UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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 September 30, 2005
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OR
( ) 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 0-21617
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 (I.R.S. Employer
of Incorporation or Organization) Identification No.)
(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 by check mark whether the registrant is a shell company (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 November 1, 2005, there were 11,673,571 shares of common stock, $.0005 par
value per share, outstanding.
TABLE OF CONTENTS
Page No.
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements 3-15
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 16-22
Item 3. Quantitative and Qualitative Disclosures About 23
Market Risk
Item 4. Controls and Procedures 23
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 6. Exhibits 24
Signatures 25
-2-
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THE QUIGLEY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS September 30, 2005 December 31, 2004
(Unaudited)
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CURRENT ASSETS:
Cash and cash equivalents $ 12,172,999 $ 14,366,441
Accounts receivable (net of doubtful accounts of $354,962 and 8,530,026 6,375,979
$311,764)
Inventory 3,997,621 3,454,682
Prepaid expenses and other current assets 959,517 764,359
------------ ------------
TOTAL CURRENT ASSETS 25,660,163 24,961,461
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PROPERTY, PLANT AND EQUIPMENT - NET 5,646,453 6,473,688
------------ ------------
OTHER ASSETS:
Goodwill 30,763 30,763
Other assets 205,455 63,844
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TOTAL OTHER ASSETS 236,218 94,607
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TOTAL ASSETS $ 31,542,834 $ 31,529,756
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 428,571 $ 428,571
Accounts payable 698,211 978,401
Accrued royalties and commissions 2,581,388 1,796,081
Accrued advertising 835,687 1,919,011
Other current liabilities 2,806,870 1,986,487
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TOTAL CURRENT LIABILITIES 7,350,727 7,108,551
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LONG-TERM DEBT 1,142,858 2,464,286
MINORITY INTEREST 53,439 54,980
COMMITMENTS AND CONTINGENCIES (NOTE 7)
STOCKHOLDERS' EQUITY:
Common stock, $.0005 par value; authorized 50,000,000;
Issued: 16,319,624 and 16,285,796 shares 8,159 8,143
Additional paid-in-capital 35,244,073 35,203,816
Retained earnings 12,931,737 11,878,139
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 22,995,810 21,901,939
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 31,542,834 $ 31,529,756
============ ============
See accompanying notes to condensed consolidated financial statements
-3-
THE QUIGLEY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, 2005 September 30, 2004 September 30, 2005 September 30, 2004
------------------ ------------------ ------------------ -----------------
NET SALES $ 15,319,980 $ 9,690,858 $ 35,917,423 $ 26,197,657
------------------ ------------------ ------------------ ------------------
COST OF SALES 7,025,776 5,890,746 18,886,726 15,100,419
------------------ ------------------ ------------------ ------------------
GROSS PROFIT 8,294,204 3,800,112 17,030,697 11,097,238
------------------ ------------------ ------------------ ------------------
OPERATING EXPENSES:
Sales and marketing 1,452,474 915,550 4,354,064 3,373,090
Administration 2,897,941 2,313,609 8,879,217 7,118,849
Research and development 1,029,985 627,344 2,938,947 2,395,193
------------------ ------------------ ------------------ ------------------
TOTAL OPERATING EXPENSES 5,380,400 3,856,503 16,172,228 12,887,132
------------------ ------------------ ------------------ ------------------
INCOME (LOSS) FROM OPERATIONS 2,913,804 (56,391) 858,469 (1,789,894)
------------------ ------------------ ------------------ ------------------
OTHER INCOME (EXPENSE)
Interest and other income 107,815 26,677 271,110 66,073
Interest expense (23,116) -- (75,981) --
Gain on dividend-in-kind -- 207,090 -- 207,090
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TOTAL OTHER INCOME (EXPENSE) 84,699 233,767 195,129 273,163
------------------ ------------------ ------------------ ------------------
INCOME (LOSS) FROM OPERATIONS
BEFORE TAXES 2,998,503 177,376 1,053,598 (1,516,731)
INCOME TAXES (BENEFIT) -- -- -- --
------------------ ------------------ ------------------ ------------------
NET INCOME (LOSS) $ 2,998,503 $ 177,376 $ 1,053,598 ($ 1,516,731)
================== ================== ================== ==================
EARNINGS (LOSS) PER COMMON SHARE:
Basic $0.26 $0.02 $0.09 ($0.13)
================== ================== ================== ==================
Diluted $0.23 $0.01 $0.08 ($0.13)
================== ================== ================== ==================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 11,659,669 11,512,796 11,656,820 11,511,858
================== ================== ================== ==================
Diluted 13,316,660 14,107,313 13,285,422 11,511,858
================== ================== ================== ==================
See accompanying notes to condensed consolidated financial statements
-4-
THE QUIGLEY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30, 2005 September 30, 2004
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NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES ($ 688,915) $ 449,701
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NET CASH FLOWS USED IN INVESTING ACTIVITIES (223,374) (152,403)
------------ ------------
NET CASH FLOWS PROVIDED BY (USED IN) FINANCING
ACTIVITIES (1,281,153) 14,011
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NET INCREASE (DECREASE) IN CASH (2,193,442) 311,309
CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD 14,366,441 11,392,089
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CASH & CASH EQUIVALENTS, END OF PERIOD $ 12,172,999 $ 11,703,398
============ ============
See accompanying notes to condensed consolidated financial statements
-5-
THE QUIGLEY CORPORATION
NOTES TO CONDENSED 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 four business segments: Cold Remedy, Health and Wellness,
Contract Manufacturing and Ethical Pharmaceutical. For the fiscal periods
presented, the majority of the Company's revenues have come from the Company's
Cold Remedy and Health and Wellness business segments.
The Company's principal cold-remedy product, 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. The lozenge form of the
product is manufactured by Quigley Manufacturing Inc. ("QMI"), a wholly owned
subsidiary of the Company, which was formed following the acquisition of certain
assets and assumption of certain liabilities of JoEl, Inc., the contract
manufacturer of the lozenge product prior to October 1, 2004.
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 distributor representatives.
In January 2001, the Company formed an Ethical Pharmaceutical segment which is
now Quigley Pharma Inc. ("Pharma"), a wholly-owned subsidiary of the Company.
The result of that segment's research and development activity may enable the
Company to diversify into the prescription drug market.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The Condensed 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 3, "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, 2004. 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. The results of operations for the three and nine months ended
September 30, 2005 and 2004 are not necessarily indicative of the results to be
expected for the entire year or any other period.
USE OF ESTIMATES
The Company's consolidated financial statements are prepared in accordance with
generally accepted accounting principles (GAAP) in the United Sates of America.
In connection with the preparation of the consolidated financial statements, it
is required to make assumptions and estimates about future events, and apply
judgments that affect the reported amounts of assets, liabilities, revenue,
expenses and related disclosures. These assumptions, estimates and judgments are
based on historical experience, current trends and other factors that management
believes to be relevant at the time the consolidated financial statements are
prepared. Management reviews the accounting policies, assumptions, estimates and
judgments on a quarterly basis to ensure the financial statements are presented
fairly and in accordance with GAAP. However, because future events and their
effects cannot be determined with certainty, actual results could differ from
these assumptions and estimates, and such differences could be material.
The Company is organized into four different but related business segments,
Cold-Remedy, Health and Wellness, Contract Manufacturing and Ethical
Pharmaceutical. When providing for the appropriate sales returns, allowances,
cash discounts and cooperative advertising costs, each segment applies a uniform
and consistent method for making certain assumptions for estimating these
provisions that are applicable to each specific segment. Traditionally, these
provisions are not material to reported revenues in the Health and Wellness and
Contract Manufacturing segments and the Ethical Pharmaceutical segment does not
have any revenues.
-6-
Provisions to these reserves within the cold remedy segment include the use of
such estimates, which are applied or matched to the current sales for the period
presented. These estimates are based on customer tracking and an overall
historical experience to obtain an applicable effective rate. Estimates for
sales returns are tracked at the specific customer level and are tested on an
annual historical basis as is the estimate for cooperative advertising costs.
Cash discounts follow the terms of sales and are taken by virtually all
customers. Additionally, the monitoring of current occurrences, developments by
customer, market conditions and any other occurrences that could affect the
expected provisions for any future returns or allowances, cash discounts and
cooperative advertising costs relative to net sales for the period presented are
also performed.
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.
INVENTORY VALUATION
Inventory is valued at the lower of cost, determined on a first-in, first-out
basis (FIFO), or market. Inventory items are analyzed to determine cost and the
market value and appropriate valuation reserves are established. The
consolidated financial statements include a reserve for excess or obsolete
inventory of $1,111,191 as of September 30, 2005, the majority of which related
to the discontinuation of the Cold-Eeze(R) Cold Remedy Nasal Spray product in
2004. Inventories included raw material, work in progress and packaging amounts
of approximately $1,392,000 and $1,087,000 at September 30, 2005 and December
31, 2004, respectively, with the remainder comprising finished goods.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are 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 to thirty nine years; machinery and equipment
- - five to seven years; computer software - three years; and furniture and
fixtures - seven years.
GOODWILL AND INTANGIBLE ASSETS
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 several 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. It is not anticipated that any one customer will exceed 10% of
consolidated sales in 2005. 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 37% and
30% of sales volume for the respective three month periods ended September 30,
2005 and 2004 and 26% and 21% for the nine month periods ended September 30,
2005 and 2004, respectively. Customers comprising the five largest accounts
receivable balances represented 56% and 48% of total trade receivable balances
at September 30, 2005 and December 31, 2004, respectively. During the nine month
periods ended September 30, 2005 and 2004, approximately 9% of the Company's net
sales were to international markets.
The Company's revenues are currently generated from the sale of the Cold-Remedy
products which approximated 60% and 52% of total revenues in the three month
periods ended September 30, 2005 and 2004, respectively, and approximated 48%
and 41% of total revenue in the nine month periods ended September 30, 2005 and
-7-
2004, respectively. The Health and Wellness segment approximated 34% and 48%,
for the three-month periods and 43% and 59% for the nine-month periods. The
Contract Manufacturing segment approximated 5% and zero for the three-month
periods and 9% and 0% for the nine-month periods ended September 30, 2005 and
2004.
Raw materials used in the production of the products are available from numerous
sources. Raw materials for the Cold-Eeze(R) lozenge product is currently
procured from a single vendor in order to secure purchasing economies. In a
situation where this one vendor is not able to supply QMI with the ingredients,
other sources have been identified. Should these product sources 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.
Darius' products for resale can be sourced from several suppliers. In the event
that such sources were no longer in a position to supply Darius with products,
other vendors have been identified as reliable alternatives 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 both the Health and Wellness segment and the Contract Manufacturing
segment, when the product is shipped to the customer. Revenue is reduced for
trade promotions, estimated sales returns, cash discounts and other allowances
in the same period as the related sales are recorded. The Company makes
estimates of potential future product returns and other allowances related to
current period revenue. The Company analyzes historical returns, current trends,
and changes in customer and consumer demand when evaluating the adequacy of the
sales returns and other allowances. The consolidated financial statements
include reserves of $817,909 for future sales returns and $465,311 for other
allowances as of September 30, 2005 and $1,109,171 and $425,008 at December 31,
2004, respectively. The 2005 and 2004 reserve balances include a returns
provision at September 30, 2005 and December 31, 2004 of approximately $225,000
and $626,000, respectively, in the event of future product returns following the
discontinuation of the Cold-Eeze(R) Cold Remedy Nasal Spray product in September
2004. The Company also makes estimates of the uncollectability of accounts
receivable resulting in a reserve of $354,962 at September 30, 2005 and $311,764
at December 31, 2004.
COST OF SALES
For the Cold Remedy Segment, in accordance with contract terms, payments
calculated based upon net sales collected to the patent holder of the Cold-Eeze
formulation and payments to the corporation founders and developers of the final
saleable Cold-Eeze product amounting to $434,384 and $534,896 for the three
month periods ended September 30, 2005 and 2004, respectively, and $1,156,927
and $985,382 for the nine months ended September 30, 2005 and 2004,
respectively, are presented in the financial statements as cost of sales.
In the Health and Wellness Segment, agreements with Independent Distributor
Representatives ("IR's") require payments to them to be calculated based upon
net sales collected and in accordance with our policy and procedures for IR's,
among other factors, and such payments are related to expanding the cycle of
additional IR's and are for maintaining the distribution channel for this
segment's products. Accordingly, such distribution payments amounting to
$2,387,235 and $2,103,052 for the three month periods ended September 30, 2005
and 2004, respectively, and $7,073,176 and $6,904,571 for the nine month periods
ended September 30, 2005 and 2004, respectively, are presented in the financial
statements as cost of sales.
-8-
OPERATING EXPENSES
Agreements relating to the Cold Remedy segment with a major national sales
brokerage firm are for this firm to sell the manufactured Cold-Eeze product to
our customers. Such related costs are presented in the financial statements as
selling expenses.
In the Health and Wellness Segment, the Company includes payments in accordance
with agreements with the former owner of its acquired proprietary products, to
be calculated based upon net sales collected. These agreements provide for
exclusivity, consulting, marketing presentations, confidentiality and
non-compete arrangements with such payments being classified as administration
expense.
SHIPPING AND HANDLING
Product sales relating to Health and Wellness products carry an additional
identifiable shipping and handling charge to the purchaser, which is classified
as revenue. For the Cold Remedy and Contract Manufacturing segments, such costs
are included as part of the invoiced price. In all cases costs related to
shipping and handling 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.
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 the 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 intrinsic value method
for the periods reported.
Expense relating to options granted to non-employees has been appropriately
recorded in the periods presented based on either fair values agreed upon with
the grantees or fair values as determined by the Black-Scholes pricing model
dependent upon the circumstances relating to the specific grants.
No stock options were granted in the nine month periods ended September 30, 2005
and 2004.
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
September 30, 2005 and 2004 were $1,542,317 and $668,715, respectively; the nine
month costs for the periods ended September 30, 2005 and 2004 were 4,046,302 and
$2,258,469, respectively. Included in prepaid expenses and other current assets
was $389,863 and $41,375 at September 30, 2005 and December 31, 2004,
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 month periods ended September 30, 2005 and 2004 were
$1,029,985 and $627,344, respectively; the nine month costs for the periods
ended September 30, 2005 and 2004 were $2,938,947 and $2,395,193, respectively.
Principally, research and development costs are related to Pharma's study
activities and costs associated with Cold-Eeze(R) products.
-9-
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. 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. See Note 9 -
Income Taxes for further discussion.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash and cash equivalents, accounts receivable and accounts payable are
reflected in the consolidated financial statements at carrying value which
approximates fair value because of the short-term maturity of these instruments.
The fair value of long-term debt was approximately equivalent to its carrying
value due to the fact that the interest rates currently available to the Company
for debt with similar terms are approximately equal to the interest rates for
its existing debt. Determination of the fair value of related party payables is
not practicable due to their related party nature.
RECENTLY ISSUED ACCOUNTING STANDARDS
In May 2005, the Financial Accounting Standards Board ("FASB") issued Statement
154, "ACCOUNTING CHANGES AND ERROR CORRECTIONS, A REPLACEMENT OF APB OPINION NO.
20 AND FASB STATEMENT NO. 3." The standard requires retrospective application to
prior periods' financial statements of a voluntary change in accounting
principle unless it is deemed impracticable. The standard states that a change
in method of depreciation, amortization or depletion for long-lived,
non-financial assets be accounted for as a change in accounting estimate that is
affected by a change in accounting principle. The standard is effective for
accounting changes and corrections of errors made occurring in fiscal years
beginning after December 15, 2005. The impact on the Company's financial
position or results of operations as a result of the adoption of Statement of
Financial Accounting Standards ("SFAS") No. 154 cannot be determined.
In December 2004, the FASB issued Statement 123 (revised 2004),"SHARE-BASED
PAYMENT." The standard eliminates the disclosure-only election under the prior
SFAS 123 and requires the recognition of compensation expense for stock options
and other forms of equity compensation based on the fair value of the
instruments on the date of grant. The standard is effective for fiscal years
beginning after June 15, 2005. In March 2005, the Securities & Exchange
Commission (the "SEC") issued Staff Accounting Bulletin No. 107, "Share-Based
Payment" ("SAB 107"). SAB 107 summarizes the views of the SEC staff regarding
the interaction between SFAS No. 123 (Revised 2004), "Share-Based Payment"
("SFAS 123R") and certain SEC rules and regulations, and is intended to assist
in the initial implementation of SFAS 123R, which for the Company is required by
the beginning of its fiscal year 2006. The Company is currently evaluating the
guidance provided within SAB 107 and SFAS 123R and the effect it will have on
its consolidated balance sheets and statements of operations, shareholders'
equity and cash flows, if any.
NOTE 3 - VARIABLE INTEREST ENTITY
In December 2003, FASB issued FASB Interpretation No. 46 (revised December
2003), CONSOLIDATION OF VARIABLE INTEREST Entities ("FIN 46R"), to address
certain implementation issues. 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, qualified 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 VIE has no long-term contractual commitments
or guarantees, the maximum exposure to loss is insignificant. As a result of
consolidating the VIE, the Company recognized a minority interest of $53,439 and
$54,980 on the Consolidated Balance Sheets at September 30, 2005 and December
31, 2004, respectively, which represented the difference between 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 on the Company's Consolidated Balance Sheets at September 30,
2005 and December 31, 2004 were $61,929 and $96,051, respectively, of VIE
assets, representing all of the assets of the VIE. The VIE assists the Company
in acquiring licenses and performing research and development activities in
certain countries.
-10-
NOTE 4 - PATENT RIGHTS AND RELATED ROYALTY COMMITMENTS
The Company has maintained 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 calculated on sales collected, less certain
deductions, throughout the term of this agreement, which is due to expire in
2007. However, the Company and the developer are in litigation and as such, no
potential offset from such litigation for these fees has been recorded. A
founder's commission totaling 5%, calculated on sales collected, less certain
deductions, has been paid to two of the officers, who are also directors and
stockholders of the Company. Such agreements expired in May 2005 (see Note 11).
The expenses for the respective periods relating to such agreements amounted to
$434,384, and $534,896 for the three month periods ended September 30, 2005 and
2004, respectively; the nine month cost for the periods ended September 30, 2005
and 2004 were $1,156,927 and $985,382, respectively. Amounts accrued for these
expenses at September 30, 2005 and December 31, 2004 were $1,505,029 and
$1,129,654, respectively.
Amounts included in accrued royalties and commissions in the balance sheets at
September 30, 2005 and December 31, 2004, apportioned between related party and
other balances, are as follows:
2005 2004
---------- ----------
Related party balances (see Note 11) $ 849 $ 459,583
Other non-related party balances 2,580,539 1,336,498
---------- ----------
Total accrued royalties and commissions $2,581,388 $1,796,081
---------- ----------
NOTE 5 - LONG-TERM DEBT
In connection with the Company's acquisition of certain assets of JoEl, Inc. in
October 2004, the Company entered into a term loan in the amount of $3 million
payable to PNC Bank, N.A. which is collateralized by mortgages on real property
located in Lebanon and Elizabethtown, Pennsylvania. The Company can elect
interest rate options at either the Prime Rate or LIBOR plus 200 basis points.
The loan is payable in eighty-four equal monthly principal payments of $35,714
that commenced on November 1, 2004. In April 2005, the Company prepaid an amount
of $1.0 million against the outstanding balance on the long-term loan. The
Company is in compliance with all related loan covenants. The entire loan
balance was under a six-month LIBOR rate of 5.39%, which expired on September
30, 2005. A six-month LIBOR rate of 6.22% commenced on October 1, 2005 and
expires on March 31, 2006.
The schedule of principal payments of long-term debt is as follows:
December 31,
2005 (remaining) $ 107,141
2006 428,571
2007 428,571
2008 428,571
2009 178,575
----------
1,571,429
Less - current portion (428,571)
----------
$1,142,858
==========
NOTE 6 - OTHER CURRENT LIABILITIES
Included in other current liabilities are $1,356,681 and $717,038 related to
accrued compensation at September 30, 2005 and December 31, 2004, respectively.
-11-
NOTE 7 - 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 September 30,
2005 and 2004 of $67,740 and $181,837, respectively; the nine month costs for
the periods ended September 30, 2005 and 2004 were $177,537 and $344,399,
respectively. The Company has approximate future obligations for the remainder
of 2005 and over the next five fiscal years as follows:
Property
Research and and Other
Year Development Leases Advertising Other Total
- ---------------------------------------------------------------------------------------------------
2005 $821,000 $62,000 $1,900,000 $74,000 $2,857,000
2006 2,457,000 175,000 883,000 - 3,515,000
2007 - 95,000 - - 95,000
2008 - - - - -
2009 - - - - -
2010 - - - - -
-------------------------------------------------------------------------------------------------
Total $3,278,000 $332,000 $2,783,000 $74,000 $6,467,000
-------------------------------------------------------------------------------------------------
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 exclusivity, consulting, marketing presentations,
confidentiality and non-compete agreements with such cost being expensed as
incurred. Amounts paid or payable under such agreement during the three month
periods ended September 30, 2005 and 2004 were $220,506 and $187,432,
respectively; the nine month costs for periods ended September 30, 2005 and 2004
were $637,819 and $612,692, respectively. Amounts payable under such agreement
at September 30, 2005 and December 31, 2004 were $72,863 and $60,876,
respectively.
The Company has several licensing and other contractual agreements, see Note 4.
KEITH J. KOCHIE VS. THE QUIGLEY CORPORATION, ET AL
On August 2, 2005, a Complaint was filed in the United States District Court for
the Eastern District of New York. The complaint was served on The Quigley
Corporation on or about September 1, 2005. The plaintiff's complaint consists of
counts for negligence, strict product liability, breach of express warranty,
breach of implied warranties, fraudulent misrepresentation, fraudulent
concealment, negligent misrepresentation, and fraud and deceit relating to the
use of the Company's COLD-EEZE Nasal Spray Product.
The Company believes plaintiff's claims are without merit and is vigorously
defending those actions. The Company's insurance carrier is presently defending
this action.
Based upon the information the Company has at this time, it believes the action
will not have a material impact on the Company. However, at this time no
prediction as to the outcome can be made.
YOUNG VS. INNERLIGHT
On September 14, 2005, Robert O. Young and Shelley R. Young instituted
Third-Party Complaints against Darius International Inc., a wholly-owned
subsidiary of The Quigley Corporation and its wholly-owned subsidiary,
Innerlight Inc., in an action brought against the Youngs by Colonial Pacific
Leasing Corporation, dba GE Capital Colonial Pacific Leasing. The Third-Party
Complaints contain Counts for Breach of Contract, Breach of Covenant of Good
Faith and Fair Dealing, Unjust Enrichment, Conversion, Common Law Trademark
Infringement/Unfair Competition, Common Law Violation of the Right of Publicity,
Violation of Abuse of Personal Identity Act, Declaratory and Injunctive Relief,
and Intentional Interference with Business Relations.
The Company believes that plaintiffs' claims are without merit and is vigorously
defending these claims. At the present time a Motion to Dismiss is pending
relative to these actions before the Fourth Judicial District Court for Utah
County, State of Utah.
-12-
NOTE 8 - 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
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 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 50% beneficial ownership of the
Company, a stockholder may exchange one Right for one common share of the
Company. The final expiration date 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
September 30, 2005, 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 or 2005 to date.
NOTE 9 - 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 $3,935,953
are deferred and will be credited to additional-paid-in-capital when existing
net operating losses are used. The cumulative tax deduction attributable to
options, warrants and restricted stock is $47,682,585 which resulted in the net
operating loss carry-forwards that approximate $11.1 million for federal
purposes, of which $3.5 million will expire in 2019, $4.0 million in 2020, and
$3.6 million in 2022 and $13.8 million for state purposes, of which $9.7 million
will expire in 2009, $3.0 million in 2010, and $1.1 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 10 - EARNINGS PER SHARE
Basic loss 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 per share amounts):
Three Months Ended Nine Months Ended Three Months Ended Nine Months Ended
September 30, 2005 September 30, 2005 September 30, 2004 September 30, 2004
Income Shares EPS Income Shares EPS Income Shares EPS Loss Shares EPS
-------------------------------------------------------------------------------------------------------
Basic EPS $3.0 11.7 $0.26 $ 1.1 11.7 $0.09 $0.2 11.5 $0.02 ($1.5) 11.5 ($0.13)
Dilutives:
Options/Warrants - 1.6 - - 1.6 - - 2.6 - - - -
--------------------------------------------------------------------------------------------------------
Diluted EPS $3.0 13.3 $0.23 $ 1.1 13.3 $0.08 $0.2 14.1 $0.01 ($1.5) 11.5 ($0.13)
========================================================================================================
Options and warrants outstanding at September 30, 2005 and 2004 were 4,149,250
and 3,827,500, respectively, of which 1,446,500 and 981,500, respectively, were
not included in the computation of diluted earnings per share because the effect
would be anti-dilutive.
-13-
NOTE 11 - RELATED PARTY TRANSACTIONS
An agreement between the Company and the founders, Mr. Guy J. Quigley and Mr.
Charles A. Phillips, both officers 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, shared a total expense of five percent (5%)
calculated on net sales collected, less certain deductions, this agreement
expired on May 31, 2005. Amounts paid or payable for the three month periods
ended September 30, 2005 and 2004 under such founders' agreements were $3,914
and $267,449, respectively, and for the nine month periods ended September 30,
2005 and 2004 were $351,198 and $492,691, respectively. Amounts payable under
such agreements at September 30, 2005 and December 31, 2004 were $849 and
$459,583, respectively.
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 $53,250 and $100,500
have been paid or are payable to a related entity in the three month periods
ended September 30, 2005 and 2004, respectively, the amounts for the nine month
periods ended September 30, 2005 and 2004 were $213,798 and $276,750,
respectively. This expenditure is used to assist with the regulatory aspects of
obtaining such licenses and is included in the research and development expense
classification on the Consolidated Statements of Operations.
NOTE 12 - SEGMENT INFORMATION
The basis for presenting segment results generally 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 four 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; Quigley Manufacturing (Contract Manufacturing),
which operates the production facility for the Cold-Eeze(R) lozenge product and
also performs contract manufacturing services for third party customers, and
Pharma (Ethical Pharmaceutical), currently involved in research and development
activity to develop patent applications for potential pharmaceutical products.
Financial information relating to 2005 and 2004 operations, by business segment,
follows:
- ---------------------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED Cold Health and Contract Ethical Corporate &
SEPTEMBER 30, 2005 Remedy Wellness Manufacturing Pharmaceutical Other Total
- ---------------------------------------------------------------------------------------------------------------------------
Revenues
Customers-domestic $9,252,322 $4,083,483 $829,886 - - $14,165,691
Customers-international - 1,154,289 - - - 1,154,289
Inter-segment - - 1,851,881 - ($1,851,881) -
Segment operating profit
(loss) $4,783,851 $384,719 ($546,905) ($1,131,346) ($576,515) $ 2,913,804
- -----------------------------------------------------------------------------------------------------------------------------
FOR THE NINE MONTHS ENDED Cold Health and Contract Ethical Corporate &
SEPTEMBER 30, 2005 Remedy Wellness Manufacturing Pharmaceutical Other Total
- -----------------------------------------------------------------------------------------------------------------------------
Revenues
Customers-domestic $17,139,868 $12,282,496 $3,206,205 - - $32,628,569
Customers-international - 3,288,854 - - - 3,288,854
Inter-segment - - 4,467,127 - ($4,467,127) -
Segment operating profit
(loss) $4,212,570 $851,882 ($345,366) ($3,087,780) ($772,837) $858,469
-14-
- --------------------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED Cold Health and Contract Ethical Corporate &
SEPTEMBER 30, 2004 Remedy Wellness Manufacturing Pharmaceutical Other Total
- --------------------------------------------------------------------------------------------------------------------------
Revenues
Customers-domestic $4,998,940 $4,072,042 - - - $9,070,982
Customers-international - 619,876 - - - 619,876
Inter-segment - - - - - -
Segment operating profit
(loss) $55,837 $439,398 - ($551,626) - ($56,391)
- -----------------------------------------------------------------------------------------------------------------------------
FOR THE NINE MONTHS ENDED Cold Health and Contract Ethical Corporate &
SEPTEMBER 30, 2004 Remedy Wellness Manufacturing Pharmaceutical Other Total
- -----------------------------------------------------------------------------------------------------------------------------
Revenues
Customers-domestic $10,682,611 $13,237,158 - - - $23,919,769
Customers-international - 2,277,888 - - - 2,277,888
Inter-segment - - - - - -
Segment operating profit
(loss) ($873,400) $1,321,022 - ($2,237,516) - ($1,789,894)
-15-
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 products, 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 Quigley Corporation makes no representation that the United States Food
and Drug Administration ("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
Food and Drug Administration. Additionally, data that demonstrates activity
or effectiveness in animals or in vitro tests do not necessarily mean such
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 ("SEC").
OVERVIEW
The Company, headquartered in Doylestown, Pennsylvania, is a leading
manufacturer, marketer and distributor of a diversified range of
homeopathic and health products which comprise the Cold Remedy, Health and
Wellness and Contract Manufacturing segments. The Company is also involved
in the research and development of potential prescription products that
comprise the Ethical Pharmaceutical segment.
The Company's business is the manufacture and distribution of cold remedy
products to the consumer through the over-the-counter marketplace together
with the sale of proprietary health and wellness products through its
direct selling subsidiary. One of the Company's key products in its Cold
Remedy segment is Cold-Eeze(R), a zinc gluconate glycine product proven in
two double-blind clinical studies to reduce the duration and severity of
the common cold symptoms by nearly half. Cold-Eeze(R) is now an established
product in the health care and cold remedy market. Effective October 1,
2004, the Company acquired substantially all of the assets of JoEl, Inc.,
the previous manufacturer of the Cold-Eeze(R) lozenge product. This
manufacturing entity, now called Quigley Manufacturing Inc. ("QMI"), a
wholly owned subsidiary of the Company, will continue to produce lozenge
product along with performing such operational tasks as warehousing and
shipping the Company's Cold-Eeze(R) products. In addition, QMI produces a
variety of hard and organic candy for sale to third party customers in
addition to performing contract manufacturing activities for non-related
entities. The Cold-Eeze(R) products reported a strong sales performance in
the first nine months of 2005 as a result of a prolonged cough/cold season,
increased consumer demand and increased household penetration. The presence
of QMI in 2005 contributed net sales of $3,206,205 in the nine month period
ended September 30, 2005.
Darius International Inc. ("Darius"), the Health and Wellness segment, a
wholly owned subsidiary of the Company, was formed in January 2000 to
introduce new products to the marketplace through a network of independent
distributor representatives. Darius is a direct selling organization
specializing in proprietary 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. This segment's 2005 net sales were
comparable to the 2004 nine month period, however, international sales
activity improved by approximately $1,000,000 or 44.4% in the 2005 period
over the 2004 comparable period offsetting a decrease in domestic sales.
In January 2001, the Company formed an Ethical Pharmaceutical segment,
Quigley Pharma Inc. ("Pharma"), that is under the direction of its
Executive Vice President and Chairman of its Medical Advisory Committee.
Pharma was formed for the purpose of developing naturally derived
prescription drugs, cosmeceuticals, and dietary supplements. Pharma is
currently undergoing research and development activity in compliance with
-16-
regulatory requirements. The Company is in the initial stages of what may
be a lengthy process to develop these patent applications into commercial
products.
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 the
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 distributor representatives and
recruiting additional active 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 currently sold in lozenge, sugar-free tablet and
gum form. During 2003, the Company launched a Kidz-EEZE(TM) Sore Throat
Pops product.
In May 1992, the Company entered into an exclusive agreement for worldwide
representation, manufacturing and marketing of Cold-Eeze(R) products 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," 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 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 and statistically (a) lessens the number of
colds an individual suffers per year, reducing the median from 1.5 to zero
and (b) 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
Cold-Eeze(R) 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 FDA
and the Homeopathic Pharmacopoeia of the United States.
-17-
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, including herbal vitamins and dietary supplements
for the human condition, primarily within the United States and since the second
quarter of 2003, internationally.
The continued success of this segment is dependent, among other things, on the
Company's ability:
o To maintain existing independent distributor representatives
and recruit additional successful independent distributor
representatives. Additionally, the loss of key high-level
distributors or business contributors as a result of business
disagreements, litigation or otherwise 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 growth of international business, difficulties with
foreign regulatory requirements could have a significant
negative impact on future growth. Any inquiries from
government authorities relating to the Company's 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.
CONTRACT MANUFACTURING
From October 1, 2004, this manufacturing entity, now called QMI, a wholly owned
subsidiary of the Company, has continued to produce lozenge product along with
performing such operational tasks as warehousing and shipping the Company's
Cold-Eeze(R) products. In addition to that function, QMI produces a variety of
hard and organic candy for sale to third party customers in addition to
performing contract manufacturing activities for non-related entities. QMI is an
FDA-approved facility.
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 also on 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
-18-
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 preventing, reducing or treating radiation dermatitis.
The patent extends through November 5, 2021.
o A Patent (No. 6,827,945 B2) entitled "Nutritional Supplement and
Method of Using It" for a method of treating at least one symptom of
arthritis. The patent extends through April 22, 2023.
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 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 2005, the Company announced
that a preliminary report of its topical compound for the treatment of diabetic
neuropathy was recently featured in the JOURNAL OF DIABETES AND ITS
COMPLICATION. Authored by Dr. C. LeFante and Dr. P. Valensi, the article
appeared in the June 1, 2005 issue, and included findings that showed the
compound reduced the severity of numbness, jolting pain, and irritation from
baseline values. In October 2005, the Company announced that two pre-clinical
toxicity studies of the compound determined it to be safe for topical
application.
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 May 2004, the Company announced
that intranasal application of the test compound by spray demonstrated efficacy
in significantly reducing the severity of illness in ferrets infected with the
Influenza A virus.
-19-
Combined with previous animal studies, there is now additional pre-clinical data
suggesting that the test compound can both prevent and treat Influenza A virus
in a ferret animal model.
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.
On November 8, 2005, the Company announced that its wholly owned subsidiary
Quigley Pharma had received three Investigational New Animal Drug (INAD) numbers
from the Center for Veterinary Medicine of the Food and Drug Administration. In
a prior successful series of in-vitro and ferret model in-vivo studies, the
Company's naturally derived formula has shown antiviral properties against the
avian influenza H5N1 virus. The Company can now begin immediate testing of its
potential veterinary drug upon chickens, turkeys and ducks. On November 9, 2005,
the Company announced that Quigley Pharma had received four additional INAD
numbers allowing its formula to be tested on companion animals such as dogs,
cats, horses and companion birds.
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
In May 2005, the Financial Accounting Standards Board ("FASB") issued Statement
154, "ACCOUNTING CHANGES AND ERROR CORRECTIONS, A REPLACEMENT OF APB OPINION NO.
20 AND FASB STATEMENT NO. 3." The standard requires retrospective application to
prior periods' financial statements of a voluntary change in accounting
principle unless it is deemed impracticable. The standard states that a change
in method of depreciation, amortization or depletion for long-lived,
non-financial assets be accounted for as a change in accounting estimate that is
affected by a change in accounting principle. The standard is effective for
accounting changes and corrections of errors made occurring in fiscal years
beginning after December 15, 2005. The impact on the Company's financial
position or results of operations as a result of the adoption of Statement of
Financial Accounting Standards ("SFAS") No. 154 cannot be determined.
In December 2004, the FASB issued Statement 123 (revised 2004),"SHARE-BASED
PAYMENT." The standard eliminates the disclosure-only election under the prior
SFAS 123 and requires the recognition of compensation expense for stock options
and other forms of equity compensation based on the fair value of the
instruments on the date of grant. The standard is effective for fiscal years
beginning after June 15, 2005. In March 2005, the Securities & Exchange
Commission (the "SEC") issued Staff Accounting Bulletin No. 107, "Share-Based
Payment" ("SAB 107"). SAB 107 summarizes the views of the SEC staff regarding
the interaction between SFAS No. 123 (Revised 2004), "Share-Based Payment"
("SFAS 123R") and certain SEC rules and regulations, and is intended to assist
in the initial implementation of SFAS 123R, which for the Company is required by
the beginning of its fiscal year 2006. The Company is currently evaluating the
guidance provided within SAB 107 and SFAS 123R and the effect it will have on
its consolidated balance sheets and statements of operations, shareholders'
equity and cash flows, if any.
CRITICAL ACCOUNTING 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. 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.
REVENUE
Provisions to reserves to reduce revenues for cold remedy products that do not
have an expiration date, include the use of estimates, which are applied or
matched to the current sales for the period presented. These estimates are based
on specific customer tracking and an overall historical experience to obtain an
effective applicable rate. Additionally, the monitoring of current occurrences,
developments by customer, market conditions and any other occurrences that could
affect the expected provisions relative to net sales for the period presented
are also performed. A one percent deviation for sales returns reserve provisions
for the three months ended September 30, 2005 and 2004 could affect net sales by
approximately $172,000 and $118,000, respectively, and the nine month periods
ended September 30, 2005 and 2004 by approximately $397,000 and $297,000,
respectively. A one percent deviation for cooperative advertising reserve
provisions for the three months ended September 30, 2005 and 2004 could affect
net sales by approximately $110,000 and $71,000, respectively, and the nine
month periods ended September 30, 2005 and 2004 by approximately $207,000 and
$140,000, respectively.
The reported results include a returns provision of approximately $225,000 and
$626,000 at September 30, 2005 and December 31, 2004, respectively in the event
of future product returns following the discontinuation of the Cold-Eeze(R) Cold
Remedy Nasal Spray product in September 2004.
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INCOME TAXES
The Company has recorded a valuation allowance against its net deferred tax
assets. Management believes that this allowance is required due to the
uncertainty of realizing these tax benefits in the future. The uncertainty
arises because the Company may incur substantial research and development costs
in its Ethical Pharmaceutical segment.
THREE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
30, 2004
Net sales for the three month period ended September 30, 2005 were $15,319,980,
reflecting an increase of $5,629,122 over the net sales of $9,690,858 for the
comparable three month period ended September 30, 2004. The Cold Remedy segment
reported net sales in the 2005 period of $9,252,322, an increase of $4,253,382,
or 85.1%, over the comparable 2004 period of $4,998,940. The Health and Wellness
segment reported net sales in the 2005 period of $5,237,772, an increase of
$545,854, or 11.6%, over the net sales of $4,691,918 for the comparable 2004
period. The Contract Manufacturing segment reported net sales of $829,886 in the
2005 period with no comparable amount in the 2004 period as this segment
commenced business as a part of The Quigley Corporation on October 1, 2004.
Sales in the third quarter 2005 reflected continued improved performance of the
Cold-Remedy segment and the Cold-Eeze(R) product. The segment realized increased
consumer acceptance and growing household penetration possibly due to successful
advertising and marketing initiatives; new product extensions of Cold-Eeze(R)
and effective sales representation.
The Health and Wellness segment's net sales increased in the 2005 period as a
result of increased international sales due to growth in the number of
international independent distributor representatives. This increase in
international sales was offset by domestic sales activity remaining comparable
with the 2004 period.
Cost of sales as a percentage of net sales for the three months ended September
30, 2005 was 45.9% compared to 60.8% for the comparable 2004 period, a decrease
of 14.9%. This decrease was primarily due to the impact of the product
discontinuation in 2004 and the expiration of a founders' commission in May
2005, both relating to the Cold-Remedy segment, these events amounted to 11.2%
of the decrease. The impact of the 2004 product discontinuation was a reduction
to sales of $974,000 and an inventory write-off of $422,000. The remaining part
of the decrease was attributable to product mix, product bonus promotions period
variations and the effect on the 2005 costs of lower profit margins related to
the Contract Manufacturing segment
Sales and marketing expense for the three month period ended September 30, 2005
were $1,452,474, an increase of $536,924 over the comparable 2004 period amount
of $915,550. The increase was primarily due to increased sales broker expenses
related to the growth in sales associated with the Cold Remedy segment.
General and administration costs for the three month period ended September 30,
2005 was $2,897,941 compared to $2,313,609 for the 2004 period, an increase of
$584,332 between the periods. The increase in 2005 was primarily due to
increased payroll costs for the period and 2005 costs associated with the
Contract Manufacturing segment for which there were no comparable 2004 costs as
this segment commenced business as a part of the Company on October 1, 2004.
Research and development costs during the three months ended September 30, 2005
were $1,029,985 compared to $627,344 during the 2004 comparable period,
reflecting an increase in 2005 of $402,641, primarily as a result of increased
Pharma segment costs and reduced study activity related to the Cold-Eeze(R)
products.
NINE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 2004
Net sales for the nine month period ended September 30, 2005 were $35,917,423,
reflecting an increase of $9,719,766 over the net sales of $26,197,657 for the
comparable nine month period ended September 30, 2004. The Cold Remedy segment
reported net sales in 2005 of $17,139,868, an increase of $6,457,257, or 60.4%,
over the comparable 2004 period of $10,682,611. The Health and Wellness segment
reported net sales in 2005 of $15,571,350, an increase of $56,304, or 0.4%, over
the net sales of $15,515,046 for the comparable 2004 period. The Contract
Manufacturing segment reported net sales of $3,206,205 in the 2005 period with
no comparable amount in the 2004 period as this segment commenced business as a
part of The Quigley Corporation on October 1, 2004.
For the nine months to September 30, 2005 the Cold Remedy segment reported
significant sales growth as compared to the 2004 period. This growth may be
attributable to the prolonged 2004/2005 cold season, more expansive and
effective media and in-store advertising in support of the Cold-Eeze(R) product,
product line extensions and greater household penetration in the past twelve
months.
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The Health and Wellness segment's net sales increased in the 2005 period as a
result of increased international sales with offset due to decreased domestic
activity. International sales for this segment increased by 44.4% in the 2005
period due to the continued expansion of international distribution.
Cost of sales as a percentage of net sales for the nine months ended September
30, 2005 was 52.6% compared to 57.6% for the comparable 2004 period, a decrease
of 5%. This decrease was primarily due to the impact of the discontinuation of
the Cold-Eeze(R) Cold Remedy Nasal Spray product in 2004 and the expiration of a
founders' commission in May 2005, both relating to the Cold-Remedy segment,
which events amounted to approximately 4.1% of the decrease. The impact of the
2004 product discontinuation included a reduction to sales of $974,000 and an
inventory write-off of $422,000 during the third quarter. In general, the
remainder of the decrease was due to variations in product mix, fluctuations in
bonus products costs and the effect on the 2005 costs of lower profit margins
related to the Contract Manufacturing segment.
Sales and marketing expense for the nine month period ended September 30, 2005
were $4,354,064, an increase of $980,974 over the comparable 2004 period amount
of $3,373,090. The increase in 2005 was largely due to increased sales broker
expense relative to the significant sales growth, increased media advertising
and the impact of sales and marketing costs associated with the Contract
Manufacturing segment for which there was no comparable 2004 amount.
General and administration costs for the nine month period ended September 30,
2005 was $8,879,217 compared to $7,118,849 during the 2004 period, an increase
of $1,760,368 between the periods. The increase in 2005 was primarily due to
increased payroll costs for the period and 2005 costs associated with the
Contract Manufacturing segment for which there was no comparable 2004 costs.
Research and development costs during the nine months ended September 30, 2005
were $2,938,947 compared to $2,395,193 during the 2004 comparable period,
reflecting an increase in 2005 of $543,754, primarily as a result of increased
Pharma segment costs and reduced study activity related to the Cold-Eeze(R)
products.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $18,309,436 and $17,852,910 at September 30,
2005 and December 31, 2004, respectively, resulting in an increase of $456,526.
Changes in working capital overall have been primarily due to the following
items: cash balances decreased by $2,193,442; accounts receivable increased by
$2,154,047 due to seasonal fluctuations and effective cash collections;
advertising liabilities decreased by $1,083,324 as a result of the seasonality
of the cold remedy products and related co-operative and media advertising
activity; and other current liabilities increased by $820,383 principally due to
increased payroll liabilities at September 30, 2005. Total cash balances at
September 30, 2005 were $12,172,999 compared to $14,366,441 at December 31,
2004. The decrease in cash was due to the movements in working capital as
reported. In April 2005, the Company prepaid an amount of $1.0 million against
the outstanding balance on the long-term loan.
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 or income from continuing 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.
CAPITAL EXPENDITURES
Capital expenditures during the remainder of 2005 are not expected to be
material.
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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 a 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. At September 30,
2005, the Company had $1.6 million of variable rate debt. If the interest rate
on the debt were to increase or decrease by 1% for the year, annual interest
expense would increase or decrease by approximately $16,000.
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-15 and 15d-15 under the Securities Exchange Act of 1934, as amended) 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. The Company is currently
undergoing a comprehensive effort in preparation for compliance with Section 404
of the Sarbanes-Oxley Act of 2002. This will involve the documentation, testing
and review of our internal controls under the direction of senior management.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
KEITH J. KOCHIE VS. THE QUIGLEY CORPORATION, ET AL
On August 2, 2005, a Complaint was filed in the United States District Court for
the Eastern District of New York. The complaint was served on The Quigley
Corporation on or about September 1, 2005. The plaintiff's complaint consists of
counts for negligence, strict product liability, breach of express warranty,
breach of implied warranties, fraudulent misrepresentation, fraudulent
concealment, negligent misrepresentation, and fraud and deceit relating to the
use of the Company's COLD-EEZE Nasal Spray Product.
The Company believes plaintiff's claims are without merit and is vigorously
defending those actions. The Company's insurance carrier is presently defending
this action.
Based upon the information the Company has at this time, it believes the action
will not have a material impact on the Company. However, at this time no
prediction as to the outcome can be made.
YOUNG VS. INNERLIGHT
On September 14, 2005, Robert O. Young and Shelley R. Young instituted
Third-Party Complaints against Darius International Inc., a wholly-owned
subsidiary of The Quigley Corporation and its wholly-owned subsidiary,
Innerlight Inc., in an action brought against the Youngs by Colonial Pacific
Leasing Corporation, dba GE Capital Colonial Pacific Leasing. The Third-Party
Complaints contain Counts for Breach of Contract, Breach of Covenant of Good
Faith and Fair Dealing, Unjust Enrichment, Conversion, Common Law Trademark
Infringement/Unfair Competition, Common Law Violation of the Right of Publicity,
Violation of Abuse of Personal Identity Act, Declaratory and Injunctive Relief,
and Intentional Interference with Business Relations.
The Company believes that plaintiffs' claims are without merit and is vigorously
defending these claims. At the present time a Motion to Dismiss is pending
relative to these actions before the Fourth Judicial District Court for Utah
County, State of Utah.
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ITEM 6. EXHIBITS
(1) Exhibit 31.1 Certification by the Chief Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
(2) Exhibit 31.2 Certification by the Chief Financial Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
(3) Exhibit 32.1 Certification by the Chief Executive Officer pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
(4) Exhibit 32.2 Certification by the Chief Financial Officer pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
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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: November 14, 2005
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