UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended JUNE 30, 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
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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 (I.R.S. Employer Identification No.)
of Incorporation or Organization)
(MAILING ADDRESS: PO Box 1349, Doylestown, PA 18901.)
KELLS BUILDING, 621 SHADY RETREAT ROAD, DOYLESTOWN, PENNSYLVANIA 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. Yes [X] 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.
As of July 26, 2004, there were 11,519,471 shares of common stock outstanding.
TABLE OF CONTENTS
Page No.
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements 3-13
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14-20
Item 3. Quantitative and Qualitative Disclosure About Market Risk 20-21
Item 4. Controls and Procedures 21
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity 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 22
Signatures 23
-2-
THE QUIGLEY CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS June 30, 2004 December 31, 2003
(Unaudited)
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CURRENT ASSETS:
Cash and cash equivalents $ 13,736,331 $ 11,392,089
Accounts receivable (net of doubtful accounts of $289,684 and $808,812) 1,361,981 7,861,883
Inventory 4,294,649 3,752,903
Prepaid expenses and other current assets 611,859 733,597
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TOTAL CURRENT ASSETS 20,004,820 23,740,472
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PROPERTY, PLANT AND EQUIPMENT - NET 2,255,203 2,418,159
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OTHER ASSETS:
Goodwill 30,763 30,763
Other assets 115,217 80,365
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TOTAL OTHER ASSETS 145,980 111,128
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TOTAL ASSETS $ 22,406,003 $ 26,269,759
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 535,856 $ 524,136
Accrued royalties and sales commissions 635,041 1,594,457
Accrued advertising 400,340 1,354,536
Other current liabilities 1,669,515 2,009,989
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TOTAL CURRENT LIABILITIES 3,240,752 5,483,118
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MINORITY INTEREST 58,706 --
COMMITMENTS AND CONTINGENCIES (NOTE 11)
STOCKHOLDERS' EQUITY:
Common stock, $.0005 par value; authorized 50,000,000;
Issued: 16,165,524 and 16,149,079 shares 8,082 8,074
Additional paid-in-capital 34,295,452 34,281,449
Retained earnings 9,991,170 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 19,106,545 20,786,641
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 22,406,003 $ 26,269,759
============ ============
See accompanying notes to consolidated financial statements
-3-
THE QUIGLEY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, 2004 June 30, 2003 June 30, 2004 June 30, 2003
------------- ------------- ------------- -------------
NET SALES $ 6,901,182 $ 7,004,580 $ 16,506,799 $ 15,195,672
------------ ------------ ------------ ------------
COST OF SALES 4,124,300 4,238,991 9,209,673 8,735,973
------------ ------------ ------------ ------------
GROSS PROFIT 2,776,882 2,765,589 7,297,126 6,459,699
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Sales and marketing 834,474 815,824 2,457,540 2,343,354
Administration 2,054,741 2,311,887 4,805,240 4,753,607
Research and development 820,847 722,036 1,767,849 1,369,005
------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSES 3,710,062 3,849,747 9,030,629 8,465,966
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (933,180) (1,084,158) (1,733,503) (2,006,267)
INTEREST AND OTHER INCOME 20,703 29,017 39,396 58,914
------------ ------------ ------------ ------------
LOSS FROM CONTINUING
OPERATIONS BEFORE TAXES (912,477) (1,055,141) (1,694,107) (1,947,353)
------------ ------------ ------------ ------------
INCOME TAXES -- -- -- --
------------ ------------ ------------ ------------
LOSS FROM CONTINUING
OPERATIONS (912,477) (1,055,141) (1,694,107) (1,947,353)
------------ ------------ ------------ ------------
DISCONTINUED OPERATIONS:
Loss from discontinued operations -- -- -- (54,349)
------------ ------------ ------------ ------------
NET LOSS ($ 912,477) ($ 1,055,141) ($ 1,694,107) ($ 2,001,702)
============ ============ ============ ============
BASIC EARNINGS PER COMMON SHARE:
Loss from continuing operations ($ 0.08) ($ 0.09) ($ 0.15) ($ 0.17)
Loss from discontinued operations -- -- -- --
------------ ------------ ------------ ------------
Net Loss ($ 0.08) ($ 0.09) ($ 0.15) ($ 0.17)
============ ============ ============ ============
DILUTED EARNINGS PER COMMON SHARE:
Loss from continuing operations ($ 0.08) ($ 0.09) ($ 0.15) ($ 0.17)
Loss from discontinued operations -- -- -- --
------------ ------------ ------------ ------------
Net Loss ($ 0.08) ($ 0.09) ($ 0.15) ($ 0.17)
============ ============ ============ ============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING:
Basic 11,512,092 11,459,950 11,511,390 11,458,284
============ ============ ============ ============
Diluted 11,512,092 11,459,950 11,511,390 11,458,284
============ ============ ============ ============
See accompanying notes to consolidated financial statements
-4-
THE QUIGLEY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONDENSED)
(UNAUDITED)
Six Months Ended
June 30, 2004 June 30, 2003
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NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES $ 2,411,132 ($ 553,314)
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INVESTING ACTIVITIES:
Capital expenditures (80,901) (109,158)
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NET CASH FLOWS USED IN INVESTING
ACTIVITIES (80,901) (109,158)
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FINANCING ACTIVITIES:
Proceeds from exercise of options and warrants 14,011 16,250
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NET CASH FLOWS PROVIDED BY FINANCING
ACTIVITIES 14,011 16,250
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NET CASH PROVIDED BY DISCONTINUED
OPERATIONS -- 133,714
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NET INCREASE (DECREASE) IN CASH 2,344,242 (512,508)
CASH & CASH EQUIVALENTS, BEGINNING OF
PERIOD 11,392,089 12,897,080
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CASH & CASH EQUIVALENTS,
END OF PERIOD $ 13,736,331 $ 12,384,572
============ ============
See accompanying notes to consolidated financial statements
-5-
THE QUIGLEY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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
homeopathic and health 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,
is a direct selling organization constituting the Health and Wellness segment
that was formed in January 2000 to introduce new products to the marketplace
through a network of independent distributors.
In January 2001, the Company formed an Ethical Pharmaceutical segment which is
now Quigley Pharma Inc. ("Pharma"), a wholly-owned subsidiary of the Company
which may enable the Company to diversify into the prescription drug market.
During 2000, the Company acquired a 60% ownership position in Caribbean Pacific
Natural Products, Inc. ("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 Note 3, "Discontinued Operations."
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 discussion in Note 7, "Variable Interest Entity").
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 of $536,000 and assumed
certain liabilities of $416,000 of a privately held company, located in Utah,
involved in the direct marketing and distribution of health and wellness
products. This acquisition also required cash payments of $110,000 and 50,000
shares of the Company's stock. 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.
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.
-6-
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 $673,000 and $729,000
at June 30, 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.
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 subject 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 12% of sales volume for
both three month periods ended June 30, 2004 and 2003 and 16% and 15% for the
six month periods ended June 30, 2004 and 2003, respectively.
Customers comprising the five largest accounts receivable balances represented
47% and 34% of total trade receivable balances (net of reserves) at June 30,
2004 and December 31, 2003, respectively. During the six month period ended June
30, 2004, 90% of the Company's net sales originated in the United States
compared to 98.5% for the comparable 2003 period.
The Company uses separate suppliers to produce Cold-Eeze(R) in lozenge, nasal
spray, gum and sugar-free tablet form. The Company's revenues are currently
generated from the sale of Cold Remedy products and from 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.
-7-
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.
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 the Company became
publicly traded. 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.
In accordance with SFAS 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure," the effect on net income and earnings per share if
the Company had applied the fair value recognition provisions of SFAS 123,
"Accounting for Stock-Based Compensation," to stock-based employee compensation,
would result in no additional expense compared to APB 25 for the periods
reported.
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 six-month periods ended June
30, 2004 or June 30, 2003. During the first quarter of 2003 a total of 250,000
warrants were granted to Forrester Financial LLC as part of an Amended and
Restated Warrant Agreement, relating to consulting services. These warrants
expired in March 2004 without being exercised. For further information see Note
6, "Transactions Affecting Stockholders' Equity".
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 month periods ended June
30, 2004 and 2003 were $289,638 and $278,300, respectively; the six month costs
for the periods ended June 30, 2004 and 2003 were $1,589,755 and $1,394,319,
respectively. Included in prepaid expenses and other current assets was $28,125
and $68,000 at June 30, 2004 and December 31, 2003, respectively, relating to
prepaid advertising expenses.
-8-
RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations in the period incurred.
Expenditures for the three month periods ended June 30, 2004 and 2003 were
$820,847 and $722,036, respectively, and the six month costs for the periods
ended June 30, 2004 and 2003 were $1,767,849 and $1,369,005, 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 Note 8, "Income Taxes".
NOTE 3 - DISCONTINUED OPERATIONS
Effective July 1, 2000, the Company acquired a 60% ownership position in CPNP
that was accounted for by the purchase method of accounting. This majority
ownership position required a cash investment of $812,000 and the provision for
a $1 million line of credit. The net assets of CPNP at the acquisition date
principally consisted of a product license, distribution rights, inventory and
fixed assets of $312,915 and working capital of $510,000 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 was declared effective by
the Securities and Exchange Commission in July, 2004) 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. 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 six month periods ended June 30, 2004 were zero as a
result of the discontinuation. Sales for the three and six months ended June 30
2003, were $59,824, all arising in the first quarter, 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. Disclosure is provided relating to
sales of products to international locations. Such products are manufactured on
behalf of domestic segments.
-9-
Financial information relating to 2004 and 2003 operations, by business segment, follows:
- -------------------------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED Cold Remedy Health and Ethical Corporate and
JUNE 30, 2004 Wellness Pharmaceutical Other Total
- -------------------------------------------------------------------------------------------------------------------------------
Net Sales
U.S. Customers $ 1,570,081 $ 4,435,020 -- -- $ 6,005,101
International -- 896,081 -- -- 896,081
----------- ----------- ----------- ----------- -----------
Total Net Sales $ 1,570,081 $ 5,331,101 -- -- $ 6,901,182
----------- ----------- ----------- ----------- -----------
Segment operating profit (loss) ($ 627,479) $ 444,844 ($ 750,545) -- ($ 933,180)
----------- ----------- ----------- ----------- -----------
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FOR THE SIX MONTHS ENDED Cold Remedy Health and Ethical Corporate and
JUNE 30, 2004 Wellness Pharmaceutical Other Total
- -------------------------------------------------------------------------------------------------------------------------------
Net Sales
U.S. Customers $ 5,683,673 $ 9,165,116 -- -- $14,848,789
International -- 1,658,010 -- -- 1,658,010
----------- ----------- ------------ ----------- -----------
Total Net Sales $ 5,683,673 $10,823,126 -- -- $16,506,799
----------- ----------- ------------ -- -----------
Segment operating profit (loss) ($ 929,233) $ 881,624 ($ 1,685,894) -- ($ 1,733,503)
----------- ----------- ------------ ----------- -----------
- -------------------------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED Cold Remedy Health and Ethical Corporate and
JUNE 30, 2003 Wellness Pharmaceutical Other Total
- -------------------------------------------------------------------------------------------------------------------------------
Net Sales
U.S. Customers $ 1,561,494 $ 5,248,007 -- -- $ 6,809,501
International -- 195,079 -- -- 195,079
----------- ----------- ----------- ----------- -----------
Total Net Sales $ 1,561,494 $ 5,443,086 -- -- $ 7,004,580
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Segment operating profit (loss) ($ 981,938) $ 573,519 ($ 675,739) -- ($ 1,084,158)
----------- ----------- ----------- ----------- -----------
- -------------------------------------------------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED Cold Remedy Health and Ethical Corporate and
JUNE 30, 2003 Wellness Pharmaceutical Other Total
- -------------------------------------------------------------------------------------------------------------------------------
Net Sales
U.S. Customers $ 4,819,761 $10,156,899 -- -- $14,976,660
International -- 219,012 -- -- 219,012
----------- ----------- ----------- ----------- -----------
Total Net Sales $ 4,819,761 $10,375,911 -- -- $15,195,672
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Segment operating profit (loss) ($ 2,001,023) $ 1,236,772 ($ 1,242,016) -- ($ 2,006,267)
----------- ----------- ----------- ----------- -----------
NOTE 5 - OTHER CURRENT LIABILITIES
Included in other current liabilities are $530,535 and $458,359 related to
accrued compensation at June 30, 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 (individually, a "Right" and
collectively, 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 by a
-10-
similarly constituted party to make a tender or exchange offer resulting in the
ownership of 15% or more of the outstanding common shares. The dividend has the
effect of giving the stockholder 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
June 30, 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 2003 or
2004 to date.
In March of 1998, as a result of litigation, a provision was made for a return
to treasury of 604,928 shares. As payment for legal services, 118,066 of these
shares were reissued with a market value of approximately $1,145,358. This value
and 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 Company 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 Company. No Complaint
was filed detailing the claim of Forrester against the Company. This action was
terminated with prejudice by Forrester as part of its Amended and Restated
Warrant Agreement (the "Amended Agreement") with The Company 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 on the
Consolidated Statement of Operations, relating to this warrant agreement in
2002. Additionally, $975,000 was reflected on 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.
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. The Company has determined that Scandasystems, a related
party, 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. As a result of consolidating the VIE
of which the Company is the primary beneficiary, in the second quarter of 2004,
the Company recognized a minority interest of approximately $59,000 on the
Consolidated Balance Sheet at June 30, 2004 which represents the difference
between the fair value of the assets and the liabilities recorded upon the
consolidation of the VIE.
-11-
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 on the Company's June 30, 2004 Consolidated Balance Sheet are
$65,000 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, as well as 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
(i) $15.3 million for federal purposes, of which $3.5 million will expire in
2019, $4.0 million in 2020, and $7.8 million in 2022 and (ii) $15.5 million for
state purposes, of which $9.7 million will expire in 2009, and $3.0 million in
2010, and $2.8 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 Six Months Ended Three Months Ended Six Months Ended
June 30, 2004 June 30, 2004 June 30, 2003 June 30, 2003
Loss Shares EPS Loss Shares EPS Loss Shares EPS Loss Shares EPS
----------------------------------------------------------------------------------------------
Basic EPS ($0.9) 11.5 ($0.08) ($1.7) 11.5 ($0.15) ($1.1) 11.5 ($0.09) ($2.0) 11.5 ($0.17)
Dilutives:
Options/Warrants -- -- -- -- -- -- -- -- -- -- -- --
----------------------------------------------------------------------------------------------
Diluted EPS ($0.9) 11.5 ($0.08) ($1.7) 11.5 ($0.15) ($1.1) 11.5 ($0.09) ($2.0) 11.5 ($0.17)
==============================================================================================
Options and warrants outstanding at June 30, 2004 and 2003 were 3,832,500 and
4,492,500, respectively. They were not included in the computation of diluted
earnings for periods reporting losses because the effect would be anti-dilutive.
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 month periods ended June 30, 2004 and 2003 under such
founder's commission agreements were $60,138 and $73,261, respectively, and for
the six months ended June 30, 2004 and 2003 were $225,242 and $226,025,
respectively. Such expense is included in the cost of sales classification on
the Consolidated Statements of Operations. Amounts payable under such agreements
at June 30, 2004 and December 31, 2003 were $76,861 and $456,748, respectively,
and are represented in the accrued royalties and sales commission classification
on the Consolidated Balance Sheets.
-12-
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 $67,000 and $92,250,
respectively, have been paid to a related entity during the three month periods
ended June 30, 2004 and 2003, respectively, with the fees for the six month
periods ended June 30, 2004 and 2003 being $176,250 and $184,500, respectively.
This expenditure is used to assist with the regulatory aspects of obtaining such
licenses and are included in the research and development expense classification
on 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 month periods ended June 30, 2004
and 2003 of $82,742 and $48,961, respectively, and the amounts for the six month
periods ended June 30, 2004 and 2003 being $162,561 and $108,380, respectively.
The Company has approximate future obligations for the remainder of 2004 and
over the next five fiscal years as follows:
Research and Property
Year Development Leases Total
-------------------------------------------------------
2004 $1,500,000 $ 109,000 $1,609,000
2005 -- 203,000 203,000
2006 -- 98,000 98,000
2007 -- 57,000 57,000
2008 -- -- --
2009 -- -- --
-------------------------------------------------------
Total $1,500,000 $ 467,000 $1,967,000
-------------------------------------------------------
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 that expires 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 $120,277 and
$146,528 for the three month periods ended June 30, 2004 and 2003, and $450,486
and $452,059 for the six month periods ended June 30, 2004 and 2003,
respectively. Amounts accrued for these expenses at June 30, 2004 and December
31, 2003 were $153,723 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 month periods ended June 30, 2004 and 2003 were
$207,623 and $228,083, respectively and the amounts for the six month periods
ended June 30, 2004 and 2003 were $425,260 and $440,169, respectively. Amounts
payable under such agreement at June 30, 2004 and December 31, 2003 were $69,252
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, that expires no later than April 2014.
Amounts paid or payable under such agreement during the three and six month
periods ended June 30, 2004 were $591 and $3,728, respectively, with zero in the
2003 comparable periods. Amounts accrued or payable relating to this agreement
at June 30, 2004 and December 31, 2003 were $5,341 and $1,613, respectively.
NOTE 12 - SUBSEQUENT EVENTS
On July 30 2004, the Company announced that its Board of Directors had approved
a distribution to its shareholders of approximately 500,000 shares of common
stock of Suncoast Naturals, Inc. (OTC BB:SNTL), which it acquired through a sale
of the Company's 60% equity interest in Caribbean Pacific Natural Products,
Inc., (see Note 3, "Discontinued Operations").
These shares will be distributed on the basis of approximately .0434 shares of
Suncoast common stock for each share of the Company's common stock owned of
record on September 1, 2004, with fractional shares paid in cash.
-13-
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 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 homeopathic and health products which
comprise the Cold Remedy and the Health and Wellness segments. The Company is
also involved in the research and development of potential prescription products
that comprise the Pharmaceutical segment.
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.
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.
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, gum and nasal spray
forms. During 2003 the Company launched Cold-Eeze(R) Nasal Spray and
Kidz-EEZE(TM) Sore Throat Pops.
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
and which is presently being marketed by the Company and through independent
brokers and marketers in the United States. 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,
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" 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.
On July 15, 1996, results of a new randomized double-blind placebo-controlled
study on the common cold, which commenced at the CLEVELAND CLINIC FOUNDATION on
October 3, 1994, were published. 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 adolescent study at the Heritage School facility in Provo, Utah that
suggests that Cold-Eeze(R) is also an effective means of preventing the common
cold, statistically lessens the number of colds an individual suffers per year,
reducing the median from 1.5 to zero and 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.
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 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 of 11 days
compared with 5 days when lozenges were administered, a reduction of 6 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 United States Food and Drug
Administration ("FDA") and the Homeopathic Pharmacopoeia of the United States.
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, that includes herbal vitamins and dietary
supplements for the human condition, primarily within the United States and
internationally since the second quarter of 2003.
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;
-15-
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.
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.
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 (No. 6,753,325 B2) entitled "Composition and Method for
Prevention, Reduction and Treatment of Radiation Dermatitis," a
composition for the preventing, reducing or treating radiation
dermatitis. The patent extends through November 5, 2021.
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
-16-
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 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.
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 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 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 exposure on humans.
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, "Variable Interest Entity"), 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.
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. See Note 1,
"Organization and Business" which describes the Company's other significant
accounting policies.
-17-
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 month periods ended June 30, 2004 and 2003 were
$289,638 and $278,300, respectively, with the six month expense being $1,589,755
and $1,394,319, respectively. This expense item increased in the 2004 reporting
periods 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 June 30, 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 month periods ended June 30, 2004 and 2003 were
$820,847 and $722,036, respectively, expenditures for the six month periods
ended June 30, 2004 and 2003 were $1,767,849 and $1,369,005, 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 JUNE 30, 2004 COMPARED WITH SAME PERIOD 2003
Net sales for the three month period ended June 30, 2004 were $6,901,182,
reflecting a decrease of $103,398 over the net sales of $7,004,580 for the
comparable three month period ended June 30, 2003. The Cold Remedy segment
reported net sales in 2004 of $1,570,081, an increase of $8,587 or 0.5% over the
comparable 2003 period of $1,561,494 and the Health and Wellness segment
reported net sales in 2004 of $5,331,101, a reduction of $111,985 or 2.1% over
the net sales of $5,443,086 for the comparable 2003 period.
Net sales of the Cold Remedy segment in 2004 were comparable to the same period
in 2003. Sales activity for the segment was assisted by a strong performance in
the fourth quarter of 2003 and this momentum has been maintained during 2004.
The Cold-Eeze(R) products continued to be supported by the Company in the period
through co-operative advertising programs with our customers.
The reduction of net sales reported by the Health and Wellness segment in 2004
is attributable to the effect of a decline in the number of active domestic
independent representatives, which was partially offset by increasing
international net sales contributing $896,000 during the second quarter of 2004
compared to $195,000 for the comparable period in 2003.
Cost of sales as a percentage of net sales for the three months ended June 30,
2004 was 59.8% compared to 60.5% for the comparable 2003 period, a decrease of
0.7%. The percentage change was influenced between the periods by variations in
product mix and particularly in the case of the Health and Wellness segment by
variations in the payout percentage to independent representatives due to
ongoing marketing and promotional initiatives and the impact of increasing
international sales activity.
Sales and marketing expense for the three month period ended June 30, 2004 was
$834,474, an increase of $18,650 over the comparable 2003 period amount of
$815,824. The increase between the periods was primarily due to increased
product promotion and payroll costs, which were offset by reductions in other
miscellaneous items.
General and administration costs for the three month period ended June 30, 2004
was $2,054,741 compared to $2,311,887 during the 2003 period, a decrease of
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$257,146 between the periods. The decrease in 2004 was primarily due to reduced
consultancy and miscellaneous tax costs related to the Health and Wellness
segment.
Research and development costs during the three months ended June 30, 2004 were
$820,847 compared to $722,036 during the 2003 comparable period, reflecting an
increase in 2004 of $98,811 with the majority of this increase related to Pharma
segment study costs.
Total assets of the Company at June 30, 2004 and December 31, 2003 were
$22,406,003 and $26,269,759, respectively. Working capital decreased by
$1,493,286 to $16,764,068 at June 30, 2004. The primary influences on working
capital during 2004 were the increase in cash balances of $2,344,242, which was
assisted by effective account collections as reflected in accounts receivable
balances decreasing by $6,499,902, and accrued advertising and royalties and
commissions balances decreased by a combined amount of $1,913,612 due to the
slow down in sales activity as a result of the conclusion of the cold season.
SIX MONTHS ENDED JUNE 30, 2004 COMPARED WITH SAME PERIOD 2003
Net sales for the six month period ended June 30, 2004 were $16,506,799, an
increase of $1,311,127 or 8.6% over the net sales of $15,195,672 for the
comparable six month period ended June 30, 2003. The Cold Remedy segment
reported net sales in 2004 of $5,683,673, an increase of $863,912 or 17.9% over
the comparable 2003 period of $4,819,761. The Health and Wellness segment
reported net sales in 2004 of $10,823,126, an increase of $447,215 or 4.3% over
the net sales of $10,375,911 for the comparable 2003 period.
Net sales of the Cold Remedy segment in 2004 increased significantly over 2003,
continuing the momentum present during the fourth quarter of 2003. The 2004
activity also reflects sales related to the launch in third quarter of 2003 of
the Cold-Eeze(R) Nasal Spray product and the Kidz-EEZE Sore Throat Pops product.
The Company provides strong marketing support to the segment by way of media
advertising, co-operative advertising programs with the trade and through
product bonus programs that benefit the consumer.
The Health and Wellness segment also reported increased net sales in 2004. This
increased activity is largely attributable to the growth of international sales
in 2004 to $1,658,000 compared to $219,000 for the 2003 period. However,
domestic sales were reduced in 2004 as a result of the reduction in active
independent representatives.
Cost of sales as a percentage of net sales for the six months ended June 30,
2004 was 55.8% compared to 57.5% for the comparable 2003 period, a decrease of
1.7%. The relationship of costs of sales to net sales was impacted in 2004 by
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 Health and Wellness segment reflected a small increase in
the percentage demonstrating variation in commissions payable to the independent
representatives related to product mix, period sales promotions and product
procurement costs.
Sales and marketing expense for the six month period ended June 30, 2004 was
$2,457,540, an increase of $114,186 over the comparable 2003 period amount of
$2,343,354. The increase between the periods was primarily due to increased
outside advertising, brokers' commission and payroll costs, mitigated by
reductions in other expense categories.
General and administration costs for the six month period ended June 30, 2004
was $4,805,240 compared to $4,753,607 during the 2003 period, an increase of
$51,633 between the periods. The increase in 2004 was primarily due to reduced
consultancy and tax costs along with other miscellaneous costs related to the
Health and Wellness segment and other items related to the Cold Remedy segment,
which were offset by increased payroll, legal and insurance costs.
Research and development costs during the six months ended June 30, 2004 were
$1,767,849 compared to $1,369,005 during the 2003 comparable period, reflecting
an increase in 2004 of $398,844, the majority of which reflects the increase in
Pharma segment study costs.
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LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $16,764,068 and $18,257,354 at June 30, 2004
and December 31, 2003, respectively. Changes in working capital overall have
been primarily due to the following items: cash balances increased by
$2,344,242; accounts receivable decreased by $6,499,902 due to seasonal
fluctuations; accrued advertising decreased by $954,196 as a result of the
seasonality of the cold remedy products and related co-operative advertising
activity; royalty and sales commission liabilities decreased by $959,416 related
to the cold-season cycle and the effect of such seasonality on account
receivables; and other current liabilities decreased by $340,474. Total cash
balances at June 30, 2004 were $13,736,331 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 and 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.
Management is not aware of any trends or uncertainties that may 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 are 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 may not 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
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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
that 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, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of the Company was held on June 23, 2003 with
11,515,255 shares eligible to vote. The presence of a quorum was reached and the
following proposals were approved by the stockholders:
(i) To elect a Board of Directors to serve for the ensuing year until the
next Annual Meeting of Stockholders and until their respective
successors have been duly elected and qualified.
(ii) To ratify the appointment of PricewaterhouseCoopers LLP as independent
auditors for the year ending December 31, 2004.
For proposals (i) and (ii) above, the votes were cast as follows:
- ------------------------------------------------------------------------------------------------------------------------------
Proposal Position For Against Withheld Abstentions
- ------------------------------------------------------------------------------------------------------------------------------
(i) By nominee:
Guy J. Quigley Chairman of the Board, President, CEO 10,763,905 11,477 - -
Charles A. Phillips Executive Vice President, COO and Director 10,763,980 11,402 - -
Vice President, CFO and Director
George J. Longo Director 10,763,980 11,402 - -
Jacqueline F. Lewis Director 10,763,980 11,402 - -
Rounsevelle W. Schaum Director 10,763,980 11,402 - -
Stephen W. Wouch Director 10,763,980 11,402 - -
Terence O. Tormay 10,763,980 11,402 - -
- ------------------------------------------------------------------------------------------------------------------------------
(ii) PricewaterhouseCoopers LLP Independent Auditors 10,664,026 8,483 - 5,416
- ------------------------------------------------------------------------------------------------------------------------------
ITEM 5. OTHER INFORMATION
None
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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 April 29, 2004 announcing its
results for the quarter ended March 31, 2004. 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.
The Company filed a Form 8-K dated June 3, 2004 providing an update on
its proposed distribution to its stockholders of shares of common
stock of Suncoast Naturals, Inc. held by the Company. The information
on Form 8-K was furnished pursuant to Item 5 of Form 8-K as directed
by the U.S. Securities and Exchange Commission.
There were no other Current Reports on Form 8-K filed during the quarter ended
June 30, 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: August 16, 2004
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