will enable the Company to diversify into
the prescription drug market and to ensure safe and effective distribution of
these important potential new products currently under development. In September
2002, the Company filed a foreign patent application for "Method and Composition
for the Topical Treatment of Diabetic Neuropathy" in Europe and other foreign
markets.
Cold Remedy Products
- --------------------
Cold-Eeze(R), a zinc gluconate glycine formulation (ZIGG(TM)) is sold in
lozenge, bubble gum and sugar-free tablet forms. In May 1992, the Company
entered into an exclusive agreement for worldwide representation, manufacturing,
marketing and distribution rights to a zinc gluconate glycine lozenge
formulation which was patented in the United States, United Kingdom, Sweden,
France, Italy, Canada, Germany, and is pending in Japan. This product is
presently being marketed by the Company and also through independent brokers and
marketers in the United States under the trade names Cold-Eeze(R), Cold-Eeze(R)
Sugar Free, and Cold-Eeze(R) Bubble Gum.
In April 2002, the Company was assigned a Patent Application which was filed
with the Patent Office of the United States Commerce Department for the use of
Cold-Eeze(R) as a prophylactic for cold prevention. The new patent application
follows the results of an adolescent study at the Heritage School facility in
Provo, Utah, that found that the use of Cold-Eeze(R) is effective in preventing
a cold, reduces the use of antibiotics and confirmed that Cold-Eeze(R) reduces
the median duration of a cold by four days.
In the second half of 1998, the Company launched Cold-Eeze(R) in a sugar free
version of the product to benefit diabetics and other consumers concerned with
their sugar intake. Late in the fourth quarter of 1998, the Company launched a
bubble gum version of Cold-Eeze(R).
6
Under a Food and Drug Administration ("FDA") approved Investigational New Drug
Application, filed by Dartmouth College, a randomized double-blind
placebo-controlled study, conducted at Dartmouth College of Health Science,
Hanover, New Hampshire, concluded that the lozenge formulation treatment,
initiated within 48 hours of symptom onset, resulted in a significant reduction
in the total duration of the common cold.
On May 22, 1992, ZINC AND THE COMMON COLD, A CONTROLLED CLINICAL STUDY, was
published in England, in the "Journal of International Medical Research", Volume
20, Number 3, Pages 234-246. According to this publication, (a) flavorings used
in other Zinc lozenge products (citrate, tartrate, separate, orotate,
picolinate, mannitol or sorbitol) render the Zinc inactive and unavailable to
the patient's nasal passages, mouth and throat, where cold symptoms have to be
treated, (b) this patented pleasant-tasting formulation delivers approximately
93% of the active Zinc to the mucosal surfaces and (c) the patient has the same
sequence of symptoms as in the absence of treatment, but goes through the phases
at an accelerated rate and with reduced symptom severity.
On July 15, 1996, results of a new randomized double-blind placebo-controlled
study on the common cold were published, which commenced at the Cleveland Clinic
Foundation on October 3, 1994. The study called "ZINC GLUCONATE LOZENGES FOR
TREATING THE COMMON COLD" was completed and published in the Annals of Internal
Medicine - Vol. 125 No. 2. Using a 13.3mg lozenge (almost half the strength of
the lozenge used in the Dartmouth Study), the result still showed a 42%
reduction in the duration of the common cold symptoms.
In April 2002, the Company announced the statistical results of a retrospective
clinical study that suggests that Cold-Eeze(R) is also an effective means of
preventing the common cold. This adolescent study indicated that when taken
daily, Cold-Eeze(R) statistically lessens the number of colds an individual
suffers per year, reducing the median from 1.5 to zero. These findings are the
result of analyzing three years of clinical data at the Heritage School facility
in Provo, Utah. The study also found that the use of Cold-Eeze(R) to treat a
cold statistically reduces the use of antibiotics for respiratory illnesses from
39.3% to 3.0% when Cold-Eeze(R) is administered as a first line treatment
approach to the common cold. Additionally, the study reinforces the original
clinical trials, concluding that Cold-Eeze(R) reduces the median duration of a
cold by four days.
The business of the Company is subject to federal and state laws and regulations
adopted for the health and safety of users of the Company's products.
Cold-Eeze(R) is a homeopathic remedy that is subject to regulations by various
federal, state and local agencies, including the FDA and the Homeopathic
Pharmacopoeia of the United States.
The Company competes with suppliers varying in range and size in the cold remedy
products arena. Cold-Eeze(R), which has been clinically proven, offers a
significant advantage over other suppliers in the over-the-counter cold remedy
market. The management of the Company believes there should be no future
impediment on the ability to compete in the marketplace now, or in the immediate
future, since factors concerning the product, such as price, product quality,
availability, reliability, credit terms, name recognition, delivery and support
are all properly positioned. The Company has several Broker, Distributor and
Representative Agreements, both nationally and internationally and the product
is distributed through numerous independent and chain drug and discount stores
throughout the United States.
The Company continues to use the resources of independent national and
international brokers complementing its own personnel to represent the Company's
over-the-counter products, thereby saving capital and other ongoing expenditures
that would otherwise be incurred.
Ethical Pharmaceutical Products
- -------------------------------
The establishment of an ethical pharmaceutical subsidiary may enable the Company
to diversify into the prescription drug market and to ensure safe and effective
distribution of these important potential new products currently under
development.
Quigley Pharma is currently undergoing research and development activity in
compliance with regulatory requirements. The Company is at the initial stages of
what may be a lengthy process to develop these patent applications into
commercial products.
The formation of the Company's Ethical Pharmaceutical Unit follows the Patent
Office of The United States Commerce Department confirming the assignment to the
Company of the following patent applications:
o A Patent Application entitled "Method and Composition for the
Topical Treatment of Diabetic Neuropathy."
7
o A Patent Application entitled "Medicinal Composition and Method of
Using it" (for Treatment of Sialorrhea and other Disorders) for a
product to relieve sialorrhea (drooling) in patients suffering from
Amyotrophic Lateral Sclerosis (ALS), otherwise known as Lou Gehrig's
Disease.
o A Patent Application entitled "Composition and Method for
Prevention, Reduction and Treatment of Radiation Dermatitis" with
the Patent Office of The United States Commerce Department.
In September 2002, the Company filed a foreign patent application entitled
"Method and Composition for the Topical Treatment of Diabetic Neuropathy" in
Europe and other foreign markets.
The pre-clinical development, clinical trials, product manufacturing and
marketing of Quigley Pharma's potential new products are subject to federal and
state regulation in the United States and other countries. Obtaining FDA
regulatory approval for these pharmaceutical products can require substantial
resources and take several years. The length of this process depends on the
type, complexity and novelty of the product and the nature of the disease or
other indications to be treated. If the Company cannot obtain regulatory
approval of these new products in a timely manner or if the patents are not
granted or if the patents are subsequently challenged, these possible events
could all have a material effect on the business and financial condition of the
Company. The strength of the Company's patent position may be important to its
long-term success. There can be no assurance that these patents and patent
applications will effectively protect the Company's products from duplication by
others.
In April 2002, the Company commenced a Phase II proof of concept study in France
for treatment of diabetic neuropathy. If the study is successful, the Company
will apply for approval by the FDA to begin pivotal Phase III clinical trials.
Because the Company's formulation for relief of diabetes-related pain is a
topical treatment and its ingredients are GRAS listed (Generally Regarded As
Safe) as identified in the Code of Federal Regulations, FDA approval could
potentially be obtained within a two-year period.
In July 2002, the Company announced the commencement of a Phase II clinical
trial on a new formulation being developed and tested by the Company to relieve
Sialorrhea (excess secretions of the salivary glands, causing drooling) in
patients suffering from diseases including Amyotrophic Lateral Sclerosis (ALS),
otherwise known as Lou Gehrig's Disease, Cerebral Palsy, Parkinson's Disease,
and Muscular Dystrophy.
Health And Wellness Products
- ----------------------------
Darius International Inc., a wholly owned subsidiary, was formed in January 2000
for the purpose of introducing new products to the marketplace through a network
of independent distributors. On January 2, 2001, the Company acquired certain
assets and assumed certain liabilities of a privately held company involved in
the direct marketing and distribution of health and wellness products. Darius is
a direct selling organization specializing in proprietary health and wellness
products. The products marketed and sold by Darius are herbal vitamins and
dietary supplements for the human condition, in the area of health, immunity,
energy and pain.
Sun-care and Skincare Products
- ------------------------------
Caribbean Pacific Natural Products, Inc., is a leading developer and marketer of
all-natural, eco-safe sun-care and skincare products for luxury resorts, theme
parks and spas. Caribbean Pacific markets a line of natural protectors, or "Sol
Cremes," that provide dual protection against the damaging effects of the sun,
along with various products rich in essential nutrients and vitamins necessary
for the skin.
Caribbean Pacific also has the capability to make available customized
merchandise, which complements the range of sun-care and skincare products that
it currently markets.
8
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The Consolidated Balance Sheet at September 30, 2002, the Consolidated
Statements of Operations for the three and nine-months periods ended September
30, 2002 and 2001, and the Consolidated Statements of Cash Flows (Condensed) for
the nine-months periods ended September 30, 2002 and 2001, have been prepared
without audit. In the opinion of management, all adjustments necessary to
present fairly the consolidated financial position, consolidated results of
operations and consolidated cash flows, for the periods indicated, have been
made. Certain prior period amounts have been reclassified to conform with the
2002 presentation.
All inter-company transactions and balances have been eliminated.
Effective July 1, 2000, the Company acquired a 60 percent ownership position in
Caribbean Pacific Natural Products, Inc., which is accounted for by the purchase
method of accounting and accordingly, the operating results have been included
in the Company's consolidated financial Statements from the date of acquisition.
This majority ownership position required a cash investment that approximated
$812,000 and the provision for a $1 million line of credit, secured by
inventory, accounts receivable and all other assets of Caribbean Pacific Natural
Products. The net assets of Caribbean Pacific Natural Products at the
acquisition date principally consisted of a product license and distribution
rights, inventory and fixed assets of $312,915 and $510,000 of working capital
with a contribution to minority interest of $329,166.
In the past, the 40 percent ownership position representing the minority
interest has been reflected in the Consolidated Statements of Operations for
their portion of losses, and in the Consolidated Balance Sheet for their
ownership portion of accumulated losses, share of net assets and capital stock
at acquisition date. At September 30, 2002, accumulated losses associated with
minority interest have reduced minority interest to zero on the Balance Sheet,
with excess losses amounting to $261,982 being absorbed in the Consolidated
Statement of Operations in 2002 and 2001, by the Company.
On January 2, 2001, the Company acquired certain assets and assumed certain
liabilities of a privately held company, located in Utah, involved in the direct
marketing and distribution of health and wellness products. This acquisition
required cash payments that approximated $110,000 and 50,000 shares of the
Company's stock issued to the former owners of the net assets acquired. The net
assets acquired at acquisition principally consisted of intangibles, inventory,
accounts receivable, bank balances and fixed assets totaling $536,000 and
liabilities assumed approximating $416,000. Also required are continuous
payments for the use of product formulations; consulting; confidentiality and
non-compete fees that are 12% on net sales collected until $540,000 is paid,
then becoming 5% on net sales collected for the continuous applications of these
arrangements. During March 2002, the payout level of $540,000 was achieved,
whereupon the rate became 5%. This acquisition is accounted for by the purchase
method of accounting and accordingly, the operating results have been included
in the Company's Consolidated Statements of Operations from the date of
acquisition. The excess of cost over net assets acquired has been amortized on a
straight-line basis over a period of 15 years. Subsequent to 2001, the account
will only be reduced if the value becomes impaired.
PRINCIPLES OF ACCOUNTING
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent liabilities at the dates of the
financial statements and the reported amounts of revenues and expenses during
the reporting periods. Actual results could differ from those estimates.
CASH EQUIVALENTS
The Company considers all highly liquid investments with an initial maturity of
three months or less at the time of purchase to be cash equivalents. Cash
equivalents include cash on hand and monies invested in money market funds. The
carrying amount approximates the fair market value due to the short-term
maturity of these investments.
INVENTORIES
Inventories are stated at the lower of cost or market. The Company uses the
first-in, first-out ("FIFO") method of determining cost for all inventories.
Inventories are primarily comprised of finished goods.
9
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost. The Company uses a
combination of straight-line and accelerated methods in computing depreciation
for financial reporting purposes. The annual provision for depreciation has been
computed in accordance with the following ranges of estimated asset lives:
building and improvements - twenty years; machinery and equipment - five to
seven years; computer software - three years; and furniture and fixtures - seven
years.
PATENT RIGHTS AND INTANGIBLES
Patent rights have been amortized on a straight-line basis over the period of
the related licensing agreements, which approximated 67 months. Amortization
costs incurred for the nine months periods ended September 30, 2002 and 2001,
were $21,940 and $65,821, respectively. At March 31, 2002, this item was fully
amortized.
Prior to January 1, 2002, the excess of cost over net assets acquired had been
subject to amortization on a straight-line basis over a period of 15 years.
In June 2001, SFAS No. 142, "Goodwill and Other Intangible Assets" was issued by
the FASB. SFAS No. 142 changed the accounting for goodwill from an amortization
method to an impairment-only approach. Amortization of goodwill, including
goodwill recorded in past business combinations, ceased upon adoption of this
statement. The Company implemented SFAS No. 142 on January 1, 2002.
Following the adoption of Statement 142, the amortization expense, net
income/(loss) and earnings per-share of The Quigley Corporation for the
three-months and nine-months periods ended September 30, 2002 and 2001 are as
follows:
Three Months Ended September 30 Nine Months Ended September 30
---------------------------------------------- ---------------------
2002 2001 2002 2001
--------------------------------------------------------------------
Reported net income/(loss) ($500,395) $313,615 ($3,651,383) ($ 769,737)
Add back: Goodwill amortization -- 5,486 -- 27,430
--------- -------- ----------- -----------
Adjusted Net Income/(Loss) ($500,395) $319,101 ($3,651,383) ($ 742,307)
========= ======== =========== ===========
Basic and Diluted earnings per share:
Reported net income/(loss) ($ 0.05) $ 0.03 ($ 0.34) ($ 0.07)
Goodwill amortization -- -- -- --
--------- -------- ----------- -----------
Adjusted net income/(loss) - Basic ($ 0.05) $ 0.03 ($ 0.34) ($ 0.07)
========= ======== =========== ===========
Adjusted net income/(loss) - Diluted ($ 0.05) $ 0.03 ($ 0.34) ($ 0.07)
========= ======== =========== ===========
Subsequent to 2001, excess of cost over net assets will only be reduced if the
value becomes impaired.
CONCENTRATION OF RISKS
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash investments and trade
accounts receivable.
The Company maintains cash and cash equivalents with three major financial
institutions. Since the Company maintains amounts in excess of guarantees
provided by the Federal Depository Insurance Corporation, the Company performs
periodic evaluations of the relative credit standing of these financial
institutions and limits the amount of credit exposure with any one institution.
Trade accounts receivable potentially subjects the Company to credit risk. The
Company extends credit to its customers based upon an evaluation of the
customer's financial condition and credit history and generally does not require
collateral. The Company has historically incurred minimal credit losses. The
Company's broad range of customers includes many large wholesalers, mass
merchandisers and multi-outlet pharmacy chains, five of which account for 18%
and 31% of sales volume, for the nine-months periods ended September 30, 2002
and 2001, respectively.
10
The Company currently uses three separate suppliers to produce Cold-Eeze(R) in
lozenge, bubble gum, and sugar-free tablet form. A significant portion of the
Company's revenue is currently generated from the sale of the Cold-Eeze(R)
product. The lozenge form is manufactured by a third party manufacturer that
produces predominantly for the Company. The other forms are manufactured by
third parties that produce a variety of other products for other customers.
Should these relationships terminate or discontinue for any reason, the Company
has formulated a contingency plan in order to prevent such discontinuance from
materially affecting the Company's operations. Any such termination may,
however, result in a temporary delay in production until the replacement
facility is able to meet the Company's production requirements.
Raw material used in the production of the product is available from numerous
sources. Currently, it is being procured from a single vendor in order to secure
purchasing economies. In a situation where this one vendor is not able to supply
the contract manufacturer with the ingredients, other sources have been
identified.
Quigley Pharma was formed in 2001 for the purpose of developing prescription
drug products. These potential new products are based on patent applications
that the Company has acquired. The Company's potential products are currently
undergoing research and testing and will require substantial resources to
develop these applications into commercial products. The successful conclusion
of such research is dependent on regulatory approval and may take several years.
The length of this process depends on the type, complexity and novelty of the
product and the nature of the disease or other indications to be treated. If the
Company cannot obtain regulatory approval of these new products in a timely
manner or if the patents are not granted or if the patents are subsequently
challenged, these possible events could all have a material effect on the
business and financial condition of the Company. The strength of our patent
position may be important to our long-term success. There can be no assurance
that these patents and patent applications will effectively protect our products
from duplication by others.
Darius' products for resale are sourced from several suppliers. In the event
that such sources were no longer in a position to supply Darius with products,
other vendors have been identified as reliable alternatives, which could result
in a temporary delay in production or a minimal adverse loss of business.
Currently, the principal finished products relating to Caribbean Pacific Natural
Products are being manufactured and blended by a single vendor. In the event of
difficulties with the current sources of raw material or finished product, other
suppliers have been identified. However, this could result in a temporary delay
in production.
LONG-LIVED ASSETS
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This statement supercedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." The statement retains the previously existing accounting
requirements related to the recognition and measurement of the impairment of
long-lived assets to be held and used while expanding the measurement
requirements of long-lived assets to be disposed of by sale to include
discontinued operations. It also expands the previously existing reporting
requirements for discontinued operations to include a component of an entity
that either has been disposed of or is classified as held for sale. The Company
implemented SFAS No. 144 on January 1, 2002. The implementation of SFAS 144 did
not have a material impact on the Company's consolidated financial position or
results of operations.
The Company reviews its long-lived assets for impairment on an exception basis
whenever events or changes in circumstances indicate that the carrying amount of
the assets may not be recoverable through future cash flows. If it is determined
that an impairment loss has occurred, such loss will be recognized in the
Statement of Operations as the difference between the carrying amount and fair
value of the asset.
REVENUE RECOGNITION
Sales are recognized at the time ownership is transferred to the customer.
Provisions for estimated product returns are accrued in the period of sale
recognition.
COUPONS, REBATES AND DISCOUNTS
In May 2000, the Emerging Issues Task Force ("EITF") issued EITF No. 00-14,
"Accounting for Coupons, Rebates and Discounts" that addressed accounting for
sales incentives. The Task Force concluded that in accounting for cash sales
incentives a manufacturer should recognize the incentive as a reduction of
revenue on the later date of the manufacturer's sale or the date the offer is
11
made to the public. The reduction of revenues should be measured based on the
estimated amount of incentives to be claimed by the ultimate customers. This
pronouncement was adopted in the first quarter of fiscal 2001.
In August 2001, the EITF issued EITF No. 01-09, "Accounting for Consideration
Given by a Vendor to a Customer or a Reseller of the Vendor's Products" that
codified and reconciled EITF No. 00-14, No. 00-22, "Accounting for "Points" and
Certain Other Time-Based or Volume-Based Sales Incentive Offers, and Offers for
Free Products or Services to be Delivered in the Future" and No. 00-25, "Vendor
Income Statement Characterization of Consideration Paid to a Reseller of the
Vendor's Products." EITF No. 01-09 addresses the accounting for consideration
given by a vendor to a customer. The Task Force concluded that cash
consideration (including a sales incentive) given by a vendor to a customer is
presumed to be a reduction of the selling prices of the vendor's products and,
therefore, should be characterized as a reduction of revenue when recognized in
the vendor's income statement. That presumption is overcome and the
consideration should be characterized as a cost incurred if, and to the extent
that, a benefit is or will be received from the recipient of the consideration
that meets both of the following conditions: (1) (a) the vendor receives, or
will receive, an identifiable benefit (goods or services) in return for the
consideration, (b) the identified benefit must be sufficiently separable from
the recipient's purchase of the vendor's products such that the vendor could
have entered into an exchange transaction with a party other than a purchaser of
its products in order to receive that benefit; (2) the vendor can reasonably
estimate the fair value of the benefit identified. This pronouncement was
adopted in the first quarter of 2002.
SHIPPING AND HANDLING
Product sales relating to Health and Wellness and Sun-care and Skincare products
carry an additional identifiable shipping and handling charge to the purchaser,
which is classified as revenue. For cold remedy products, such costs are
included as part of the invoiced price. In all cases costs related to this
revenue are recorded in costs of goods sold.
STOCK COMPENSATION
Stock options and warrants for purchase of the Company's common stock have been
granted to both employees and non-employees since the date of the Company's
public inception. Options and warrants are exercisable during a period
determined by the Company, but in no event later than ten years from the date
granted.
The Company's policy for stock and option grants follows APB No. 25 and FASB 123
which clarifies the definition of employee for purposes of applying APB No. 25,
criteria for determining whether a plan qualifies as a non-compensatory plan,
the accounting consequences of various modifications to the terms of a
previously fixed option or award, and the accounting for an exchange of share
compensation awards in a business combination, among others. Under the intrinsic
value method prescribed by APB No. 25, the Company has recorded no compensation
expense relating to option grants to employees in periods reported.
Expense relating to warrants granted to non-employees has been appropriately
recorded in the periods presented based on either fair values agreed upon with
the grantees or fair values as determined by the Black Scholes pricing model
dependent upon the circumstances relating to the specific grants.
ROYALTIES
The Company includes royalties and founders commissions incurred as cost of
products sold based on agreement terms.
ADVERTISING
Advertising costs are expensed within the period in which they are utilized.
Advertising expense is made up of media advertising, presented as part of sales
and marketing expense; co-operative advertising, which is accounted for as a
deduction from sales; and free product, which is accounted for as part of cost
of sales. Advertising costs incurred for the nine-months periods ended September
30, 2002 and 2001 were $2,270,183 and $2,090,852, respectively. Included in
prepaid expenses and other current assets was $241,875 and $419,000 at September
30, 2002 and December 31, 2001, respectively, relating to prepaid advertising
and promotion expenses.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations in the year incurred.
Expenditures for the nine-months periods ended September 30, 2002 and 2001 were
$1,897,403 and $970,575, respectively. Principally, the increase of research and
12
development costs in 2002 was due to expenses incurred as part of the product
research costs related to Quigley Pharma and study costs associated with
Cold-Eeze(R). Quigley Pharma is currently involved in research activity
following patent applications that the Company has acquired and such research
and development costs relating to potential products are expected to increase
significantly over time as product research and testing progresses.
INCOME TAXES
The Company utilizes an asset and liability approach which requires the
recognition of deferred tax assets and liabilities for the future tax
consequences of events that have been recognized in the Company's financial
statements or tax returns. In estimating future tax consequences, the Company
generally considers all expected future events other than enactments of changes
in the tax law or rates. See Note 5 for further discussion.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted. It is suggested
that these financial statements be read in conjunction with the financial
statements and accompanying notes for the fiscal year ended December 31, 2001,
in the Company's Form 10-K.
NOTE 3 - SEGMENT INFORMATION
The basis for presenting segment results generally is consistent with overall
Company reporting. The primary difference relates to presentation of
partially-owned operations, which are presented as if owned 100% in the
operating segments. The adjustment to ownership basis is included in Corporate
& Other.
The Company has divided its operations into four reportable segments: The
Quigley Corporation (Cold Remedy Products), whose main product is Cold-Eeze(R),
a proprietary zinc gluconate glycine lozenge for the common cold; Darius (Health
and Wellness) whose business is the sale and direct marketing of a range of
health and wellness products; Caribbean Pacific Natural Products, Inc. (Sun-care
and Skincare Products), a leading developer and marketer of all-natural sun-care
and skincare products for luxury resorts, theme parks and spas and Quigley
Pharma (Ethical Pharmaceutical Products), currently involved in research and
development activity to develop patent applications into commercial
pharmaceutical products.
Financial information by business segment follows:
- ------------------------------------------------------------------------------------------------------------------
For the three
months ended Cold Sun-care and Ethical
September 30, Remedy Health and Skincare Pharmaceutical Corporate and
2002 Products Wellness Products Products Other Total
- ------------------------------------------------------------------------------------------------------------------
Net Sales
Customers $3,524,663 $4,309,662 $443,574 - - $8,277,899
Inter-segment - - - - - -
Licensing fees - - - - - -
Segment operating
profit (loss) ($421,754) $547,354 ($211,542) ($470,682) $14,365 ($542,259)
- ------------------------------------------------------------------------------------------------------------------
As of and for the
nine months
ended Cold Sun-care and Ethical
September 30, Remedy Health and Skincare Pharmaceutical Corporate and
2002 Products Wellness Products Products Other Total
- ------------------------------------------------------------------------------------------------------------------
Net Sales
Customers $7,268,303 $10,604,176 $1,643,898 - - $19,516,377
Inter-segment - - - - - -
Licensing fees 148,866 - - - - 148,866
Segment operating
profit (loss) (3,442,255) 1,044,342 (299,268) ($1,119,163) $40,612 (3,775,732)
Total Assets $25,714,500 $1,609,299 $965,350 - ($3,046,928) $25,242,221
13
- ------------------------------------------------------------------------------------------------------------------
For the three
months ended Cold Sun-care and Ethical
September 30, Remedy Health and Skincare Pharmaceutical Corporate and
2001 Products Wellness Products Products Other Total
- ------------------------------------------------------------------------------------------------------------------
Net Sales
Customers $4,768,372 $1,664,391 $510,790 - - $6,943,553
Inter-segment - - - - - -
Licensing fees 136,364 - - - - 136,364
Segment operating
profit (loss) $604,020 ($45,685) ($290,506) ($151,780) $5,547 $121,596
- ------------------------------------------------------------------------------------------------------------------
As of and for the
nine months
ended Cold Sun-care and Ethical
September 30, Remedy Health and Skincare Pharmaceutical Corporate and
2001 Products Wellness Products Products Other Total
- ------------------------------------------------------------------------------------------------------------------
Net Sales
Customers $9,036,960 $4,025,370 $1,902,410 - - $14,964,740
Inter-segment (116,385) 176,412 - - ($60,027) -
Licensing fees 1,410,228 - - - - 1,410,228
Segment operating
Profit (loss) (292,600) (337,566) (491,533) ($306,254) 122,967 (1,304,986)
Total Assets $24,539,453 $1,051,312 $1,173,396 - ($3,034,649) $23,729,512
Costs attributable to Quigley Pharma relating to 2002 and 2001 research activity
have been disclosed above in the segment caption "Ethical Pharmaceutical
Products".
NOTE 4 - TRANSACTIONS AFFECTING STOCKHOLDERS' EQUITY
Since the inception of the stock buy-back program in January 1998, the Board has
subsequently increased the authorization on five occasions, for a total
authorized buy-back of 5,000,000 shares or approximately 38% of the previous
shares outstanding. Such shares are reflected as treasury stock and will be
available for general corporate purposes. From the initiation of the plan,
4,159,191 shares have been repurchased at a cost of $24,042,801 or an average
cost of $5.78 per share.
As a result of the litigation relating to the case against Nutritional Foods
Corporation, in March of 1998, a subsequent order of the Court of Common Pleas
of Bucks County modified the decree of January 23, 1997 to provide for a return
to treasury of 604,928 shares to the Company. As payment for legal services,
118,066 of these shares were reissued with a market value of approximately
$1,145,358. This value, the cost of reacquiring these shares, then became the
value of the net treasury stock ($2.35 per share) represented by 486,862 shares
returned to treasury.
On April 9, 2002, The Quigley Corporation entered into an agreement with
Forrester Financial LLC, ("Forrester") providing for Forrester to act as a
financial consultant to the Company. The consulting agreement commenced on March
7, 2002 and has a term of twelve months, but may be terminated by the Company in
its sole discretion at any time. As compensation for services to be provided by
Forrester to the Company, the Company granted to Forrester, or its designees,
warrants to purchase up to a total of 1,000,000 shares of the Company's common
stock. The warrants have three distinct exercise prices, 500,000 warrants are
exercisable at $6.50 per share, 250,000 warrants are exercisable at $8.50 per
share, and 250,000 warrants are exercisable at $11.50 per share. The warrants
are exercisable until the earlier to occur of (i) March 6, 2003 or (ii) the
termination of the Consulting Agreement. In the six months ended June 30, 2002,
the Company recorded an expense of $700,000 relating to the grant. In May 2002,
Forrester Financial exercised 500,000 warrants at an exercise price of $6.50 per
share resulting in cash received by the Company in the amount of $3,250,000 with
a correlating increase to additional paid-in-capital.
At September 30, 2002, there were 4,160,500 unexercised and vested options and
warrants of the Company's stock available for exercise.
14
NOTE 5 - INCOME TAXES
Certain exercises of options and warrants, and restricted stock issued for
services that became unrestricted resulted in reductions to taxes currently
payable and a corresponding increase to additional-paid-in-capital for years
prior to 1999. The tax benefit effects of option and warrant exercises during
the period 1999 to 2002 were $1,756,383. However, these benefits were deferred
because of a net operating loss carry-forward for tax purposes ("NOLs") that
occurred during the fourth quarter of 1999, resulting from a cumulative effect
of deducting a total value of $42,800,364 attributed to these options, warrants
and unrestricted stock deductions from taxable income during the tax years 1997
and 1998. The net operating loss carry-forwards arising from the option, warrant
and stock activities approximate $13.2 million for federal tax purposes, of
which $3.5 million will expire in 2019, $9.7 million in 2020 and thereafter; and
$18.4 million for state purposes, of which $9.7 million will expire in 2009,
$3.3 million in 2010 and $5.4 million in 2011 and thereafter. Until sufficient
taxable income to offset the temporary timing differences attributable to
operations and the tax deductions attributable to option, warrant and stock
activities are assured, a valuation allowance equaling the total deferred tax
asset is being provided.
NOTE 6 - EARNINGS PER SHARE
Basic earnings per share ("EPS") excludes dilution and is computed by dividing
income available to Common Stockholders by the weighted average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue Common Stock were
exercised or converted into Common Stock or resulted in the issuance of Common
Stock that then shared in the earnings of the entity. Diluted EPS also utilizes
the treasury stock method that prescribes a theoretical buy-back of shares from
the theoretical proceeds of all options and warrants outstanding during the
period. Since there are 4,160,500 options and warrants outstanding, fluctuations
in the actual market price can have a varying of results for each period
presented. For the periods presented that reflect losses, no effect was given
for options and warrants because the result would be anti-dilutive.
A reconciliation of the applicable numerators and denominators of the income
statement periods presented is as follows (millions, except earnings per share
amounts):
Three Months Ended Nine Months Ended Three Months Ended Nine Months Ended
September 30, 2002 September 30, 2002 September 30, 2001 September 30, 2001
Loss Shares EPS Loss Shares EPS Income Shares EPS Loss Shares EPS
----------------------------------------------------------------------------------------------------------
Basic EPS ($0.5) 11.0 ($0.05) ($3.7) 10.9 ($0.34) $0.3 10.7 $0.03 ($0.8) 10.7 ($0.07)
Dilutives:
Options/Warrants - - - - - 0.1 - -
----------------------------------------------------------------------------------------------------------
Diluted EPS ($0.5) 11.0 ($0.05) ($3.7) 10.9 ($0.34) $0.3 10.8 $0.03 ($0.8) 10.7 ($0.07)
==========================================================================================================
NOTE 7 - RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Company has sales brokerage and other
arrangements with entities whose major stockholders are also stockholders of The
Quigley Corporation, or are related to major stockholders of the Company.
Commissions and other items paid or payable under such arrangements amounted to
approximately $38,000 and $171,000 respectively, for the nine-months periods
ended September 30, 2002 and 2001.
The Company is in the process of acquiring licenses in certain countries through
related party entities. For the nine-months periods ended September 30, 2002 and
2001, fees amounting to $217,000 and $219,000, respectively, have been paid to a
related entity to assist with the regulatory aspects of obtaining such licenses.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
The Company maintains certain royalty and founders commission agreements with
the developers, licensors, founders, and consultants for the Cold-Eeze(R)
products. Up to March 5, 2002, these payments were 13% of sales collected less
certain deductions and thereafter at 10%. Of the 13%, up to March 2002, a three
percent royalty on sales collected less certain deductions was payable to the
patent holder whose agreement expired on March 5, 2002. A three percent royalty
of sales collected less certain deductions is payable to the developer of the
product formulation together with a two percent consulting fee based on an
agreement that expires in 2007. Additionally, a founders' commission is payable
totaling 5% of sales collected less certain deductions, which is shared by two
of the officers whose agreements expire in 2005.
15
Also, required for the acquisition of certain assets of a privately held company
involved in the direct marketing and distribution of health and wellness
products are continuous payments for the use of product formulations;
consulting; confidentiality and non-compete fees that are 5% on net sales
collected for the continuous applications of these arrangements.
On April 9, 2002, The Quigley Corporation entered into an agreement with
Forrester Financial LLC, providing for Forrester to act as a financial
consultant to the Company. The consulting agreement commenced on March 7, 2002
and has a term of twelve months, but may be terminated by the Company in its
sole discretion at any time. As compensation for services to be provided by
Forrester to the Company, the Company granted to Forrester, or its designees,
warrants to purchase up to a total of 1,000,000 shares of the Company's common
stock at three specific exercise prices. The warrants are exercisable until the
earlier to occur of (i) March 6, 2003 or (ii) the termination of the Consulting
Agreement. In the six months ended June 30, 2002, the Company recorded an
expense of $700,000 relating to the grant. In May 2002, Forrester Financial
exercised 500,000 warrants at an exercise price of $6.50 per share resulting in
cash received by the Company in the amount of $3,250,000.
The Company has anticipated commitments for advertising and other purchases
amounting to approximately $1,800,000.
The Company is a party to legal proceedings, which are routine and incidental to
its business. The consequences of these proceedings are not presently
determinable. However in the opinion of management, they will not have a
material adverse affect on the Company's liquidity, financial position or
results of operations
NOTE 9 - RECENT ACCOUNTING PRONOUNCEMENTS
SFAS 146
In June 2002, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards, or SFAS, No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities." This Statement addresses
financial accounting and reporting for costs associated with exit or disposal
activities and supercedes Emerging Issues Task Force (EITF) Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The
Statement requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred. Under EITF 94-3,
a liability for an exit cost was recognized at the date of commitment to an exit
or disposal plan. This Statement also establishes that fair value is the
objective for initial measurement of the liability. We must adopt SFAS No. 146
for all exit or disposal activities that are initiated after December 31, 2002.
We do not believe that adopting this pronouncement will have a material impact
on our consolidated results of operation, financial position or cash flows.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
In addition to historical information, this Report contains forward-looking
statements. These forward-looking statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
reflected in these forward-looking statements. Factors that might cause such a
difference include, but are not limited to management of growth, competition,
pricing pressures on the Company's product, industry growth and general economic
conditions. Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's opinions only as of the
date hereof. The Company undertakes no obligation to revise or publicly release
the results of any revision to these forward-looking statements. The Company is
subject to a variety of factors more fully described in the Company's Annual
Report on Form 10-K, as filed, and the prospectus filed as part of the
registration statement on Form S-3 as filed on April 25, 2002 (File no.
333-86976), with the Securities and Exchange Commission.
Overview
- --------
Revenues for the three and nine-months periods ended September 30, 2002 were
$8,277,899 and $19,665,243, respectively, as compared to $7,079,917 and
$16,374,968 for the comparable 2001 periods. Revenue for the nine-months periods
ended September 30, 2002 and 2001 include an amount of $148,866 and $1,410,228,
respectively, relating to licensing fees from the settlement of a lawsuit
following the filing by The Quigley Corporation of a patent infringement suit
against Gel Tech, LLC, the developer of Zicam(TM), and Gum Tech International,
Inc., its distributor, in November 1999. Under the agreement, Gum Tech agreed to
pay The Quigley Corporation $1,137,500 for a limited license for Quigley's
patent on the use of zinc gluconate for the treatment of the duration and
symptoms of the common cold. Gum Tech was also required to pay The Quigley
16
Corporation an ongoing royalty of 5.5 percent from April 1, 2001 through March
5, 2002 on all Zicam cold relief sales receipts. In addition, Gum Tech
guaranteed to pay Quigley a minimum of $500,000 in ongoing royalties regardless
of sales receipts through March 5, 2002, that actually totaled $557,957 for the
period. Legal and other expenses associated with this lawsuit approximated
$700,000.
Net sales of the Cold-Eeze(R) products were reduced in the nine-months period
ended September 30, 2002 over the comparable 2001 period by approximately
$1,768,657. During the past cold season demand for cold remedy products in
general was reduced despite the increase in the incidence of cold occurrences.
Additionally, the Company's customers are exercising tighter control over
inventory levels during the current economic conditions.
During 2002 the Company has continued to establish relationships with customers
in all sectors of the industry through co-operative advertising programs and
point of sale initiatives that communicate the effectiveness of Cold-Eeze(R) as
a clinically proven remedy in reducing the duration of the common cold.
Darius International, Inc., had revenues for the three and nine-months periods
ended September 30, 2002 of $4,309,662 and $10,604,176 with the comparable 2001
revenues of $1,664,391 and $4,025,370, respectively. These increased revenues
for the periods reflect continued growth for the Health and Wellness segment of
the Company business and follows the Corporate strategy of diversification of
products and product distribution systems.
Caribbean Pacific Natural Products Inc. reported decreased revenues of $67,216
and $258,512 for the three and nine-months periods ended September 30, 2002 and
2001. The Sun-care and Skincare segment continues to experience the effects of
the downturn in the tourism and travel industry experienced over the past twelve
months.
The consolidated Gross Profit margin was reduced in 2002 due to the reduced
licensing fee income in 2002 compared to 2001 along with the higher proportion
of sales attributable to Darius in 2002, the products of which carry a lower
margin compared to the other business segments of the Company.
Net losses for the three and nine-months periods ended September 30, 2002 were
$500,395 and $3,651,383, respectively, the comparative 2001 net income/(loss)
was $313,615 and ($769,737). The increased losses relating to 2002 are primarily
as a result of increased research and development costs for Quigley Pharma and
other clinical trials; increased Cold-Eeze(R) product promotion through enhanced
co-operative advertising spending and additional general and administration
costs resulting from fees associated with consulting duties. These losses were
mitigated by net profits in 2002 from the Health and Wellness business segment.
The Company continues to use the resources of contract manufacturers and
independent national and international brokers to represent and compliment sales
of the Company's Cold-Eeze(R) products, thereby saving capital and other ongoing
expenditures that would otherwise be incurred.
The Company currently uses three separate suppliers to produce Cold-Eeze(R) in
lozenge, bubble gum, and sugar free tablet form. Other products of the Company
and its subsidiaries are manufactured by third parties that produce a variety of
other products for other customers. Should these relationships terminate or
discontinue for any reason, the Company has formulated a contingency plan in
order to prevent such discontinuance from materially affecting the Company's
operations. Any such termination may, however, result in a temporary delay in
production until the replacement facility is able to meet the Company's
production requirements.
Raw material used in the production of certain products are available from
numerous sources. Currently, certain materials are being procured from a single
source vendor in order to secure purchasing economies. In a situation where one
vendor is not able to supply the contract manufacturer with the ingredients,
other sources have been identified. All manufacturing sites have the capacity to
respond quickly to market requirements.
Effect of Recent Accounting Pronouncements
- ------------------------------------------
SFAS 146
In June 2002, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards, or SFAS, No. 146, "Accounting for
17
Costs Associated with Exit or Disposal Activities." This Statement addresses
financial accounting and reporting for costs associated with exit or disposal
activities and supercedes Emerging Issues Task Force (EITF) Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The
Statement requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred. Under EITF 94-3,
a liability for an exit cost was recognized at the date of commitment to an exit
or disposal plan. This Statement also establishes that fair value is the
objective for initial measurement of the liability. We must adopt SFAS No. 146
for all exit or disposal activities that are initiated after December 31, 2002.
We do not believe that adopting this pronouncement will have a material impact
on our consolidated results of operation, financial position or cash flows.
Significant Accounting Policies
- -------------------------------
As previously described, the Company is engaged in the development,
manufacturing, and marketing of health and homeopathic products that are being
offered to the general public. Due to the nature of the business, it is unlikely
that any accounting policies, that are open to interpretation, could have a
material effect on the Company's results of operations. Certain key accounting
policies that may affect the results of the Company are the timing of revenue
recognition and sales incentives (including coupons, rebates and discounts); the
classification of advertising expenses; and the fact that all research and
development expenses are expensed as incurred. Note 1 to the consolidated
financial statements describes the Company's other significant accounting
policies.
REVENUE RECOGNITION
Sales are recognized at the time ownership is transferred to the customer.
Provisions for estimated product returns are accrued in the period of sale
recognition.
COUPONS, REBATES AND DISCOUNTS
In May 2000, the Emerging Issues Task Force ("EITF") issued EITF No. 00-14,
"Accounting for Coupons, Rebates and Discounts" that addressed accounting for
sales incentives. The Task Force concluded that in accounting for cash sales
incentives a manufacturer should recognize the incentive as a reduction of
revenue on the later date of the manufacturer's sale or the date the offer is
made to the public. The reduction of revenues should be measured based on the
estimated amount of incentives to be claimed by the ultimate customers. This
pronouncement was adopted in the first quarter of fiscal 2001.
In August 2001, the EITF issued EITF No. 01-09, "Accounting for Consideration
Given by a Vendor to a Customer or a Reseller of the Vendor's Products" that
codified and reconciled EITF No. 00-14, No. 00-22, "Accounting for "Points" and
Certain Other Time-Based or Volume-Based Sales Incentive Offers, and Offers for
Free Products or Services to be Delivered in the Future" and No. 00-25, "Vendor
Income Statement Characterization of Consideration Paid to a Reseller of the
Vendor's Products." EITF No. 01-09 addresses the accounting for consideration
given by a vendor to a customer. The Task Force concluded that cash
consideration (including a sales incentive) given by a vendor to a customer is
presumed to be a reduction of the selling prices of the vendor's products and,
therefore, should be characterized as a reduction of revenue when recognized in
the vendor's income statement. That presumption is overcome and the
consideration should be characterized as a cost incurred if, and to the extent
that, a benefit is or will be received from the recipient of the consideration
that meets both of the following conditions: (1) The vendor receives, or will
receive, an identifiable benefit (goods or services) in return for the
consideration. The identified benefit must be sufficiently separable from the
recipient's purchase of the vendor's products such that the vendor could have
entered into an exchange transaction with a party other than a purchaser of its
products in order to receive that benefit; (2) The vendor can reasonably
estimate the fair value of the benefit identified. This pronouncement was
adopted in the first quarter of 2002.
ADVERTISING
Advertising costs are expensed within the period to which they relate.
Advertising expense is made up of media advertising, presented as part of sales
and marketing expense; co-operative advertising, which is accounted for as a
deduction from sales; and free product, which is accounted for as part of cost
of sales. Advertising costs incurred for the nine months periods ended September
30, 2002 and 2001 were $2,270,183 and $2,090,852, respectively. Included in
18
prepaid expenses and other current assets was $241,875 and $419,000 at September
30, 2002 and December 31, 2001, respectively, relating to prepaid advertising
and promotion expenses.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations in the year incurred.
Expenditures for the nine-months periods ended September 30, 2002 and 2001 were
$1,897,403 and $970,575, respectively. Principally, the increase of research and
development costs in 2002 was due to expenses incurred as part of the product
research costs related to Quigley Pharma and study costs associated with
Cold-Eeze(R). Quigley Pharma is currently involved in research activity
following patent applications that the Company has acquired and such research
and development costs relating to potential products are expected to increase
significantly over time as product research and testing progresses.
Results of Operations
- ---------------------
Three months ended September 30, 2002 compared to three months ended September
30, 2001
- --------------------------------------------------------------------------------
For the three months ended September 30, 2002, the Company reported revenues of
$8,277,899 and a net loss of $500,395 as compared to revenues of $7,079,917 and
net income of $313,615, for the comparable period ended September 30, 2001.
Cold-Eeze(R) sales were reduced by $761,552 due to more stringent controls on
inventory and ordering frequencies being exercised by the Company's customers.
Additionally, the third quarter activity relating to Cold-Eeze(R) can vary prior
to the peak cough/cold season.
Darius International, Inc., had revenues for the three-months periods ended
September 30, 2002 of $4,309,662 with the comparable 2001 revenues being
$1,664,391. These increased revenues for the periods reflect continued growth
for the Health and Wellness segment of the Company business and follows the
Corporate strategy of diversification of products and product distribution
systems.
The Skin-care and Suncare segment reported a decrease in revenues of $67,216
between the periods, reflecting the uncertainty in the travel and tourism
industry.
Cost of Sales as a percentage of sales before co-operative advertising
promotions for the three months ended September 30, 2002 was 53.8% compared to
48.6% for the comparable period ended September 30, 2001. The 2002 results
reflect a higher cost of sales due to the greater proportion of sales
represented by Darius in 2002 (47.9% of consolidated 2002 sales as compared to
23.2% of consolidated 2001 sales). The Darius cost of goods is significantly
higher relative to Cold-Eeze(R) and Caribbean Pacific products, thereby
increasing the overall 2002 percentage.
For the three months ended September 30, 2002, total operating expenses were
$3,978,666 compared to $3,474,490 for the comparable period ended September 30,
2001. The 2002 expenditures reflects increased clinical trial costs associated
with Quigley Pharma of approximately $315,000 along with increased legal costs.
As compared to 2001, net loss for the three months ended September 30, 2002 was
increased, due to costs associated with Quigley Pharma's ongoing clinical trials
and other studies and increased co-operative advertising activity with customers
in order to gain greater awareness of Cold-Eeze(R) in the marketplace.
During the three months ended September 30, 2002, the major operating expenses
of salaries, brokerage commissions, promotion, media advertising, and legal
costs accounted for $1,679,728 (42%) of total operating costs. These expense
categories for the comparable period in 2001 accounted for $1,886,827 (54%) of
total operating costs. The remaining items for the periods were of a semi-fixed
nature in that they do not strictly follow sales trends.
Nine months ended September 30, 2002 compared to nine months ended September 30,
2001
- --------------------------------------------------------------------------------
For the nine months ended September 30, 2002, the Company reported revenues of
$19,665,243 and a net loss of $3,651,383 as compared to revenues of $16,374,968
and a net loss of $769,737, for the comparable period ended September 30, 2001.
Cold-Eeze(R) sales were reduced in 2002 due to a slowdown in demand despite
increases in cough/cold illnesses.
During the period the Health and Wellness business segment had revenues of
$10,604,176 as compared to $4,025,370 for the same period 2001. This segment had
significant growth between the periods supporting the Company's diversification
19
strategy. Additionally, this segment contributed net income of $1,046,844 in the
nine-month period, mitigating the overall loss for the period.
The Sun-care and Skincare segment continues to be subject to the downturn in the
travel and leisure industry that has been evident over the last twelve months.
This business segment reported revenues in the nine month period ended September
30, 2002 of $1,643,898 and an operating loss of $299,268.
Cost of Sales as a percentage of sales before co-operative advertising
promotions for the nine months ended September 30, 2002 was 54.3% compared to
45.3% for the comparable period ended September 30, 2001. The 2002 results
reflect a higher cost of sales due to the greater proportion of sales
represented by Darius in 2002 (51% of consolidated 2002 sales as compared to 26%
of consolidated 2001 sales). The Darius cost of goods is significantly higher
relative to Cold-Eeze(R) and Caribbean Pacific products, thereby increasing the
overall percentage.
For the nine months ended September 30, 2002, total operating expenses were
$12,237,818 compared to $10,540,868 for the comparable period ended September
30, 2001. The 2002 expenditures reflects increased research and development
costs associated with Quigley Pharma of approximately $763,000, along with
additional Cold-Eeze(R) trial and study costs approximating $165,000.
Comparative operating expenses were affected by reduced legal costs in 2002 of
approximately $330,000.
2002 administration costs also included a charge of $700,000 relating to the
granting of 1,000,000 warrants to Forrester Financial, LLC in March 2002
providing for Forrester to act as a financial consultant to the Company.
Net loss for the nine months ended September 30, 2002 was negatively impacted by
the reduced net licensing fees that commenced during the second quarter of 2001,
increased research and development costs in 2002 primarily associated with
Quigley Pharma and other clinical studies, and fees in 2002 associated with
consulting services.
During the nine months ended September 30, 2002, the major operating expenses of
salaries, brokerage commissions, promotion, media advertising, and legal costs
accounted for $6,926,180 (57%) of total operating costs. These expense
categories for the comparable period in 2001 accounted for $6,575,205 (62%) of
total operating costs. The remaining items for the periods were of a semi-fixed
nature in that they do not strictly follow sales trends.
Liquidity and Capital Resources
- -------------------------------
The total assets of the Company at September 30, 2002 and December 31, 2001 were
$25,242,221 and $24,755,795, respectively. Working capital decreased to
$18,537,907 from $18,625,819 during the period. The significant movement within
total assets represents the decrease in accounts receivable of $181,800, cash
and cash equivalents increased by $1,551,581, prepaid expenses and other current
assets decreased by $835,328 and inventory decreased by $161,556. From a working
capital perspective, accounts payable decreased by $65,284 and accrued royalties
and sales commissions decreased over the period by $113,229 while the
advertising accrual decreased by $120,284. Total cash balances at September 30,
2002 were $11,292,421, as compared to $9,740,840 at December 31, 2001. In June
2002, Forrester Financial, LLC, exercised 500,000 warrants at an exercise price
of $6.50 per share, resulting in cash received by the Company in the amount of
$3,250,000.
The Company believes that its increased marketing efforts and national publicity
concerning the Cold-Eeze(R) products, the Company's manufacturing availability,
newly available products, growth in international sales together with its
current working capital should provide an internal source of capital to fund the
Company's business operations. In addition to anticipated funding from
operations, the Company may raise capital through the issuance of equity
securities to finance anticipated growth.
Notwithstanding previous period negative cash flows from operations, management
believes amounts of cash on hand as well as those current assets readily
convertible to cash will provide adequate liquidity to support future
operations. Any challenge to the Company's patent rights could have a material
adverse effect on future liquidity of the Company; however, the Company is not
aware of any condition that would make such an event probable.
Capital Expenditures
- --------------------
Since the Company's products are manufactured by outside sources, capital
expenditures during the remainder of 2002 are not anticipated to be material.
20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
ITEM 4. CONTROLS AND PROCEDURES
Based on their evaluation, as of a date within 90 days of the filing of this
Form 10-Q, the Company's Chief Executive Officer and Chief Financial Officer
have concluded the Company's disclosure controls and procedures (as defined in
Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934) are
effective. There have been no significant changes in internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Part II. Other Information
--------------------------
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(1) 99.1 Certification by the Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(2) 99.2 Certification by the Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) The Company reported under:
ITEM 5. OTHER EVENTS
At its Regular Meeting of the Board of Directors held on October 9,
2002, the Corporation accepted the resignations of Charles A. Genuardi
and Eric H. Kaytes as Directors of the Corporation, and the resignation
of Mr. Kaytes as Chief Information Officer of the Corporation. Each of
Messrs. Genuardi and Kaytes advised the Corporation that their
respective resignations were for personal reasons. The Corporation will
not fill the Board vacancy or the position of Chief Information Officer
created by Mr. Kaytes' resignation, but will immediately search for
qualified candidates to replace Mr. Genuardi as an Outside Director of
the Corporation.
There were no other Current Reports on Form 8-K filed during the quarter ended
September 30, 2002.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE QUIGLEY CORPORATION
By: /s/ George J. Longo
----------------------------------
George J. Longo
Vice President, Chief Financial Officer
Date: October 31, 2002
22
THE QUIGLEY CORPORATION
a Nevada corporation
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
Section 302 Certification
I, Guy J. Quigley, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Quigley
Corporation, a Nevada corporation (the "registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: October 31, 2002
By: /s/ Guy J. Quigley
---------------------------------
Guy J. Quigley
Chief Executive Officer
23
THE QUIGLEY CORPORATION
a Nevada corporation
CERTIFICATION OF CHIEF FINANCIAL OFFICER
Section 302 Certification
I, George J. Longo, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Quigley
Corporation, a Nevada corporation (the "registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: October 31, 2002
By: /s/ George J. Longo
---------------------------
George J. Longo
Chief Financial Officer
24