UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 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 MARCH 31, 2004
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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
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(Exact Name of Registrant as Specified in its Charter)
Nevada 23-2577138
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(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
(MAILING ADDRESS: PO Box 1349, Doylestown, PA 18901.)
KELLS BUILDING, 621 SHADY RETREAT ROAD, DOYLESTOWN, PA 18901
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(Address of Principal Executive Offices) (Zip Code)
(215) 345-0919
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(Registrant's Telephone Number,
Including Area Code)
N/A
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Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date (all of one class of $.0005 par
value Common Stock). As of April 28, 2004 there were 11,515,255 shares of common
stock outstanding.
TABLE OF CONTENTS
PAGE NO.
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements 3-17
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 18-22
Item 3. Quantitative and Qualitative Disclosure About
Market Risk 22
Item 4. Controls and Procedures 22
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 22-23
Item 2. Changes in Securities and Use of Proceeds 23
Item 3. Defaults Upon Senior Securities 23
Item 4. Submission of Matters to a
Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
Signatures 24
-2-
THE QUIGLEY CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS March 31, 2004 December 31,
(Unaudited) 2003
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CURRENT ASSETS:
Cash and cash equivalents $ 15,586,602 $ 11,392,089
Accounts receivable (net of doubtful accounts of $515,753 and $808,812) 2,077,575 7,861,883
Inventory 3,954,475 3,752,903
Prepaid expenses and other current assets 464,772 733,597
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TOTAL CURRENT ASSETS 22,083,424 23,740,472
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PROPERTY, PLANT AND EQUIPMENT - net 2,337,791 2,418,159
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OTHER ASSETS:
Goodwill 30,763 30,763
Other assets 133,326 80,365
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TOTAL OTHER ASSETS 164,089 111,128
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TOTAL ASSETS $ 24,585,304 $ 26,269,759
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 670,978 $ 524,136
Accrued royalties and sales commissions 845,347 1,594,457
Accrued advertising 846,608 1,354,536
Other current liabilities 2,145,787 2,009,989
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TOTAL CURRENT LIABILITIES 4,508,720 5,483,118
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MINORITY INTEREST 57,563 --
COMMITMENTS AND CONTINGENCIES (NOTE 11)
STOCKHOLDERS' EQUITY:
Common stock, $.0005 par value; authorized 50,000,000;
Issued: 16,161,308 and 16,149,079 shares 8,080 8,074
Additional paid-in-capital 34,295,454 34,281,449
Retained earnings 10,903,646 11,685,277
Less: Treasury stock, 4,646,053 and 4,646,053 shares, at cost (25,188,159) (25,188,159)
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TOTAL STOCKHOLDERS' EQUITY 20,019,021 20,786,641
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 24,585,304 $ 26,269,759
============ ============
See accompanying notes to consolidated financial statements
-3-
THE QUIGLEY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
March 31, 2004 March 31, 2003
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NET SALES $ 9,605,617 $ 8,191,092
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COST OF SALES 5,085,374 4,496,982
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GROSS PROFIT 4,520,243 3,694,110
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OPERATING EXPENSES:
Sales and marketing 1,623,066 1,527,530
Administration 2,750,499 2,441,720
Research and development 947,002 646,969
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TOTAL OPERATING EXPENSES 5,320,567 4,616,219
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LOSS FROM OPERATIONS (800,324) (922,109)
INTEREST AND OTHER INCOME 18,693 29,897
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LOSS FROM CONTINUING OPERATIONS BEFORE TAXES (781,631) (892,212)
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INCOME TAXES -- --
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LOSS FROM CONTINUING OPERATIONS (781,631) (892,212)
DISCONTINUED OPERATIONS:
Loss from discontinued operations -- (54,349)
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NET LOSS ($ 781,631) ($ 946,561)
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BASIC EARNINGS PER COMMON SHARE:
Loss from continuing operations ($ 0.07) ($ 0.08)
Loss from discontinued operations -- --
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Net loss ($ 0.07) ($ 0.08)
============ ============
============ ============
DILUTED EARNINGS PER COMMON SHARE:
Loss from continuing operations ($ 0.07) ($ 0.08)
Loss from discontinued operations -- --
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Net loss ($ 0.07) ($ 0.08)
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WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 11,510,687 11,456,617
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Diluted 11,510,687 11,456,617
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See accompanying notes to consolidated financial statements
-4-
THE QUIGLEY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONDENSED)
(UNAUDITED)
Three Months Ended
March 31, 2004 March 31, 2003
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NET CASH PROVIDED BY OPERATING ACTIVITIES $ 4,218,445 $ 342,843
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INVESTING ACTIVITIES:
Capital expenditures (37,943) (58,603)
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NET CASH FLOWS USED IN INVESTING
ACTIVITIES (37,943) (58,603)
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FINANCING ACTIVITIES:
Proceeds from exercise of options and warrants 14,011
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NET CASH FLOWS PROVIDED BY FINANCING
ACTIVITIES 14,011
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NET CASH PROVIDED BY DISCONTINUED
OPERATIONS -- 133,714
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NET INCREASE IN CASH 4,194,513 417,954
CASH & CASH EQUIVALENTS, BEGINNING OF
PERIOD 11,392,089 12,897,080
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CASH & CASH EQUIVALENTS,
END OF PERIOD $ 15,586,602 $ 13,315,034
============ ============
See accompanying notes to consolidated 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, and the
research and development of potential prescription products. The Company is
organized into three business segments which are, Cold Remedy, Health and
Wellness, and Ethical Pharmaceutical. For the fiscal periods presented, the
Company's revenues have come from the Company's Cold Remedy business segment and
the Health and Wellness business segment.
Darius International Inc., ("Darius") a wholly owned subsidiary of the Company,
the Health and Wellness segment, 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. 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.
The formation of Darius has provided diversification to the Company in both the
method of product distribution and the broader range of products available to
the marketplace serving as a balance to the seasonal revenue cycles of the
Cold-Eeze(R) branded products.
In January 2001, the Company formed an Ethical Pharmaceutical Unit which is now
Quigley Pharma Inc. ("Pharma"), a wholly-owned subsidiary of the Company, the
Ethical Pharmaceutical segment, that is under the direction of its Executive
Vice President and Chairman of its Medical Advisory Committee. The formation of
Pharma 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" which was
issued and extends through March 27, 2021. The establishment of a dedicated
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. At this time,
three patents have been issued and assigned to the Company resulting from
research activity of Pharma.
During 2000, the Company acquired a 60% ownership position in Caribbean Pacific
Natural Products, Inc. ("CPNP"), a leading developer and marketer of all-natural
sun-care and skincare products for luxury resorts, theme parks and spas. In
December 2002, the Board of Directors of the Company approved a plan to sell
CPNP. On January 22, 2003, the Company completed the sale of the Company's 60%
equity interest in CPNP to Suncoast Naturals, Inc. ("Suncoast"). See discussion
in Notes to Financial Statements, Note 3 - Discontinued Operations.
COLD REMEDY
Cold-Eeze(R), a zinc gluconate glycine formulation (ZIGG(TM)) is an
over-the-counter consumer product used to reduce the duration and severity of
the common cold and is sold in lozenge, sugar-free tablet and nasal spray forms.
During 2003 the Company launched a Cold-EEZE(R) nasal spray and Kidz-EEZE(TM)
Sore Throat Pops. The nasal spray product, a nasal spray containing the active
ingredient Zinc Gluconate and also containing Aloe Vera, began shipping to
retail during the second half of 2003.
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 and extensions are presently being marketed by the Company and also
through independent brokers and marketers in the United States under the trade
name Cold-Eeze(R). 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 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.
-6-
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. 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 the adolescent study at the Heritage
School facility. In May 2003, the Company announced the study findings of a
prospective study, conducted at the Heritage School facility in Provo, Utah, in
which 178 children ages 12 to 18 years were given Cold-Eeze(R) lozenges both
symptomatically and prophylactically from October 5, 2001 to May 30, 2002. The
study found a 54% reduction in the most frequently observed cold duration. Those
subjects not receiving treatment most frequently experienced symptom duration at
11 days compared with 5 days when lozenges were administered, a reduction of 6
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.
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 United States Food and Drug
Administration ("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. Because Cold-Eeze(R) has been clinically proven, it offers a
significant advantage over other suppliers in the over-the-counter cold remedy
market. Management of the Company believes there should be no 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.
HEALTH AND WELLNESS
Darius, through Innerlight Inc., its wholly owned subsidiary, is a direct
selling company specializing in the development and distribution of proprietary
health and wellness products primarily within the United States with the
commencement of international business activity during the second quarter of
2003. The Company develops and markets products that are suitable for
distribution within a direct selling business environment. The products marketed
and sold by Darius are herbal vitamins and dietary supplements for the human
condition.
Within the framework of a direct selling business environment, Darius sells its
products through a network of independent representatives, who are not employees
of Darius. These purchases by the independent representatives may be used for
personal consumption or used for resale to consumers. The independent
representatives receive compensation for sales achieved by means of a commission
structure or compensation plan based on their product sales and those of
independent representatives within their down-line network. Independent
representatives pay for product prior to shipment therefore accounts receivable
balances at any time are negligible.
-7-
The continued success of this segment is dependent, among other things, on the
Company's ability:
o To maintain existing independent representatives and recruit additional
successful independent representatives. Additionally, the loss of key
high-level distributors could negatively impact future growth and revenues;
o To continue to develop and make available new and desirable products at an
acceptable cost;
o To maintain safe and reliable multiple-location sources for product and
materials;
o To maintain a reliable information technology system and internet
capability. The Company has expended significant resources on systems
enhancements in the past and will continue to do so to ensure prompt
customer response times, business continuity and reliable reporting
capabilities. Any interruption to computer systems for an extended period
of time could be harmful to the business;
o To execute conformity with various federal, state and local regulatory
agencies both within the United States and abroad. With the commencement of
international business, difficulties with foreign regulatory requirements
could have a significant negative impact on future growth. Any inquiries
from government authorities relating to our business and compliance with
laws and regulations could be harmful to the Company;
o To compete with larger more mature organizations operating within the same
market and to remain competitive in terms of product relevance and business
opportunity;
o To successfully implement methods for progressing the direct selling
philosophy internationally; and
o To plan strategically for general economic conditions.
Any or all of the above risks could result in significant reductions in revenues
and profitability of the Health and Wellness segment.
ETHICAL PHARMACEUTICAL
Pharma's current activity is the development of naturally-derived prescription
drugs with the goal to improve the quality of life and health of those in need
through scientific research and development. Research and development will focus
on the identification, isolation and direct use of active medicinal substances.
One aspect of Pharma's research will focus on the combination of isolated active
constituents and whole plant components. The search for new natural sources of
medicinal substances will focus not only on world plants, fungi, and other
natural substances, but an intense investigation into traditional medicinals and
historic therapeutics.
Pharma is currently undergoing research and development activity in compliance
with regulatory requirements. During the course of its research and development,
certain formulae have led to three patents and several patent applications,
which the Patent Office of the United States Commerce Department has confirmed
the assignment to the Company. The Company, through Pharma, is at the initial
stages of what may be a lengthy process to develop these patents and patent
applications into commercial products.
The pre-clinical development, clinical trials, product manufacturing and
marketing of 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 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.
Since the majority of the Company's formulations' components are derived from
natural sources or are GRAS listed (Generally Regarded As Safe) as identified in
the Code of Federal Regulations, FDA approval could potentially be obtained
earlier than what is normally required in the FDA process.
-8-
The areas of focus are:
o A Patent (No. 6,555,573 B2) entitled "Method and Composition for the
Topical Treatment of Diabetic Neuropathy." The patent extends through
March 27, 2021.
o A Patent (No. 6,592,896 B2) 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. The patent extends through August 6, 2021.
o A Patent (No. 6,596,313 B2) entitled "Nutritional Supplement and
Method of Using It" for a product to relieve sialorrhea (drooling) in
patients suffering from Amyotrophic Lateral Sclerosis (ALS), otherwise
known as Lou Gehrig's Disease. The patent extends through April 15,
2022.
o A Patent Application entitled "Composition and Method for Prevention,
Reduction and Treatment of Radiation Dermatitis" was filed with the
Patent Office of the United States Commerce Department. In January
2004, the Company announced that it received a "Notice of Allowance"
from the United States Patent and Trademark Office following the
patent application. A "Notice of Allowance" is sent by the Patent and
Trademark Office "if, on examination, it appears that an application
is entitled to a patent under the law"
o 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.
In April 2002, the Company initiated a Phase II Proof of Concept Study in France
for treatment of diabetic neuropathy, which was concluded in 2003. In April 2003
the Company announced that an independently monitored analysis of the Phase II
Proof of Concept Study concluded that subjects using this formulation had 67% of
their symptoms improve, suggesting efficacy. In March 2004, the Company
announced that it had completed its first meeting at the United States Food and
Drug Administration ("FDA") prior to submitting the Company's Investigational
New Drug ("IND") application for the relief of symptoms of diabetic symmetrical
peripheral neuropathy. The FDA's pre-IND meeting programs are designed to
provide sponsors with advance guidance and input on drug development programs.
In July 2002, the Company announced the commencement of testing on a new
formulation being developed 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.
In January 2004, a broad anti-viral compound was determined to be effective in
in-vitro and in-vivo studies for applications such as Influenza A&B, SARS, and
Herpes Simplex 1 and since this Sialorrhea formulation is a derivative compound
of the anti-viral formulation, ongoing testing for this Sialorrhea compound is
being reconsidered and probably will be discontinued.
In September 2003, the Company announced its intention to file for permission to
study its patent pending potential treatment for psoriasis and other skin
disorders. Continued testing will therefore have to be conducted under an IND
application following positive preliminary results.
In December 2003, the Company announced positive test results of a preliminary
independent in vitro study indicating that a test compound of the Company
previously tested on the Influenza virus showed "significant virucidal activity
against a strain of the Severe Acute Respiratory Syndrome (SARS) virus." In
January 2004 the Company announced that it intends to conduct two further
studies. The first study is intended to repeat the previously announced results,
which demonstrated the compound to be 100 percent effective in preventing
non-infected ferrets in close proximity to an infected ferret from becoming
infected with the influenza A virus. The second study is a dose ranging study on
the test compound. Upon dosage determination and confirmation results from this
forthcoming animal model study, a human proof of concept study using a virus
challenge with Influenza A virus in a quarantine unit can be the next step. In
January 2004 the Company also reported that its compound has shown virucidal and
virustatic activity against the strain 3B of the Human Immunodeficiency Virus
Type 1 (HIV-1) in an in-vitro study. Based on these results, the Company intends
to proceed with a confirmatory in-vitro study with additional dilution levels to
fully explore the capabilities of the compound. Should the new study confirm the
previous results, animal model studies will be considered as a next step in the
developmental process.
In April 2004, the Company announced the results of a preliminary, pre-clinical
animal study, which measured the effect of its proprietary, patent applied for
formulation against the effects of ionizing (nuclear) radiation. This study
determined that parenteral (injection) administration of the study compound was
protective against the effects of a lethal, whole body ionizing radiation dose,
in a mouse model. This compound is being investigated to potentially reduce the
effects of radiation on humans.
-9-
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The Consolidated Financial Statements include the accounts of the Company and
its wholly owned subsidiaries. All inter-company transactions and balances have
been eliminated. Effective March 31, 2004, the financial statements include
consolidated variable interest entities ("VIEs") of which the Company is the
primary beneficiary (See Note 7).
These financial statements have been prepared by management without audit and
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2003. In the opinion of management, all adjustments necessary
for a fair presentation of the consolidated financial position, consolidated
results of operations and consolidated cash flows, for the periods indicated,
have been made. Prior period amounts have been reclassified to conform with this
presentation.
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 included assets totaling $536,000 and liabilities assumed
approximating $416,000. Also required were payments totaling $540,000 for the
use of product formulations; consulting; confidentiality and a non-compete
agreement. To maintain the continuous application of these arrangements, fees of
5% on net sales collected must be paid to the former owners and are expensed as
incurred. The operating results have been included in the Company's Consolidated
Statements of Operations from the date of acquisition. 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. Subsequent to 2001, the account
will only be reduced if the carrying amount becomes impaired.
During 2000, the Company acquired a 60% ownership position in CPNP. In December
2002, the Board of Directors of the Company approved a plan to sell CPNP. On
January 22, 2003, the Board of Directors of the Company completed the sale of
the Company's 60% equity interest in CPNP to Suncoast. Results of CPNP prior to
January 22, 2003 are presented as discontinued operations in the Consolidated
Statements of Operations. See discussion in Notes to Financial Statements, Note
3 - Discontinued Operations.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities 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 included raw material amounts of approximately $485,000 and $729,000
at March 31, 2004 and December 31, 2003, respectively.
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.
-10-
GOODWILL
Goodwill is not amortized but reviewed for impairment on an annual basis or when
events and circumstances indicate the carrying amount may not be recoverable.
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 four 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 a
significant percentage of sales volume, representing 18% and 23% of sales volume
for the three months periods ended March 31, 2004 and 2003, respectively.
Customers comprising the five largest accounts receivable balances represented
46% and 34% of total trade receivable balances at March 31, 2004 and December
31, 2003, respectively. During the three month period ended March 31, 2004, 92%
of the Company's net sales originated in the United States.
The Company uses separate suppliers to produce Cold-Eeze(R) in lozenge, nasal
spray and sugar-free tablet form. The Company's revenues are currently generated
from the sale of Cold Remedy products and the Health and Wellness segment. The
lozenge form of Cold-Eeze(R) is manufactured by a third party manufacturer a
significant amount of whose revenues are from 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 materials used in the production of the products are available from numerous
sources. For the Cold-Eeze(R) lozenge product they are currently 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.
Darius' product for resale is sourced from several suppliers. In the event that
such sources were no longer in a position to supply Darius with product, other
vendors have been identified as reliable alternatives with minimal adverse loss
of business.
LONG-LIVED ASSETS
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 based on the expected cash flows compared
to the related asset value, an impairment loss is recognized in the Statement of
Operations.
REVENUE RECOGNITION
Sales are recognized at the time ownership is transferred to the customer, which
for the Cold Remedy segment is the time the shipment is received by the customer
and for the Health and Wellness segment, when the product is shipped to the
customer. Sales returns and allowances are provided for in the period that the
related sales are recorded. Provisions for these reserves are based on
historical experience.
-11-
SHIPPING AND HANDLING
Product sales relating to the Health and Wellness 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 cost
of sales.
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. Stock options granted to employees vest immediately.
The Company applies Accounting Principles Board Opinion No. 25 ("APB 25") in
accounting for its grants of options to employees. Under the intrinsic value
method prescribed by APB 25, no compensation expense relating to grants to
employees has been recorded by the Company in periods reported. Compensation
expense for awards made during any periods presented would be determined under
the fair value method of Statement of Financial Accounting Standards (SFAS) No.
123, "Accounting for Stock-Based Compensation."
Expense relating to warrants granted to non-employees have been appropriately
recorded, which have been 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.
No stock options were granted to employees in the three months periods ended
March 31, 2004 or March 31, 2003. During the first quarter of 2003 a total of
250,000 warrants were granted to Forrester Financial as part of an Amended and
Restated Warrant Agreement, relating to consulting services. These warrants
expired in March 2004 without being exercised, see Note 6, Transactions
Affecting Stockholders' Equity for further information.
ROYALTIES AND COMMISSIONS
The Company includes royalties and founders commissions incurred as cost of
sales for the Cold Remedy segment and in administration expenses for the Health
and Wellness segment based on agreement terms. Independent representative
commissions incurred by the Health and Wellness segment are included in cost of
sales. Commission expense related to independent brokers associated with the
Cold Remedy segment is included in administration expenses.
ADVERTISING
Advertising costs are expensed within the period in which they are utilized.
Advertising expense is comprised of media advertising, presented as part of
sales and marketing expense; co-operative advertising, which is accounted for as
a deduction from sales; and bonus product, which is accounted for as part of
cost of sales. Advertising costs incurred for the three months periods ended
March 31, 2004 and 2003 were $1,209,572 and $1,116,019, respectively. Included
in prepaid expenses and other current assets was $28,125 and $68,000 at March
31, 2004 and December 31, 2003, respectively, relating to prepaid advertising
expenses.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations in the period incurred.
Expenditures for the three months periods ended March 31, 2004 and 2003 were
$947,002 and $646,969, respectively. Principally, research and development costs
are related to Pharma's study activities and costs associated with Cold-Eeze(R).
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 discussion in Notes to Financial Statements, Note 8
- - Income Taxes.
-12-
NOTE 3 - DISCONTINUED OPERATIONS
Effective July 1, 2000, the Company acquired a 60% ownership position of CPNP
and was accounted for by the purchase method of accounting. Accordingly, the
operating results were 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, collateralized by inventory, accounts receivable and all
other assets of CPNP. The net assets of CPNP at the acquisition date principally
consisted of a product license and distribution rights with no recorded value,
inventory and fixed assets of $312,915 and $510,000 of working capital with a
contribution to minority interest of $329,166.
In December 2002, the Board of Directors of the Company approved a plan to sell
CPNP. On January 22, 2003, the Board of Directors of the Company completed the
sale of the Company's 60% equity interest in CPNP to Suncoast. In exchange for
its 60% equity interest in CPNP, the Company received: (i) 750,000 shares of
Suncoast's common stock, which Suncoast has agreed, at its cost and within 60
days from the closing, to register for public resale through an appropriate
registration statement (this registration statement has not been declared
effective by the Securities and Exchange Commission) and (ii) 100,000 shares of
Suncoast's Series A Redeemable Preferred Stock, which bears interest at a rate
of 4.25% per annum and which is redeemable from time to time after March 31,
2003 in such amounts as is equal to 50% of the free cash flow reported by
Suncoast in the immediately preceding quarterly financial statements divided by
the redemption price of $10.00 per share. The Company owns 19.5% of Suncoast's
issued and outstanding capital stock valued at $79,365, which investment is
accounted for on the cost basis method, representing the Company's share of the
fair value of Suncoast at the time the transaction was recorded, this amount is
included in Other Assets in the Consolidated Balance Sheets. During August 2003,
a registration statement was filed but an effective date has not been
determined. The disposal of CPNP was completed in order to allow the Company to
focus resources on other activities and clinical research and development.
Net Sales for CPNP for the three months ended March 31, 2003 were $59,824 with a
net loss of $54,349.
NOTE 4 - SEGMENT INFORMATION
The basis for presenting segment results is consistent with overall Company
reporting. The Company reports information about its operating segments in
accordance with Financial Accounting Standard Board Statement No. 131,
"Disclosure About Segments of an Enterprise and Related Information," which
establishes standards for reporting information about a company's operating
segments. All consolidating items are included in Corporate & Other.
The Company has divided its operations into three reportable segments as
follows: The Quigley Corporation (Cold Remedy), 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, and Quigley Pharma (Ethical
Pharmaceutical), currently involved in research and development activity to
develop potential pharmaceutical products.
As discussed in Notes to Financial Statements, Note 3 - Discontinued Operations,
the Company disposed of its Sun-care and Skincare segment in January 2003.
Financial information relating to 2004 and 2003 operations, by business segment,
follows:
- --------------------------------------------------------------------------------------------------------------------------------
AS OF AND FOR THE THREE Cold Health and Ethical Corporate and
MONTHS ENDED MARCH 31, 2004 Remedy Wellness Pharmaceutical Other Total
- --------------------------------------------------------------------------------------------------------------------------------
Net Sales
Customers $4,113,592 $5,492,025 - - $9,605,617
Segment operating profit (loss) (301,756) 436,780 ($935,348) - (800,324)
Total Assets $23,035,977 $3,480,270 - ($1,930,943) $24,585,304
- --------------------------------------------------------------------------------------------------------------------------------
FOR THRE THREE MONTHS ENDED Cold Health and Ethical Corporate and
MARCH 31, 2003 Remedy Wellness Pharmaceutical Other Total
- --------------------------------------------------------------------------------------------------------------------------------
Net Sales
Customers $3,258,267 $4,932,825 - - $8,191,092
Segment operating profit (loss) (1,019,085) 663,253 ($566,277) - (922,109)
TOTAL ASSETS AT DECEMBER 31,
2003 $24,892,338 $3,881,970 - ($2,504,549) $26,269,759
-13-
NOTE 5 - OTHER CURRENT LIABILITIES
Included in other current liabilities are $750,310 and $458,359 related to
accrued compensation at March 31, 2004 and December 31, 2003, respectively.
NOTE 6 - TRANSACTIONS AFFECTING STOCKHOLDERS' EQUITY
On September 8, 1998, the Company's Board of Directors declared a dividend
distribution of Common Stock Purchase Rights (the "Rights"), thereby creating a
Stockholder Rights Plan (the "Plan"). The dividend was payable to the
stockholders of record on September 25, 1998. Each Right entitles the
stockholder of record to purchase from the Company that number of Common Shares
having a combined market value equal to two times the Rights exercise price of
$45. The Rights are not exercisable until the distribution date, which will be
the earlier of a public announcement that a person or group of affiliated or
associated persons has acquired 15% or more of the outstanding common shares, or
the announcement of an intention to make a tender or exchange offer resulting in
the ownership of 15% or more of the outstanding common shares by a similarly
constituted party. The dividend has the effect of giving the stockholder a 50%
discount on the share's current market value for exercising such right. In the
event of a cashless exercise of the Right, and the acquirer has acquired less
than a 50% beneficial ownership of the Company, a stockholder may exchange one
Right for one common share of the Company. The Final Expiration of the Plan is
September 25, 2008.
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 until
March 31, 2004, 4,159,191 shares have been repurchased at a cost of $24,042,801
or an average cost of $5.78 per share. No shares were repurchased during 2004 to
date or 2003.
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 as of
March 7, 2002 for 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 Company's financial statements reflect a $1,125,000 non-cash charge
in 2002 resulting from the granting and exercising of these warrants. The
warrants have three exercise prices, 500,000 warrants exercisable at $6.50 per
share, which were exercised in May 2002 resulting in cash to the Company in the
amount of $3,250,000, 250,000 warrants exercisable at $8.50 per share, and
250,000 warrants exercisable at $11.50 per share. The warrants were initially
exercisable until the earlier to occur of (i) March 6, 2003 or (ii) the
termination of the Consulting Agreement.
On December 7, 2002, Forrester commenced an action by a Writ of Summons filed in
the Court of Common Pleas of Bucks County, PA against The Quigley Corporation.
No Complaint was filed detailing the claim of Forrester against The Quigley
Corporation. This action was terminated with prejudice by Forrester as part of
its Amended and Restated Warrant Agreement (the "Amended Agreement) with The
Quigley Corporation on February 2, 2003 whereby certain warrants that were
scheduled to expire on March 7, 2003 were extended to March 7, 2004 (warrants to
purchase 250,000 shares at $8.50; warrants to purchase 250,000 shares at $11.50)
and are no longer cancelable by the Company. As an additional part of this
agreement, Forrester was granted warrants to purchase 250,000 shares at any time
until March 7, 2004 at the price of $9.50 a share. As a result of this Amended
Agreement the Company recorded a further non-cash charge of $975,000 in the
fourth quarter of 2002, amounting to a total expense of $2,100,000, classified
as administrative expense in the Consolidated Statement of Operations, relating
to this warrant agreement in 2002. Additionally, $975,000 was reflected in the
Consolidated Balance Sheet at December 31, 2002, which represented the value of
the unexercised warrants and is included in accrued liabilities. On March 7,
2003 this liability was converted to equity. All warrants subject to the Amended
Agreement expired unexercised on March 7, 2004.
-14-
NOTE 7 - VARIABLE INTEREST ENTITY
In December, 2003 the Financial Accounting Standards Board (FASB or the "Board")
issued FASB Interpretation No. 46 (revised December 2003), CONSOLIDATION OF
VARIABLE INTEREST ENTITIES (FIN 46R), to address certain implementation issues.
FIN 46R varies significantly from FASB Interpretation No. 46, CONSOLIDATION OF
VARIABLE INTEREST ENTITIES ("VIE") (FIN 46), which it supersedes. FIN 46R
requires the application of either FIN 46 or FIN 46R by "Public Entities" to all
Special Purpose Entities ("SPEs") at the end of the first interim or annual
reporting period ending after December 15, 2003. FIN 46R is applicable to all
non-SPEs created prior to February 1, 2003 by Public Entities that are not small
business issuers at the end of the first interim or annual reporting period
ending after March 15, 2004.
Effective March 31, 2004, the Company adopted FIN 46R for VIE's formed prior to
February 1, 2003. As a result of consolidating the VIE of which the Company is
the primary beneficiary, in the first quarter of 2004 the Company recognized a
minority interest of approximately $58,000 in the Consolidated Balance Sheet at
March 31, 2004 which represents the difference between the fair value of the
assets and the liabilities recorded upon the consolidation of the VIE.
The liabilities recognized as a result of consolidating the VIE do not represent
additional claims on the Company's general assets, rather, they represent claims
against the specific assets of the consolidated VIE. Conversely, assets
recognized as a result of consolidating this VIE do not represent additional
assets that could be used to satisfy claims against the Company's general
assets. Reflected in the Company's March 31, 2004 balance sheet are $81,000 of
VIE assets, representing all of the assets of the VIE. The VIE assists the
Company in acquiring licenses and research and development activities in certain
countries.
NOTE 8 - 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 prior
years. Certain tax benefits for option and warrant exercises totaling $1,880,390
are 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 $47,520,526 attributed to options, warrants and
unrestricted stock deductions from taxable income. The net operating loss
carry-forwards arising from the option, warrant and stock activities approximate
$14.3 million for federal purposes, of which $3.5 million will expire in 2019,
$4.0 million in 2020, $6.8 million in 2022 and $14.5 million for state purposes,
of which $9.7 million will expire in 2009, $3.0 million in 2010, and $1.8
million in 2012. 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 9 - 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 shared in the earnings of the entity. Diluted EPS also
utilizes the treasury stock method which prescribes a theoretical buy back of
shares from the theoretical proceeds of all options and warrants outstanding
during the period. Since there is a large number of options and warrants
outstanding, fluctuations in the actual market price can have a variety of
results for each period presented.
A reconciliation of the applicable numerators and denominators of the income
statement periods presented, as reflects the results of continuing operations,
is as follows (millions, except earnings per share amounts):
Three Months Ended Three Months Ended
March 31, 2004 March 31, 2003
------------------------------------------------------------------
Loss Shares EPS Loss Shares EPS
------------------------------------------------------------------
Basic EPS ($0.8) 11.5 ($0.07) ($0.9) 11.5 ($0.08)
Dilutives:
Options/Warrants - - - -
------------------------------------------------------------------
Diluted EPS ($0.8) 11.5 ($0.07) ($0.9) 11.5 ($0.08)
==================================================================
Options and warrants outstanding at March 31, 2004 and 2003 were 3,837,500 and
4,512,500, respectively. They were not included in the computation of diluted
earnings for periods reporting losses because the effect would be anti-dilutive.
-15-
NOTE 10 - RELATED PARTY TRANSACTIONS
An agreement between the Company and the founders Mr. Guy J. Quigley and Mr.
Charles A. Phillips, both officers, directors and stockholders of the Company,
was entered into on June 1, 1995. The founders, in consideration of the
acquisition of the Cold-Eeze(R) cold therapy product, are to share a total
commission of five percent (5%), on sales collected, less certain deductions,
until the termination of this agreement on May 31, 2005. The amounts paid or
payable for the three months periods ended March 31, 2004 and 2003 under such
founder's commission agreements were $165,104 and $152,724, respectively, such
expense is included in the cost of sales classification in the Consolidated
Statements of Operations. Amounts payable under such agreements at March 31,
2004 and December 31, 2003 were $147,583 and $456,748, respectively, and are
represented in the accrued royalties and sales commission classification in the
Consolidated Balance Sheets.
The Company is in the process of acquiring licenses in certain countries through
related party entities whose stockholders include Mr. Gary Quigley, a relative
of the Company's Chief Executive Officer. Fees amounting to $109,520 and
$92,250, respectively, have been paid to a related entity during the three
months periods ended March 31, 2004 and 2003, respectively, to assist with the
regulatory aspects of obtaining such licenses and are included in the research
and development expense classification in the Consolidated Statements of
Operations.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
Certain operating leases for office and warehouse space maintained by the
Company resulted in rent expense for the three months periods ended March 31,
2004 and 2003 of $79,819 and $59,419, respectively. The Company has approximate
future obligations over the next five fiscal years as follows:
Research and Property
Year Development Leases Total
-------------------------------------------------------------
2004 $1,400,000 $179,000 $1,579,000
2005 - 203,000 203,000
2006 - 98,000 98,000
2007 - 57,000 57,000
2008 - - -
2009 - - -
-------------------------------------------------------------
Total $1,400,000 $537,000 $1,937,000
-------------------------------------------------------------
Additional advertising and research and development costs are expected to be
incurred for the remainder of 2004 and during 2005.
The Company also maintains a separate representation and distribution agreement
relating to the development of the zinc gluconate glycine product formulation.
In return for exclusive distribution rights, the Company must pay the developer
a 3% royalty and a 2% consulting fee based on sales collected, less certain
deductions, throughout the term of this agreement, expiring in 2007.
Additionally, a founder's commission totaling 5%, on sales collected, less
certain deductions, is paid to two of the officers, who are also directors and
stockholders of the Company, and whose agreements expire in 2005. The expenses
for the respective periods relating to such agreements amounted to $330,209 and
$305,531 for the three months periods ended March 31, 2004 and 2003,
respectively. Amounts accrued for these expenses at March 31, 2004 and December
31, 2003 were $295,875 and $915,109, respectively.
The Company has an agreement with the former owners of the Utah based direct
marketing and selling company, whereby they receive payments, currently totaling
5% of net sales collected, for use of product formulations, consulting,
confidentiality and non-compete agreements. Amounts paid or payable under such
agreement during the three months periods ended March 31, 2004 and 2003 were
$217,638 and $212,086, respectively. Amounts payable under such agreement at
March 31, 2004 and December 31, 2003 were $78,104 and $68,388, respectively.
In August 2003, the Company entered into a licensing agreement with a patent
holder relating to the utilization of a nasal spray product in the treatment of
symptoms of the common cold. The Company agreed to pay the patent holder a two
percent royalty on net sales of nasal spray products, less certain deductions,
throughout the term of this agreement, expiring no later than April 2014.
Amounts paid or payable under such agreement during the three month period ended
March 31, 2004 were $3,137, with zero in the 2003 comparable period. Amounts
accrued or payable relating to this agreement at March 31, 2004 and December 31,
2003 were $4,750 and $1,613, respectively.
-16-
PAIGE D. DAVISON VS. THE QUIGLEY CORPORATION
On February 26, 2004, the plaintiff filed an action against The Quigley
Corporation (the "Company"), which was not served until April 5, 2004. The
action alleges that the plaintiff suffered certain losses and injuries as a
result of using the Company's nasal spray product. Among the allegations of the
plaintiff are that the nasal spray was defective and unreasonably dangerous,
lacked proper and adequate warnings and/or instructions, and was not fit for the
purposes and uses intended.
The Company has investigated the claims and believes they are without merit. At
the present time the matter is being defended by the Company's liability
insurance carrier.
The Company believes plaintiff's claims are without merit and is vigorously
defending those claims. Based upon the information the Company has at this time,
it believes the action will not have a material impact to the Company. However,
at this time no prediction as to the outcome can be made.
NOTE 12 - RECENT ACCOUNTING PRONOUNCEMENTS
FIN 46R, CONSOLIDATION OF VARIABLE INTEREST ENTITIES -- AN INTERPRETATION OF ARB
51 (REVISED DECEMBER 2003)
In December, 2003 the Financial Accounting Standards Board (FASB or the "Board")
issued FASB Interpretation No. 46 (revised December 2003), CONSOLIDATION OF
VARIABLE INTEREST ENTITIES (FIN 46R), to address certain implementation issues.
FIN 46R varies significantly from FASB Interpretation No. 46, CONSOLIDATION OF
VARIABLE INTEREST ENTITIES (FIN 46), which it supersedes. FIN 46R requires the
application of either FIN 46 or FIN 46R by "Public Entities" to all Special
Purpose Entities ("SPEs") at the end of the first interim or annual reporting
period ending after December 15, 2003. FIN 46R is applicable to all non-SPEs
created prior to February 1, 2003 by Public Entities that are not small business
issuers at the end of the first interim or annual reporting period ending after
March 15, 2004. The Company has determined that Scandasystems, a related party
(See note 7), qualifies as a variable interest entity and the Company has
consolidated Scandasystems beginning with the quarter ended March 31, 2004. Due
to the fact that the Company has no long-term contractual commitments or
guarantees, our maximum exposure to loss is insignificant.
-17-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
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.
CERTAIN RISK FACTORS
The Company makes no representation that the FDA or any other regulatory agency
will grant an Investigational New Drug ("IND") or take any other action to allow
its formulations to be studied or marketed. Furthermore, no claim is made that
potential medicine discussed herein is safe, effective, or approved by the FDA.
Additionally, data that demonstrates activity or effectiveness in animals or in
vitro tests do not necessarily mean the formula test compound, referenced herein
will be effective in humans. Safety and effectiveness in humans will have to be
demonstrated by means of adequate and well controlled clinical studies before
the clinical significance of the formula test compound is known. Readers should
carefully review the risk factors described in other sections of the filing as
well as in other documents the Company files from time to time with the
Securities and Exchange Commission.
OVERVIEW
The Company, headquartered in Doylestown, Pennsylvania, is a leading marketer
and distributor of a diversified range of health and homeopathic products and is
also involved in the research and development of potential prescription
products.
The Company's business interests comprise three segments, being Cold Remedy,
Health and Wellness and Ethical Pharmaceutical.
The Cold-Eeze(R) product continues to be the primary product of the Cold Remedy
segment and is available in lozenge, sugar-free tablet and nasal spray form. The
Cold-Eeze(R) Nasal Spray and the Kidz-Eeze(TM) Sore Throat products were both
launched in the third quarter of 2003 in preparation for the cold season. The
efficacy of the Cold-Eeze(R) product was established following the publication
of the second double blind study in July 1996. A 2002 study also found that the
use of Cold-Eeze(R) to treat a cold statistically reduced the use of antibiotics
for respiratory illnesses by 92% when Cold-Eeze(R) is administered as a first
line treatment approach to the common cold. In May 2003, the Company announced
the findings of a prospective study, conducted at the Heritage School facility
in Provo, Utah, in which 178 children ages 12 to 18 years were given
Cold-Eeze(R) lozenges both symptomatically and prophylactically from October 5,
2001 to May 30, 2002. The study found a 54% reduction in the most frequently
observed cold duration. Those subjects not receiving treatment most frequently
experienced symptom duration at 11 days compared with 5 days when lozenges were
administered, a reduction of 6 days.
Cold-Eeze(R) is distributed through numerous independent, chain drug and
discount stores throughout the United States. The Company reports increased cold
remedy net sales in the first quarter of 2004 compared to the same period 2003
by 26.3%. This increase in net sales may be attributable to continued sales
momentum initiated by strong sales during the fourth quarter 2003. The strong
sales performance follows increased advertising during the 2003/2004 cold season
involving strategic media advertising, continued product support at retail by
way of co-operative advertising programs and bonus product promotions that
benefit the consumer. The Company continues to use the services of an outsourced
nationwide brokerage network under the direction of the Company's internal sales
and marketing team. In addition the Company launched the Cold-EEZE(R) Cold
Remedy Nasal Spray and Kidz-EEZE(TM) Sore Throat Pops during the third quarter
2003 providing a benefit to the 2004 period as compared to the corresponding
2003 period.
Net sales relating to Darius, the Health and Wellness segment, increased in the
first quarter of 2004 compared to 2003 by 11.3%. This improvement was primarily
due to increases in the number of independent representatives and the
-18-
development of international markets with this market providing increased net
sales approximating $740,000 in 2004 over the 2003 comparable period. The Health
and Wellness segment has been effective in balancing the seasonality of the Cold
Remedy segment and producing a more consistent revenue source throughout the
fiscal year.
The establishment of an ethical pharmaceutical subsidiary, Pharma, 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. During the course of 2003, the Company was assigned three
patents and filed three patent applications, two with the Patent Office of the
United States Commerce Department and one within the European Community.
Research and development costs relating to projects being undertaken by Pharma
increased in the first quarter 2004 by $298,559 over the prior year comparable
period as a result of increased study activity in various areas of interest.
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. The distribution of product relating to the
direct selling segment is by means of independent representatives who are not
employees of the Company.
Manufacturing for all the Company's products is accomplished by outside sources.
The lozenge form is manufactured by a third party manufacturer, a significant
part of this manufacturer's revenues are from the Company, with the sugar-free,
nasal spray, sore throat and health and wellness products being produced by
different manufacturers.
During the first three months of 2004, the Company continued the process of the
registration of the Cold-Eeze(R) products in the United Kingdom as a pharmacy
drug and incurred approximately $109,520 in related expenses and is included in
the research and development expense classification.
Future revenues, costs, margins, and profits will continue to be influenced by
the Company's ability to maintain its manufacturing availability and capacity
together with its marketing and distribution capabilities and requirements
associated with the development of Pharma's potential prescription drugs in
order to continue to compete on a national and international level. The
continued expansion of Darius is dependent on the Company retaining existing
independent representatives and recruiting additional representatives both
internationally and within the United States; continued conformity with
government regulations; a reliable information technology system capable of
supporting continued growth and continued reliable sources for product and
materials to satisfy consumer demand.
During 2000, the Company acquired a 60% ownership position in CPNP. In December
2002, the Board of Directors of the Company approved a plan to sell CPNP. On
January 22, 2003, the Company completed the sale of the Company's 60% equity
interest in CPNP to Suncoast. Results of CPNP prior to January 22, 2003 are
presented as discontinued operations in the Consolidated Statements of
Operations.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
FIN 46R, CONSOLIDATION OF VARIABLE INTEREST ENTITIES -- AN INTERPRETATION OF ARB
51 (REVISED DECEMBER 2003)
In December, 2003 the Financial Accounting Standards Board (FASB or the "Board")
issued FASB Interpretation No. 46 (revised December 2003), CONSOLIDATION OF
VARIABLE INTEREST ENTITIES (FIN 46R), to address certain implementation issues.
FIN 46R varies significantly from FASB Interpretation No. 46, CONSOLIDATION OF
VARIABLE INTEREST ENTITIES (FIN 46), which it supersedes. FIN 46R requires the
application of either FIN 46 or FIN 46R by "Public Entities" to all Special
Purpose Entities ("SPEs") at the end of the first interim or annual reporting
period ending after December 15, 2003. FIN 46R is applicable to all non-SPEs
created prior to February 1, 2003 by Public Entities that are not small business
issuers at the end of the first interim or annual reporting period ending after
March 15, 2004. The Company has determined that Scandasystems, a related party
(See note 7), qualifies as a variable interest entity and the Company has
consolidated Scandasystems beginning with the quarter ended March 31, 2004. Due
to the fact that the Company has no long-term contractual commitments or
guarantees, our maximum exposure to loss is insignificant.
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CRITICAL 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 and is also involved in the research and
development of potential prescription products. Certain key accounting policies
that may affect the results of the Company are the timing of revenue recognition
and sales incentives (including coupons, rebates, co-operative advertising and
discounts); the classification of advertising expenses; and the fact that all
research and development costs are expensed as incurred. Notes to Financial
Statements, Note 1, Organization and Business, describes the Company's other
significant accounting policies.
REVENUE RECOGNITION
Cold Remedy sales are recognized at the time ownership and risk of loss is
transferred to the customer, which is primarily the time the shipment is
received by the customer. In the case of the Health and Wellness segment sales
are recognized at the time goods are shipped to the customer. Sales returns and
allowances are provided for in the period that the related sales are recorded.
Provisions for these reserves are based on historical experience.
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 bonus product, which is accounted for as part of cost
of sales. The level of advertising expense to be incurred is determined each
period to coincide with management's sales and marketing strategies. Advertising
costs incurred for the three months periods ended March 31, 2004 and 2003 were
$1,209,572 and $1,116,019, respectively. This expense item increased in the 2004
three-month reporting period due to strategic media advertising in addition to
other trade related methods of advertising, necessary to promote and support the
Cold-Eeze(R) product. Included in prepaid expenses and other current assets was
$28,125 and $68,000 at March 31, 2004 and December 31, 2003, respectively,
relating to prepaid advertising expenses.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations in the year incurred.
Expenditures for the three months periods ended March 31, 2004 and 2003 were
$947,002 and $646,969, respectively. Principally, research and development is
part of the product research costs related to Pharma and study costs associated
with Cold-Eeze(R). Expenditure for 2003 also included study costs relating to
Cold-EEZE(R) Cold Remedy Nasal Spray. Pharma is currently involved in research
activity that is expected to increase significantly over time as product
research and testing progresses. The Company is at the initial stages of what
may be a lengthy process to develop potential commercial prescription products.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2004 COMPARED WITH SAME PERIOD 2003
Net sales for the three months period ended March 31, 2004 were $9,605,617,
reflecting an increase of 17.3% over the comparable three months period ended
March 31, 2003 net sales of $8,191,092. The Cold Remedy segment reported net
sales in 2004 of $4,113,592, an increase of $855,325 or 26.3% over the
comparable 2003 period of $3,258,267; the Health and Wellness segment reported
net sales in 2004 of $5,492,025, an increase of $559,200 or 11.3% over the
comparable 2003 period net sales of $4,932,825.
The increased Cold Remedy segment sales in 2004 may be attributable to the sales
momentum generated during the strong sales performance of the fourth quarter of
2003. Management has continued the strategy of strong support for the
Cold-Eeze(R) product through strategic media advertising, co-operative
advertising with customers and bonus programs that benefit the consumer.
Additionally, the net sales results of the Cold Remedy segment in 2004 have been
supported by sales activity of the Cold-EEZE(R) Nasal Spray and the Kidz-EEZE
Sore Throat products both of which were launched during the third quarter of
2003.
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The increased net sales reported by the Health and Wellness segment in 2004 may
be attributable to increasing international net sales contributing approximately
$762,000 during the first quarter of 2004 compared to approximately $24,000 for
the 2003 comparable period.
Cost of sales as a percentage of net sales for the three months ended March 31,
2004 was 52.9% compared to 54.9% for the comparable 2003 period. The decrease in
the percentage of 2% in the 2004 period is due to: the absence of a royalty cost
associated with the sore throat product and a reduced royalty cost relating to
the nasal spray product, as both of these products were launched in the third
quarter of 2003 resulting in a benefit to the 2004 margin; the 2004 period
included reduced costs relating to product bonus programs. The 2004 cost of
sales percentage of the Health and Wellness segment was reduced as a result of
variations in the payout percentage to independent representatives due to
ongoing marketing and promotional initiatives, along with increased product cost
due to product mix and the impact of international sales activity.
Sales and marketing expense for the three months period ended March 31, 2004 was
$1,623,066, an increase of $95,536 over the comparable 2003 period amount of
$1,527,530. The increase between the periods was primarily due to increased
media advertising related to the Cold Remedy segment of $53,228 along with
increased meeting and conventions costs of the Health and Wellness segment of
$26,851 during the 2004 three-month period.
General and administration costs for the three months period ended March 31,
2004 was $2,750,499 compared to $2,441,720 during the 2003 period, an increase
of $308,779 between the periods. The increase in 2004 was primarily due to
increased wages and salaries of $172,463, increased legal costs of $70,173, and
increased insurance costs of $36,000.
Research and development costs during the three months ended March 31, 2004 were
$947,002 compared to $646,969 during the 2003 comparable period reflecting an
increase in 2004 of $300,033. The increase in Pharma study costs between the
periods was $298,559 thereby being the primary reason for the increase.
During 2004, the Company's major operating expenses of salaries, consultancy,
Pharma study costs, brokerage commissions, promotion, advertising, and legal
costs accounted for approximately $4,172,205 (78.4%) of the total operating
expenses of $5,320,567, an increase of 18.3% over the 2003 amount of $3,526,686
(76.4%) of total operating expenses of $4,616,219. The selling, general and
administrative expenses related to Health and Wellness for 2004 and 2003 were
$1,350,613 and $985,498, respectively, reflecting increased expenditure in 2004
necessary to support the growth of this segment.
Total assets of the Company at March 31, 2004 and December 31, 2003 were
$24,585,304 and $26,269,759, respectively. Working capital decreased by $682,650
to $17,574,704 at March 31, 2004. The primary influences on working capital
during the first quarter of 2004 were: the increase in cash balances of
$4,194,513, which was assisted by effective account collections as reflected in
account receivable balances decreasing by $5,784,308; accrued advertising and
royalties and commissions balances decreased by a combined amount of $1,257,038
due to the slow down in sales activity as a result of the conclusion of the cold
season.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $17,574,704 and $18,257,354 at March 31, 2004
and December 31, 2003, respectively. Changes in working capital overall have
been primarily due to the following items: cash balances increased by
$4,194,513; accounts receivable decreased by $5,784,308 due to seasonal
fluctuations; accrued advertising decreased by $507,928 as a result of the
seasonality of the cold remedy products and related co-operative advertising
activity; royalties and sales commissions liabilities decreased by $749,110
related to the cold-season cycle and the effect of such seasonality on account
receivables; and other current liabilities increased by $135,798. Total cash
balances at March 31, 2004 were $15,586,602 compared to $11,392,089 at December
31, 2003, the increase in cash was due to the movements in working capital.
Management believes that its revised strategy to establish Cold-Eeze(R) as a
recognized brand name, its broader range of products, its diversified
distribution methods as it relates to the Health and Wellness business segment,
adequate manufacturing capacity, 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 and its subsidiaries may in the short and long term
raise capital through the issuance of equity securities to finance anticipated
growth.
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Management is not aware of any trends, events or uncertainties that have or are
reasonably likely to have a material negative impact upon the Company's (a)
short-term or long-term liquidity, or (b) net sales, revenues or income from
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.
Management believes that cash generated from operations along with its current
cash balances will be sufficient to finance working capital and capital
expenditure requirements for at least the next twelve months.
OFF-BALANCE SHEET ARRANGEMENTS
It is not the Company's usual business practice to enter into off-balance sheet
arrangements such as guarantees on loans and financial commitments,
indemnification arrangements, and retained interests in asset transferred to an
unconsolidated entity for securitization purposes. Consequently, the Company has
no off-balance sheet arrangements that have, or is reasonably likely to have, a
material current or future effect on its financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources.
CAPITAL EXPENDITURES
Since the Company's products are manufactured by outside sources, capital
expenditures during the remainder of 2004 are not anticipated to be material.
IMPACT OF INFLATION
The Company is subject to normal inflationary trends and anticipates that any
increased costs should be passed on to its customers.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's operations are not subject to risks of material foreign currency
fluctuations, nor does it use derivative financial instruments in its investment
practices. The Company places its marketable investments in instruments that
meet high credit quality standards. The Company does not expect material losses
with respect to its investment portfolio or exposure to market risks associated
with interest rates. The impact on the Company's results of one percentage point
change in short-term interest rates would not have a material impact on the
Company's future earnings, fair value, or cash flows related to investments in
cash equivalents or interest earning marketable securities.
ITEM 4. CONTROLS AND PROCEDURES
Based on their evaluation, as of the end of the period covered by this report,
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
PAIGE D. DAVISON VS. THE QUIGLEY CORPORATION
On February 26, 2004, the plaintiff filed an action against The Quigley
Corporation (the "Company"), which was not served until April 5, 2004. The
action alleges that the plaintiff suffered certain losses and injuries as a
result of using the Company's nasal spray product. Among the allegations of the
plaintiff are that the nasal spray was defective and unreasonably dangerous,
lacked proper and adequate warnings and/or instructions, and was not fit for the
purposes and uses intended.
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The Company has investigated the claims and believes they are without merit. At
the present time the matter is being defended by the Company's liability
insurance carrier.
The Company believes plaintiff's claims are without merit and is vigorously
defending those claims. Based upon the information the Company has at this time,
it believes the action will not have a material impact to the Company. However,
at this time no prediction as to the outcome can be made.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
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) 31.1 Certification by the Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
(2) 31.2 Certification by the Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
(3) 32.1 Certification by the Chief Executive Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(4) 32.2 Certification by the Chief Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
The Company filed a Form 8-K dated February 26, 2004 announcing its results
for the quarter ended December 31, 2003. The information on Form 8-K was
furnished pursuant to Item 12 of Form 8-K as directed by the U.S. Securities
and Exchange Commission in Release No. 34-47583.
There were no other Current Reports on Form 8-K filed during the quarter
ended March 31, 2004.
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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: May 12, 2004
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