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 March 31, 2007
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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
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Commission file number 0-21617
THE QUIGLEY CORPORATION
-----------------------
(Exact Name of Registrant as Specified in Its Charter)
Nevada 23-2577138
- --------------------------------------------------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large Accelerated Filer [ ] Accelerated Filer [X] Non-Accelerated Filer [ ]
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 May 4, 2007, there were 12,684,633 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 16-25
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 25
Item 4. Controls and Procedures 25
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 26-28
Item 6. Exhibits 29
Signatures
-2-
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THE QUIGLEY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS March 31, 2007 December 31, 2006
(Unaudited)
------------------ -----------------
CURRENT ASSETS:
Cash and cash equivalents $ 19,175,912 $ 17,756,759
Accounts receivable (net of doubtful 2,745,930 6,557,347
accounts of $244,559 and $275,636)
Inventory 4,163,556 4,262,104
Prepaid expenses and other current assets 983,523 1,217,097
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TOTAL CURRENT ASSETS 27,068,921 29,793,307
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PROPERTY, PLANT AND EQUIPMENT - NET 4,798,372 4,838,076
------------ ------------
OTHER ASSETS 130,862 213,651
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TOTAL ASSETS $ 31,998,155 $ 34,845,034
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable 661,968 885,648
Accrued royalties and commissions 3,978,401 3,752,646
Accrued advertising 708,027 2,150,259
Other current liabilities 2,983,557 2,463,481
------------ ------------
TOTAL CURRENT LIABILITIES 8,331,953 9,252,034
------------ ------------
MINORITY INTEREST 64,971 63,563
COMMITMENTS AND CONTINGENCIES (NOTE 6)
STOCKHOLDERS' EQUITY:
Common stock, $.0005 par value; authorized 50,000,000;
Issued: 17,330,686 and 17,330,686 shares 8,665 8,665
Additional paid-in-capital 37,362,453 37,362,453
Retained earnings 11,418,272 13,346,478
Less: Treasury stock, 4,646,053 and (25,188,159) (25,188,159)
4,646,053 shares, at cost ------------ ------------
TOTAL STOCKHOLDERS' EQUITY 23,601,231 25,529,437
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 31,998,155 $ 34,845,034
============ ============
See accompanying notes to condensed consolidated financial statements
-3-
THE QUIGLEY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31, 2007 March 31, 2006
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NET SALES $ 9,077,876 $ 10,266,038
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COST OF SALES 4,067,856 4,953,454
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GROSS PROFIT 5,010,020 5,312,584
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OPERATING EXPENSES:
Sales and marketing 2,733,543 2,434,925
Administration 3,212,155 3,705,761
Research and development 1,152,662 784,523
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TOTAL OPERATING EXPENSES 7,098,360 6,925,209
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LOSS FROM OPERATIONS (2,088,340) (1,612,625)
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OTHER INCOME (EXPENSE)
Interest and other income 160,134 179,974
Interest expense -- (21,644)
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TOTAL OTHER INCOME (EXPENSE) 160,134 158,330
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LOSS FROM OPERATIONS BEFORE TAXES
(1,928,206) (1,454,295)
INCOME TAXES (BENEFIT) -- --
------------ ------------
NET LOSS ($ 1,928,206) ($ 1,454,295)
============ ============
LOSS PER COMMON SHARE:
Basic $ (0.15) $ (0.12)
============ ============
Diluted $ (0.15) $ (0.12)
============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 12,684,633 11,714,140
============ ============
Diluted 12,684,633 11,714,140
============ ============
See accompanying notes to condensed consolidated financial statements
-4-
THE QUIGLEY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31, 2007 March 31, 2006
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NET CASH PROVIDED BY OPERATING ACTIVITIES $ 1,631,835 $ 1,503,382
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NET CASH FLOWS USED IN INVESTING ACTIVITIES (212,682) (140,966)
------------ ------------
NET CASH FLOWS USED IN FINANCING ACTIVITIES -- (57,167)
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NET INCREASE IN CASH 1,419,153 1,305,249
CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD 17,756,759 16,885,170
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CASH & CASH EQUIVALENTS, END OF PERIOD $ 19,175,912 $ 18,190,419
============ ============
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, 2006. 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 month periods ended
March 31, 2007 and 2006 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, the Company 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 incentive promotion 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 specific 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, and reviewed quarterly, as is the estimate for
cooperative incentive promotion 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 incentive promotion 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 specific reserve for excess or
obsolete inventory of $387,636 and $430,926 as of March 31, 2007 and December
31, 2006, respectively. Inventories included raw material, work in progress and
packaging amounts of approximately $1,194,000 and $1,077,000 at March 31, 2007
and December 31, 2006, 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.
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 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 2007. 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 31% and
26% of sales volume for the respective three month periods ended March 31, 2007
and 2006, respectively. Customers comprising the five largest accounts
receivable balances represented 47% and 56% of total trade receivable balances
at March 31, 2007 and December 31, 2006, respectively. During each of the three
month periods ended March 31, 2007 and 2006, approximately 11% of the Company's
net sales were related to international markets.
The Company's revenues are currently generated from the sale of the Cold-Remedy
products which approximated 61% and 50% of total revenues in the three month
periods ended March 31, 2007 and 2006, respectively. The Health and Wellness
segment approximated 32% and 45%, respectively, for the three month periods
ended March 31, 2007 and 2006. The Contract Manufacturing segment approximated
7% and 5%, respectively, for the three month periods ended March 31, 2007 and
2006.
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
-7-
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 $438,256 for future sales returns and $332,565 for other
allowances as of March 31, 2007 and $534,176 and $429,546 at December 31, 2006,
respectively. The 2007 and 2006 reserve balances include a remaining returns
provision at March 31, 2007 and December 31, 2006 of approximately $112,000 and
$113,000, 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 reserves also include an estimate of the uncollectability of accounts
receivable resulting in a reserve of $244,559 and $275,636 at March 31, 2007 and
December 31, 2006, respectively.
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(R) formulation amounting to $257,996 and $242,514 respectively, for
the three month periods ended March 31, 2007 and 2006 are presented in the
financial statements as cost of sales (see also Note 4).
In the Health and Wellness Segment, agreements with Independent Distributor
Representatives ("IR's") require payments to them to be calculated based upon
net commissionable sales of other IR's in their down-line and not on any of
their individual purchases of products including not taking title to the
products that are sold by other IR's. In accordance with EITF 01-9, such
payments to the IR's do not qualify as a reduction of the selling price as these
payments are not offered as an allowance or as a percentage rebate of direct
purchases made, and the IR's are not offered any cooperative promotion
incentives of any type. Such payments, among other factors, are related to
expand the cycle of additional IR's and for maintaining the distribution channel
for this segment's products.
Accordingly, such distribution payments amounting to $1,132,549 and $2,052,714
for the three month periods ended March 31, 2007 and 2006, respectively, and are
presented in the financial statements as cost of sales.
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(R) 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.
-8-
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 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.
As of January 1, 2006, the Company adopted SFAS 123R, "SHARE BASED PAYMENT". The
adoption of SFAS 123R did not have an impact on the Company's financial position
or results of operations in the 2007 and 2006 periods reported.
No stock options were granted in the three month periods ended March 31, 2007
and 2006. All stock options granted prior to January 1, 2006 were fully vested.
ADVERTISING AND INCENTIVE PROMOTIONS
Advertising and incentive promotion costs are expensed within the period in
which they are utilized. Advertising and incentive promotion expense is
comprised of media advertising, presented as part of sales and marketing
expense; cooperative incentive promotion, which is accounted for as part of net
sales; and free product, which is accounted for as part of cost of sales.
Advertising and incentive promotion costs incurred for the three month periods
ended March 31, 2007 and 2006 were $2,590,416 and $2,035,284, respectively.
Included in prepaid expenses and other current assets was zero and $258,215 at
March 31, 2007 and December 31, 2006, respectively, relating to prepaid
advertising and promotion expenses.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations in the period incurred.
Expenditures for the three month periods ended March 31, 2007 and 2006 were
$1,152,662 and $784,523, respectively. Principally, research and development
costs are related to Pharma's study activities and costs associated with
Cold-Eeze(R) products.
INCOME TAXES
The Company utilizes the 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 8 -
Income Taxes for further discussion.
Effective January 1, 2007, the Company adopted Financial Accounting Standards
Board ("FASB") Interpretation No. 48, ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES
(FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in an enterprise's financial statements in accordance with SFAS
Statement No. 109, ACCOUNTING FOR INCOME TAXES. FIN 48 prescribes a recognition
threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. FIN
48 also provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure and transition. Adoption of
this standard did not have an impact on the Company's consolidated financial
position, results of operations or cash flows. Our evaluation was performed for
the tax years ended 2003, 2004, 2005 and 2006, the tax years which remain
subject to examination by major tax jurisdictions as of March 31, 2007.
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 then available to the Company for
debt with similar terms was 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.
-9-
RECENTLY ISSUED ACCOUNTING STANDARDS
In February 2007, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 159, The Fair Value Option for Financial Assets and Financial Liabilities -
Including an amendment of FASB No. 115 ("FAS 159"). The Statement permits
companies to choose to measure many financial instruments and certain other
items at fair value in order to mitigate volatility in reported earnings caused
by measuring related assets and liabilities differently without having to apply
complex hedge accounting provisions. FAS 159 is effective for the Company
beginning January 1, 2008. The Company is currently evaluating the impact, if
any, of FAS 159 on its operating results and financial position.
NOTE 3 - VARIABLE INTEREST ENTITY
In December 2003, the FASB 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, the maximum
exposure to loss is insignificant. As a result of consolidating the VIE of which
the Company is the primary beneficiary, the Company recognized a minority
interest of approximately $64,971 and $63,563 on the Consolidated Balance Sheets
at March 31, 2007 and December 31, 2006, respectively, which represents 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 March 31, 2007
and December 31, 2006, respectively, are $72,644 and $64,592 of VIE assets,
representing all of the assets of the VIE. The VIE assists the Company in
acquiring licenses and with research and development activities in certain
countries.
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 based 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 have been recorded.
The expenses for the respective periods relating to such agreement amounted to
$257,996 and $242,514, for the three month periods ended March 31, 2007 and
2006, respectively. Amounts accrued for these expenses at March 31, 2007 and
December 31, 2006 were $3,488,761 and $3,230,765, respectively, all non-related
party balances.
NOTE 5 - OTHER CURRENT LIABILITIES
Included in other current liabilities are $660,280 and $234,208 related to
accrued compensation at March 31, 2007 and December 31, 2006, respectively.
NOTE 6 - 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 March 31,
2007 and 2006 of $95,438, and $64,588, respectively. The Company has approximate
future obligations over the next five years as follows:
-10-
Property
Research and and Other
Year Development Leases Other Total
---------------------------------------------------------------
2007 $2,615,057 $ 174,356 $ 936,350 $3,725,763
2008 -- 194,361 -- 194,361
2009 -- 108,355 -- 108,355
2010 -- -- -- --
2011 -- -- -- --
2012 -- -- -- --
---------------------------------------------------------------
Total $2,615,057 $ 477,072 $ 936,350 $4,028,479
---------------------------------------------------------------
Additional research and development costs are expected to be incurred during the
remainder of 2007.
Other includes new products procurement commitments for the cold remedy segment
with initial sales of these products expected to occur during the second half of
2007.
The Company has an agreement with the former owners of the Utah based direct
marketing and selling company, whereby the former owners receive payments,
currently totaling 5% of net sales collected, for product exclusivity,
consulting, marketing presentations, confidentiality and non-compete
arrangements. However, the Company and the former owners are in litigation and
as such no potential offset from such litigation for these fees have been
recorded. Amounts paid or payable under such agreement during the three month
periods ended March 31, 2007 and 2006 were $108,606 and $190,639, respectively.
Amounts payable under such agreement, included in other current liabilities, at
March 31, 2007 and December 31, 2006 were $637,240 and $528,990, respectively.
The Company has several licensing and other contractual agreements, see Note 4.
TESAURO AND ELEY, ET AL. VS. THE QUIGLEY CORPORATION
(CCP OF PHILA., AUGUST TERM 2000, NO. 001011)
In September, 2000, the Company was sued by two individuals (Jason Tesauro and
Elizabeth Eley, both residents of Georgia), allegedly on behalf of a "nationwide
class" of "similarly situated individuals," in the Court of Common Pleas of
Philadelphia County, Pennsylvania. The Complaint further alleges that the
plaintiffs purchased certain Cold-Eeze products between August, 1996, and
November, 1999, based upon cable television, radio and internet advertisements,
which allegedly misrepresented the qualities and benefits of the Company's
products. The Complaint, as pleaded originally, requested an unspecified amount
of damages for violations of Pennsylvania's consumer protection law, breach of
implied warranty of merchantability and unjust enrichment, as well as a judicial
determination that the action be maintained as a class action. In October, 2000,
the Company filed Preliminary Objections to the Complaint seeking dismissal of
the action. The court sustained certain objections, thereby narrowing
plaintiffs' claims.
In May 2001, plaintiffs filed a motion to certify the putative class. The
Company opposed the motion. In November, 2001, the court held a hearing on
plaintiffs' motion for class certification. In January, 2002, the court denied
in part and granted in part plaintiffs' motion. The court denied plaintiffs'
motion to certify a class based on plaintiffs' claims under Pennsylvania's
consumer protection law, under which plaintiffs sought treble damages,
effectively dismissing this cause of action; however, the court certified a
class based on plaintiffs' secondary breach of implied warranty and unjust
enrichment claims. In August, 2002, the court issued an order adopting a form of
Notice of Class Action to be published nationally. The form of Notice approved
by the court included a provision which limits the potential class members who
may potentially recover damages in this action to those persons who present a
proof of purchase of Cold-Eeze during the period August 1996 and November 1999.
Afterward, a series of pre-trial motions were filed raising issues concerning
trial evidence and the court's jurisdiction over the subject matter of the
action. In March, 2005, the court held oral argument on these motions.
On November 8, 2006, the Court entered an Order dismissing the case in its
entirety on the basis that the action was preempted by federal law. The
plaintiffs appealed the Court's decision in December, 2006. On March 22, 2007,
the Superior Court entered a scheduling order for briefing. On May 1,
plaintiffs/appellants filed their opening brief. The Company's brief in response
is due on May 30, 2007.
For the reasons stated by the Court in dismissing the case, as well as for other
reasons, the Company believes that plaintiffs' case on appeal lacks merit;
however, no prediction as to the outcome of the appeal can be made.
-11-
MONIQUE FONTENOT DOYLE VS. THE QUIGLEY CORPORATION
(U.S.D.C., W.D. LA. DOCKET NO.: 6:06CV1497)
On August 31, 2006, the plaintiff filed an action against the Company in the
United States District Court for the Western District of Louisiana
(Lafayette-Opelousas Division). The action alleges the plaintiff suffered
certain losses and injuries as a result of the Company's nasal spray product.
Among the allegations of plaintiff are breach of express warranties and damages
pursuant to the Louisiana Products Liability Act.
At the present time this matter is being defended by the Company's liability
insurance carrier. However, the Company has been tendered the defense of this
action for which there is no insurance. The Company is vigorously defending this
lawsuit and believes that the action lacks merit. However, at this time no
prediction as to the outcome of the case can be made.
GREG SCRAGG VS. THE QUIGLEY CORPORATION, ET AL.
(U.S.D.C, D. COLO. DOCKET NO.: 06- 00061 LTB-CBS)
On November 30, 2005, an action was brought in the District Court of Denver,
Colorado. The complaint was served on the Company soon thereafter. The action
alleges the plaintiff suffered certain losses and injuries as a result of using
the Company's nasal spray product. The complaint consists of counts for fraud
and deceit (fraudulent concealment), negligent misrepresentation, strict
liability (failure to warn), and strict product liability (design defect).
A trial date has been set for August 27, 2007. The Company believes the
plaintiff's claims are without merit and is vigorously defending this lawsuit.
At the present time this matter is being defended by the Company. Based upon the
information the Company has at this time, it believes the action is without
merit. However, at this time no prediction as to the outcome can be made.
INNERLIGHT INC. VS. THE MATRIX GROUP, LLC
(FOURTH JUDICIAL DISTRICT COURT, UTAH COUNTY, STATE OF UTAH)
On March 13, 2006 Innerlight Inc. filed a declaratory judgment action in the
Fourth Judicial District, Utah County, State of Utah, requesting a declaration
that there is no valid contract between the parties. The Matrix Group, LLC has
alleged there is a contract between the parties obligating Innerlight Inc. to
purchase $750,000 of products for the 12-month period commencing October 18,
2004 and ending October 17, 2005, $1,500,000 for the period commencing October
18, 2005 and ending October 17, 2006, and for each 12-month period thereafter,
through and including October 17, 2013, at least $4,000,000 of products from The
Matrix Group, LLC. The document on which Matrix relies was drafted by Matrix and
states that the acceptance of the appointment by distributor (Innerlight Inc.)
is conditioned upon distributor's written acceptance of the Company's product
price list. No written acceptance of the product price list was ever made by
Innerlight Inc.
The Matrix Group, LLC filed a Utah Rule of Civil Procedure 12(b)(3) motion
asking that the complaint be dismissed. On July 13, 2006 the Court for the
Fourth Judicial District, Utah County, State of Utah, entered an order denying
defendant's motion to dismiss under Rule 12(b)(3) based on Innerlight's
assertion that a material condition precedent remains to be satisfied to
establish an enforceable agreement between the parties. The Utah County Court
has maintained jurisdiction of this action to make a final determination on the
merits of Innerlight's claim.
Thereafter, Matrix filed a counterclaim alleging that a contract did exist and
that Innerlight had breached this contract. Both parties then agreed to stay
discovery, concluding that discovery was not necessary and both filed motions
for summary judgment to resolve the case.
On January 17, 2007, arguments were presented to the Court on the parties' cross
motions for summary judgment and the Court ruled in Innerlight's favor, finding
that no contract existed between the parties and that Innerlight was entitled to
return over $150,000 in product to Matrix for reimbursement. The wording of the
final Order granting Innerlight's motion and rejecting Matrix's were entered by
the Court on April 10, 2007. Matrix has the right to appeal. Matrix has
expressed its intent to appeal the Court's summary judgment ruling and related
rulings, and has filed a motion to stay enforcement of the Court's order pending
appeal, and for an order excusing Matrix from the requirement of filing a bond.
Innerlight intends to oppose Matrix's motion and any appeal vigorously.
For the reasons stated by the Court in the case, as well as for other reasons,
the Company believes that plaintiffs' case on appeal lacks merit; however, no
prediction as to the outcome of the appeal can be made.
-12-
TERMINATED LEGAL PROCEEDINGS
ZANG ANGELFIRE, TRACEY ARVIN, SHANE HOHNSTEIN, TAMMY LAURENT,
BARBARA SEOANE, DONNA SMALLEY, AND JOHN WILLIAMS
VS. THE QUIGLEY CORPORATION
(PA. C.C.P., BUCKS COUNTY, DOCKET NO. 2004-07364-27-2)
On November 4, 2004, the above plaintiffs filed an action in the Court of Common
Pleas of Bucks County against the Company. The complaint was amended on March
11, 2005. The action alleged that the plaintiffs suffered certain losses and
injuries as a result of using the Company's nasal spray product. The plaintiffs
claimed the Company was liable to them based on the following allegations:
negligence, strict products liability (failure to warn and defective design),
breach of express warranty, breach of implied warranty, and a violation of the
Pennsylvania Unfair Trade Practices and Consumer Protection Law and other
consumer protection statutes.
These actions were recently settled at the direction of the insurance carrier
out of insurance proceeds.
BRIGITTE YVON & KLAUS YVON VS. THE QUIGLEY CORPORATION, ET AL.
On October 12, 2005, the Plaintiffs instituted an action against Caribbean
Pacific Natural Products, Inc. and other defendants for personal injuries as a
result of being hit by a chair on the pool deck of Waikoloa Beach Marriott Hotel
d/b/a Outrigger Enterprises, Inc. in Honolulu, Hawaii. On December 9, 2005, The
Quigley Corporation was added as an additional defendant without notice to this
case. The main defendant in the case is Caribbean Pacific Natural Products, Inc.
in which The Quigley Corporation formerly held stock. On January 22, 2003 all
shares of The Quigley Corporation stock were sold to Suncoast Naturals, Inc. in
return for stock of Suncoast Naturals, Inc. At the time of the accident, The
Quigley Corporation had no ownership interest in Caribbean Pacific Natural
Products, Inc. On April 26, 2007, counsel for all parties entered into a
stipulation for partial dismissal without prejudice against The Quigley
Corporation.
NOTE 7 - 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
March 31, 2007, 4,159,191 shares have been repurchased at a cost of $24,042,801
or an average cost of $5.78 per share. No shares were repurchased during 2004 to
2007 to date.
During the three months ended March 31, 2007, no options or warrants were
granted or exercised.
NOTE 8 - INCOME TAXES
Certain exercises of options and warrants, and restricted stock issued for
services that became unrestricted resulted in reductions to taxes currently
payable and a corresponding increase to additional-paid-in-capital for prior
years. In addition, certain tax benefits for option and warrant exercises
totaling $6,581,458 are deferred and will be credited to
additional-paid-in-capital when the NOL's attributable to these exercises are
utilized. As a result, these NOL's will not be available to offset income tax
expense. The net operating loss carry-forwards that currently approximate $16.6
million for federal purposes will be expiring through 2026. Additionally, there
are net operating loss carry-forwards of $16.9 million for state purposes that
-13-
will be expiring through 2016. Until sufficient taxable income to offset the
temporary timing differences attributable to operations, the tax deductions
attributable to option, warrant and stock activities and alternative minimum tax
credits of $110,270 are assured, a valuation allowance equaling the total
deferred tax asset is being provided.
NOTE 9 - EARNINGS PER SHARE
Basic loss per share ("EPS") excludes dilution and is computed by dividing
income available to common stockholders by the weighted - average number of
common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that shared in the earnings of the entity. Diluted EPS also
utilizes the treasury stock method which prescribes a theoretical buy-back of
shares from the theoretical proceeds of all options and warrants outstanding
during the period. Since there is a large number of options and warrants
outstanding, fluctuations in the actual market price can have a variety of
results for each period presented.
A reconciliation of the applicable numerators and denominators of the income
statement periods presented, as reflects the results of continuing operations,
is as follows (millions, except per share amounts):
March 31, 2007 March 31, 2006
----------------------------------------------------------
Net Net
Loss Shares EPS Loss Shares EPS
----------------------------------------------------------
Basic EPS ($ 1.9) 12.7 ($ 0.15) ($ 1.5) 11.7 ($ 0.12)
Dilutives:
Options/Warrants -- -- -- --
----------------------------------------------------------
Diluted EPS ($ 1.9) 12.7 ($ 0.15) ($ 1.5) 11.7 ($ 0.12)
==========================================================
Options and warrants outstanding at March 31, 2007 and 2006 were 3,597,000 and
4,593,750 respectively. They were not included in the computation of diluted
earnings for the periods with a net loss because the effect would be
anti-dilutive.
NOTE 10 - RELATED PARTY TRANSACTIONS
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 $30,750 and $53,250
have been paid to a related entity during the three month periods ended March
31, 2007 and 2006, respectively. This expenditure is used to assist with the
regulatory aspects of obtaining such licenses.
NOTE 11 - 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 divides 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 is 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.
-14-
Financial information relating to 2007 and 2006 operations, by business segment,
follows:
---------------------------------------------------------------------------------------------------------------------------
For the Three Months Ended Cold Health and Contract Ethical Corporate &
March 31, 2007 Remedy Wellness Manufacturing Pharmaceutical Other Total
---------------------------------------------------------------------------------------------------------------------------
Revenues
Customers-domestic $ 5,540,640 $ 1,937,854 $ 609,311 $ -- $ -- $ 8,087,805
Customers-international $ -- $ 990,071 $ -- $ -- $ -- $ 990,071
Inter-segment $ -- $ -- $ 1,183,350 $ -- $(1,183,350) $ --
Segment operating profit (loss) $ (459,929) $ (239,103) $ (226,673) $(1,254,869) $ 92,234 $(2,088,340)
---------------------------------------------------------------------------------------------------------------------------
For the Three Months Ended Cold Health and Contract Ethical Corporate &
March 31, 2006 Remedy Wellness Manufacturing Pharmaceutical Other Total
---------------------------------------------------------------------------------------------------------------------------
Revenues
Customers-domestic $ 5,177,340 $ 3,416,889 $ 523,892 $ -- $ -- $ 9,118,121
Customers-international $ -- $ 1,147,917 $ -- $ -- $ -- $ 1,147,917
Inter-segment $ -- $ -- $ 1,593,128 $ -- $(1,593,128) $ --
Segment operating profit (loss) $ (305,907) $ (218,372) $ (169,795) $(876,961) $ (41,590) $(1,612,625)
-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 ("IND") or take any other action to allow its
formulations to be studied or/and for any granted IND to be 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 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-Remedy segment reported an increase in net sales in the first quarter
of 2007 of $363,300 as compared to the same period in 2006. Consumer purchasing
levels appear to be comparable between the quarters, however, the increased
sales are the result of a shift in buying patters by our customers to adjust for
low inventory levels during 2007.
The Contract Manufacturing segment reported an increase in net sales in the
first quarter of 2007 of $85,419 as compared to the 2006 comparative period.
This segment's sales remained comparable between the periods, however, its
primary function is to support the cold remedy segment through production,
warehousing and distribution of the Cold-Eeze product.
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. In the
first quarter of 2007, this segment reported a reduction in net sales of
$1,636,881 compared to the same period in 2006. Sales in the 2007 period reflect
the continued reduction in active independent distributor representatives. The
performance of this segment may also be negatively affected by current
litigation with the sponsor of the segment's product line. During the third
-16-
quarter of 2006 the Company implemented a plan of corrective action for this
segment, part of which was the appointment of a new president who has broad
experience in this industry.
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. Pharma is
currently undergoing research and development activity in compliance with
regulatory requirements. The Company is in the initial stages of what may be a
lengthy process to develop these patent applications into commercial products.
The Company continues to invest significantly in ongoing research and
development activities of this segment. Such investment amounted to $1,254,869
in the first quarter 2007 compared to $876,961 in the 2006 comparative period.
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 PRODUCTS
In May 1992, the Company entered into an exclusive agreement for the worldwide
representation, manufacturing and marketing of Cold-Eeze(R) products in the
United States. 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 available in lozenge, sugar-free tablet and gum form. The
Company has substantiated the effectiveness of Cold-Eeze(R) through a variety of
studies. 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.
-17-
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 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, 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 active 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.
-18-
ETHICAL PHARMACEUTICAL
Pharma's current activity is the research and development of naturally-derived
prescription drugs with the goal of improving the quality of life and health of
those in need. 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 potential synergistic benefits of combining isolated
active constituents and whole plant components. The Company will search for new
natural sources of medicinal substances from plants and fungi from around the
world while also investigating the use of traditional and historic medicinals
and 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.
Patents and certain 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 5, 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 14, 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
Supplements and Method of Using Same" for a method for
treating at least one symptom of arthritis. The patent
extends through April 22, 2023.
o A Patent (No. 7,083,813 B2) entitled "Methods for The
Treatment of Peripheral Neural and Vascular Ailments." The
patent extends through August 4, 2023.
o A Patent (No. 7,166,435 B2) entitled "Compositions and
Methods for Reducing the Tranmissivity of Illnesses." This
patent will provide additional protection to an existing
composition patent (number 6,592,896), which the Company
received in July 2003 and will support on-going
investigations and potential commercialization
opportunities. The Company will be continuing its studies to
test the effects of the referenced compound against avian
flu and human influenza. The patent extends through November
5, 2021.
o A Patent (No. 7,175,987 B2) entitled "Compositions and
Methods for The Treatment of Herpes." The patent extends
through November 5, 2021.
o A Mexican Patent (No. 236311) entitled "Method and
Composition for the Treatment of Diabetic Neuropathy." The
patent extends through December 18, 2020.
o A New Zealand Patent (No. 533439) entitled "Methods for The
Treatment of Peripheral Neural and Vascular Ailments." The
patent extends through November 6, 2022.
o A New Zealand Patent (No. 526041) entitled "Method and
Composition for the Treatment of Diabetic Neuropathy." The
patent extends through December 18, 2021.
o A New Zealand Patent (No. 532775) entitled "Topical
Compositions and Methods for Treatment of Adverse Effects of
Ionizing Radiation." The patent extends through November 6,
2022.
-19-
o An Australian Patent (No. 2002231095) entitled "Method and
Composition for the Treatment of Diabetic Neuropathy." The
patent extends through December 18, 2021.
o A South African Patent (No. 2003/4247) entitled "Methods and
Composition for the Treatment of Diabetic Neuropathy." The
patent extends through December 18, 2021.
o A South African Patent (No. 2003/9802) entitled "Nutritional
Supplements and Methods of Using Same" for a method for
treating at least one symptom of arthritis. The patent
extends through August 5, 2022.
o A South African Patent (No. 2004/4614) entitled "Methods for
The Treatment of Peripheral Neural and Vascular Ailments."
The patent extends through November 5, 2022.
o A South African Patent (No. 2005/0517) entitled
"Anti-Microbial Compositions & Methods for Using Same," the
patent extends through July 23, 2023.
o A South African Patent (No. 2004/3365) "Topical Compositions
and Methods for Treatment of Adverse Effects of Ionizing
Radiation," the patent extends through November 5, 2022.
o An Israeli Patent (No. 159357) entitled "Nutritional
Supplements and Methods of Using Same," the patent extends
through August 6, 2022.
QR-333 - 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 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, and irritation from baseline values.
In October 2005, the Company announced the results of pre-clinical toxicology
studies that showed no irritation, photo toxicity, contact hypersensitivity or
photo allergy when applied topically to hairless guinea pigs and another study
that showed no difference in the dermal response of the compound or placebo when
applied to Gottingen Minipigs. (Both animal models are suggested for the
evaluation of topical drugs, by the FDA). In March 2006, the Company announced
the filing of an IND application with the FDA for its topical compound for the
treatment of Diabetic Peripheral Neuropathy. This filing allowed the Company to
begin human clinical trials following a 30-day review period. If no further
comments were forthcoming from the FDA, studies with human subjects could
commence pending the availability of study drug. This application included a
compilation of all of the supporting development data and regulatory
documentation required to file an IND application with the FDA. In April 2006,
upon FDA approval for its IND, the Company announced its intent to commence
human studies on its formulation.
The Company also announced that in anticipation of receiving this IND, it had
previously held its investigators meeting to organize its multi-center phase
2(b) trials. This would allow the Company to begin these trials as soon as study
drug is available.
In May 2006, the Company announced that it had begun screening patients to start
testing their investigational new drug QR-333 and patients suffering from
diabetic peripheral neuropathy would be given doses in an escalating fashion to
provide pharmacokinetics data.
In September 2006, the Company announced that the results from its human study,
titled "Single Center, Dose Escalating, Safety, Tolerability, And
Pharmacokinetics Study Of QR-333 In Subjects With Diabetic Peripheral
Neuropathy", demonstrated that QR-333 can be administered safely to patients
suffering from diabetic peripheral neuropathy and it would proceed to conducting
Phase IIb clinical trials. The essential CMC (Chemistry Manufacturing and
Controls) stage would provide the Company with the necessary information needed
to produce larger quantities of drug for the Phase IIb trial involving
approximately 180 patients.
The pharmacokinetics trial was the first study in the U.S. conducted under the
FDA issued IND. The positive data showed that QR-333 is safe, it is not
systemically absorbed and it is well tolerated after multiple doses. These
findings are consistent with prior animal toxicity data and the human proof of
concept study performed in France.
-20-
In November 2006, the Company announced that patient enrollment in a Phase IIb
multi center clinical study of QR-333 for the treatment of symptomatic Diabetic
Peripheral Neuropathy (DPN) had commenced. The Phase IIb trial will evaluate the
safety and efficacy of QR-333 applied three times daily compared to
placebo-treated patients over 12 weeks. Efficacy will be determined by Symptom
Assessment Scores, a Visual Analogy Scale (VAS), Quality of Life and Sleep
Questionnaires. Safety will be determined by medical history, physical
examination, vital signs, 12-lead ECG, laboratory tests and nerve conduction
studies. The study will involve 150-180 randomized male and female patients with
Type 1 & 2 diabetes, as defined by the ADA (American Diabetes Association) and
distal symmetric diabetic polyneuropathy.
The Study Chairman is Dr. Philip Raskin, Professor of Medicine University of
Texas Southwestern Medical Center at Dallas Texas. The study protocol was
approved by the FDA as a part of Quigley Pharma's IND submission and has been
approved by the required Investigational Review Boards. The completion of the
study is dependent upon enrollment rates that may affect the overall length of
the study and the communication of its results.
QR-336 - 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.
In April 2006, the Company announced that it signed an agreement with Dr.
William H. McBride, the Vice Chair of Research, Department of Oncology at UCLA
to help develop an appropriate animal model radio protective research program
for QR-336 to comply with New Food and Drug Administration animal efficacy rules
for radio-protective pharmacological compounds.
In October 2006, the Company announced that it had received significant data
identifying 50 microliters as the least toxic and most effective radiation
protection dose in mice when administered ip (intraperitoneal), po (by mouth) or
sc (under the skin) prior to radiation exposure. These experiments were
essential for providing the Company with data to optimize the formulation for
efficacy and route of administration, which is required for filing under the
FDA's "Animal Efficacy Rule".
QR-337 - 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.
QR-435 - In May 2004, the Company announced that an intranasal spray application
of the anti-viral test compound demonstrated efficacy by significantly reducing
the severity of illness in ferrets that had been infected with the Influenza A
virus. In pre-clinical studies, the antiviral formulation demonstrates antiviral
activity against Ocular and Genital Herpes, indicating a new research and
development path for the versatile compound. The Company is pleased with the
progress and indicated that continued research is required to confirm the
compound's safety and efficacy profiles.
In May 2006, the Company announced that it would begin a series of studies to
evaluate the ocular antiviral efficacy and toxicity of its naturally-derived
topical compound QR-435. Studies will be completed at The Campbell Ophthalmic
Microbiology Laboratory at the University of Pittsburgh in the same lab where
previous successful in vitro studies of QR-435 were performed.
In December 2006, the Company announced that a series of studies were conducted
on the advice of Campbell Laboratories, University of Pittsburgh, to assess
QR-435 (Quigley Pharma's broad spectrum anti-viral) potential for treating
Herpes Keratitis. While the in-vitro studies were very successful at killing the
herpes virus on direct contact, the HSV-1/NZW rabbit keratitis model study
showed that the compound, in its aqueous form, did not remain in the eye long
enough to penetrate the corneal epithelial cells where the virus resides in an
infection. The HSV-1/NZW rabbit keratitis model is a recognized standard for
evaluating potential therapeutic agents in this class and is only utilized based
on prior positive experimentation, as was the case.
Quigley Pharma may continue to pursue research and development objectives of
this compound in the treatment of respiratory viruses on the strength of prior
successful in-vitro and ferret model in-vivo studies. The company's naturally
derived formula has shown significant antiviral properties against various
strains of H3N2 and H5N1 Influenza viruses in these studies.
QR-437 - In January 2004, the Company reported that its compound, which was
demonstrating antiviral activity, had shown virucidal and virustatic activity
against the strain 3B of the Human Immunodeficiency Virus Type 1 (HIV-1) in an
in-vitro study. Additionally, the Company decided that the derivative compound
of the anti-viral formulation previously found to be effective for treating
Sialorrhea would probably postpone further development on the Sialorrhea
indication and concentrate on further qualification and development of the
anti-viral capabilities of the compound in humans.
-21-
QR-439 - 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 would conduct two further studies
evaluating the compound which had shown activity against Influenza and SARS. The
first study was 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 was a dose ranging study on the test
compound. Upon dosage determination and confirmation results from these
forthcoming animal model studies, a human proof of concept study using a virus
challenge with Influenza A virus in a quarantine unit would be a viable next
step.
QR-440 (a) - The Company received an additional Investigational New Animal Drug
(INAD) number from the Center for Veterinary Medicine of the FDA. In previous
studies, QR-440 has been shown to reduce inflammation and also suggests possible
disease-modifying potential.
QR-441(a) - In November 2005, the Company was assigned nine INADs for a broad
anti-viral agent by the Center for Veterinary Medicine of the FDA. Eight of the
INADs are for investigating the compound use against avian flu H5N1virus in
chickens, turkeys, ducks, pigs, horses, dogs, cats and non-food birds. In
January 2006, a ninth INAD was assigned for investigating its compound for
treating arthritis in dogs. In March 2006, the Company announced that it is
planning a series of controlled experiments designed to test its all natural
broad spectrum anti-viral compound in poultry stocks. The Company also announced
that Dr. Timothy S. Cummings, MS, DVM, ACPV Clinical Poultry Professor at the
College of Veterinary Medicine at Mississippi State University and Thomas G.
Voss, Ph.D. Assistant Professor Tulane University School of Medicine will be
assisting the Company in the development of the INAD bird challenge studies.
In July 2006, the Company announced that it has obtained positive results that
support Quigley Pharma's continued progress in developing the natural broad
spectrum anti-viral QR441(a) for use in preventing the spread of avian flu in
poultry stocks. The results of the healthy chicken medical feed study confirmed
that food or water dose forms provide an opportunity for potential
commercialization if the compound demonstrates efficacy within these dose forms.
The results clearly showed that the chickens tolerated and consumed all
concentrations of QR441 (a) in the medicated feed. They also tolerated and
consumed the low concentration of drug in the medicated water.
In January 2007, the Company announced positive results from a study evaluating
its anti-viral compound QR-441(a) in embryonating egg and VERO E6 cell test
models. The preliminary study demonstrated QR-441(a) as a potential antiviral
agent in reducing Infectious Bronchitis and New Castle Disease, two viral
poultry diseases that have a significant economic impact to the poultry industry
on an annual basis. Previous in vitro studies have demonstrated that QR-441(a)
to be a potent antiviral agent against H5N1 (Avian Flu).
In February 2007, the Company announced that it had signed an agreement with the
State of Israel Ministry of Agriculture & Rural Development (MOAG) and the
Kimron Veterinary Institute to conduct a clinical trial testing the anti-viral
capacity of the Quigley compound QR-441(a) administered as a medical feed and
water to chickens exposed to HPAI (Highly Pathogenic Avian Influenza) H5N1.
If successful this study could potentially provide data on the efficacy of
QR-441(a) in preventing the infection of food grade poultry through the use of
formulated feed and water. Positive data could be used to continue the
development of the compound in the U.S with guidance from the FDA under the
INAD's issued to Quigley in 2005 and might also be useful for development
outside the United States, where the impact of disease has already been felt.
QR-443 - In August 2006, the Company announced that it had obtained positive
results for its QR-443 compound for the treatment of Cachexia. Cachexia is an
extremely debilitating and life threatening, wasting syndrome associated with
chronic diseases such as cancer, AIDS, chronic renal failure, COPD and
rheumatoid arthritis, where inflammation has a significant impact and patients
experience loss of weight, muscle atrophy, fatigue, weakness and decreased
appetite. The results of an animal study found a 75% efficacy rate in the
treatment of mice with this condition.
In January 2007, the Company announced that it had completed a preliminary
follow up Cachexia study, evaluating weight loss in mice. The tumor burden
Cachexia model study concluded that QR-443 was as effective in delaying the
progression of Cachexia when given orally as it had been shown to be when
administered intra-peritoneally in a previous study.
The new data compliments the previous study results demonstrating a correlation
between effectiveness and the frequency of administration of the QR-443
compound.
-22-
RECENTLY ISSUED ACCOUNTING STANDARDS
In February 2007, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 159, The Fair Value Option for Financial Assets and Financial Liabilities -
Including an amendment of FASB No. 115 ("FAS 159"). The Statement permits
companies to choose to measure many financial instruments and certain other
items at fair value in order to mitigate volatility in reported earnings caused
by measuring related assets and liabilities differently without having to apply
complex hedge accounting provisions. FAS 159 is effective for the Company
beginning January 1, 2008. The Company is currently evaluating the impact, if
any, of FAS 159 on its operating results and financial position.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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.
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 incentive promotion costs, each segment applies a uniform and
consistent method for making certain assumptions for estimating these provisions
that are applicable to that specific segment. Traditionally, these provisions
are not material to net income in the Health and Wellness and Contract
Manufacturing segments. The Ethical Pharmaceutical segment does not have any
revenues.
The product in the Cold Remedy segment, Cold-Eeze(R), has been clinically proven
in two double-blind studies to reduce the severity and duration of common cold
symptoms. Accordingly, factors considered in estimating the appropriate sales
returns and allowances for this product include it being: a unique product with
limited competitors; competitively priced; promoted; unaffected for remaining
shelf life as there is no expiration date; monitored for inventory levels at
major customers and third-party consumption data, such as Information Resources
Incorporated ("IRI").
At March 31, 2007 and December 31, 2006, the Company included reductions to
accounts receivable for sales returns and allowances of $438,000 and $534,000,
respectively, and cash discounts of $88,000 and $154,000, respectively.
Additionally, current liabilities at March 31, 2007 and December 31, 2006
include $694,745 and $861,186, respectively, for cooperative incentive promotion
costs.
Management believes there are no material charges to net income in the current
period related to sales from a prior period.
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, which is tested on an annual basis and reviewed
quarterly to ascertain the most applicable effective 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 these consolidated reserve provisions for the three
month periods ended March 31, 2007, and 2006 would affect net sales by
approximately $104,000 and $117,000, respectively. A one percent deviation for
cooperative incentive promotions reserve provisions for the three month periods
ended March 31, 2007 and 2006 would affect net sales by approximately $66,000
and $62,000, respectively.
The reported results include a remaining returns provision of approximately
$112,000 and $113,000 at March 31, 2007 and December 31, 2006, respectively, in
the event of future product returns following the discontinuation of the
Cold-Eeze(R) Cold Remedy Nasal Spray product in September 2004.
-23-
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 MARCH 31, 2007 COMPARED WITH THREE MONTHS ENDED MARCH 31, 2006
Net sales for the three month period ended March 31, 2007 were $9,077,876,
reflecting a decrease of $1,188,162 over the net sales of $10,266,038 for the
comparable three month period ended March 31, 2006. The Cold Remedy segment
reported net sales in the 2007 period of $5,540,640, an increase of $363,300, or
7.0%, over the comparable 2006 period of $5,177,340. The Health and Wellness
segment reported net sales in the 2007 period of $2,927,925, a decrease of
$1,636,881, or 35.9%, over the net sales of $4,564,806 for the comparable 2006
period. The Contract Manufacturing segment reported net sales of $609,311 in the
2007 period compared to $523,892 in the comparable 2006 period, an increase of
$85,419 or 16.3%.
The increase in cold remedy sales in the 2007 period is the result of a shift in
buying patterns by our customers to increase their low inventory levels in the
2007 quarter. Customer inventory levels were high in the 2006 period as a result
of unusually warm weather and a lower incidence of upper respiratory ailments.
The 2007 cold season was extended as a result of unseasonably cold weather
during the early part of 2007 also resulting in increased sales for this
segment.
The Health and Wellness segment's net sales decreased in the 2006 period as a
result of the continued reduction in the number of active independent
distributor representatives. Management has implemented corrective action which
included the appointment of a new president of this segment who has broad
experience in this industry.
Net sales of the Contract Manufacturing segment reported a small increase in
2007. The primary purpose of the Contract Manufacturing segment is to
manufacture, warehouse and distribute COLD-EEZE(R), other contract manufacturing
is performed for non-related third party entities to compensate for the
necessary fixed costs associated with this segment.
Cost of sales as a percentage of net sales for the three months ended March 31,
2007 was 44.8% compared to 48.3% for the comparable 2006 period, a decrease of
3.5%. The Cold Remedy segment's cost of sales in the 2007 period was 34.4%
compared to 32.3% in the 2006 comparable period, an increase of 2.1%, largely
due to increased freight costs and variations in product mix. The cost of sales
for the Health and Wellness segment decreased by 2.8% between periods due to
decreased independent distributor representatives commission expense, along with
increased product and freight costs. The Contract Manufacturing segment had a
negative impact to cost of sales overall which is a factor of production volume
and fixed costs. On consolidation the cost of sales was favorably affected by
the change in mix of sales between segments having different costs.
Sales and marketing expense for the three month period ended March 31, 2007 were
$2,733,543, an increase of $298,618 over the comparable 2006 period amount of
$2,434,925. The increase was primarily due to increased media advertising
expense in 2007 of $544,138 mitigated by reduced product promotion costs of
$179,694.
General and administration costs for the three month period ended March 31, 2007
was $3,212,155 compared to $3,705,761 for the 2006 period, a decrease of
$493,606 between the periods. The decrease in 2007 was primarily due to
decreased legal and insurance costs of $302,674 and $99,244, respectively.
Research and development costs during the three months ended March 31, 2007 were
$1,152,662 compared to $784,523 during the 2006 comparable period, reflecting an
increase in 2007 of $368,139, primarily as a result of increased Pharma segment
costs.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $18,736,968 and $20,541,273 at March 31, 2007
and December 31, 2006, respectively. Changes in working capital overall have
been primarily due to the following items: cash balances increased by
$1,419,153; account receivable balances, net, decreased by $3,811,417 due to
seasonal factors and effective collection practices; inventory decreased by
$98,548 primarily due to a slow down in sales activity; accrued advertising
decreased by $1,442,232 due to the seasonal nature of the Cold-Remedy segment,
accrued royalties and sales commissions increased by $225,755 largely due to the
effects of certain litigation in progress. Total cash balances at March 31, 2007
were $19,175,912 compared to $17,756,759 at December 31, 2006.
-24-
Management believes that its 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. Generally, profitable operations from the
Cold Remedy and Health and Wellness segments contribute current expenditure
support in relation to the Ethical Pharmaceutical segment. 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, events or uncertainties that have or are
reasonably likely to have a material negative impact upon the Company's (a)
short-term or long-term liquidity, or (b) net sales 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 2007 are not expected to be
material.
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.
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 was deemed an
"accelerated filer" as such term is defined pursuant to Rule 12b-2 of the
Securities Exchange Act of 1934, as amended, as of the end of the Company's
fiscal year ended December 31, 2006. As an "accelerated filer", the Company was
required by the Sarbanes-Oxley Act of 2002, as amended, to include an assessment
of its internal control over financial reporting and attestation from an
independent registered public accounting firm in its Annual Report on Form 10-K
commencing with the fiscal year ended December 31, 2006. The Company has
undergone a comprehensive effort in preparation for compliance with Section 404
of the Sarbanes-Oxley Act of 2002. This has involved the documentation, testing
and review of our internal controls under the direction of senior management.
-25-
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
TESAURO AND ELEY, ET AL. VS. THE QUIGLEY CORPORATION
(CCP OF PHILA., AUGUST TERM 2000, NO. 001011)
In September, 2000, the Company was sued by two individuals (Jason Tesauro and
Elizabeth Eley, both residents of Georgia), allegedly on behalf of a "nationwide
class" of "similarly situated individuals," in the Court of Common Pleas of
Philadelphia County, Pennsylvania. The Complaint further alleges that the
plaintiffs purchased certain Cold-Eeze products between August, 1996, and
November, 1999, based upon cable television, radio and internet advertisements,
which allegedly misrepresented the qualities and benefits of the Company's
products. The Complaint, as pleaded originally, requested an unspecified amount
of damages for violations of Pennsylvania's consumer protection law, breach of
implied warranty of merchantability and unjust enrichment, as well as a judicial
determination that the action be maintained as a class action. In October, 2000,
the Company filed Preliminary Objections to the Complaint seeking dismissal of
the action. The court sustained certain objections, thereby narrowing
plaintiffs' claims.
In May 2001, plaintiffs filed a motion to certify the putative class. The
Company opposed the motion. In November, 2001, the court held a hearing on
plaintiffs' motion for class certification. In January, 2002, the court denied
in part and granted in part plaintiffs' motion. The court denied plaintiffs'
motion to certify a class based on plaintiffs' claims under Pennsylvania's
consumer protection law, under which plaintiffs sought treble damages,
effectively dismissing this cause of action; however, the court certified a
class based on plaintiffs' secondary breach of implied warranty and unjust
enrichment claims. In August, 2002, the court issued an order adopting a form of
Notice of Class Action to be published nationally. The form of Notice approved
by the court included a provision which limits the potential class members who
may potentially recover damages in this action to those persons who present a
proof of purchase of Cold-Eeze during the period August 1996 and November 1999.
Afterward, a series of pre-trial motions were filed raising issues concerning
trial evidence and the court's jurisdiction over the subject matter of the
action. In March, 2005, the court held oral argument on these motions.
On November 8, 2006, the Court entered an Order dismissing the case in its
entirety on the basis that the action was preempted by federal law. The
plaintiffs appealed the Court's decision in December, 2006. On March 22, 2007,
the Superior Court entered a scheduling order for briefing. On May 1,
plaintiffs/appellants filed their opening brief. The Company's brief in response
is due on May 30, 2007.
For the reasons stated by the Court in dismissing the case, as well as for other
reasons, the Company believes that plaintiffs' case on appeal lacks merit;
however, no prediction as to the outcome of the appeal can be made.
MONIQUE FONTENOT DOYLE VS. THE QUIGLEY CORPORATION
(U.S.D.C., W.D. LA. DOCKET NO.: 6:06CV1497)
On August 31, 2006, the plaintiff filed an action against the Company in the
United States District Court for the Western District of Louisiana
(Lafayette-Opelousas Division). The action alleges the plaintiff suffered
certain losses and injuries as a result of the Company's nasal spray product.
Among the allegations of plaintiff are breach of express warranties and damages
pursuant to the Louisiana Products Liability Act.
At the present time this matter is being defended by the Company's liability
insurance carrier. However, the Company has been tendered the defense of this
action for which there is no insurance. The Company is vigorously defending this
lawsuit and believes that the action lacks merit. However, at this time no
prediction as to the outcome of the case can be made.
GREG SCRAGG VS. THE QUIGLEY CORPORATION, ET AL.
(U.S.D.C, D. COLO. DOCKET NO.: 06- 00061 LTB-CBS)
On November 30, 2005, an action was brought in the District Court of Denver,
Colorado. The complaint was served on the Company soon thereafter. The action
alleges the plaintiff suffered certain losses and injuries as a result of using
the Company's nasal spray product. The complaint consists of counts for fraud
and deceit (fraudulent concealment), negligent misrepresentation, strict
liability (failure to warn), and strict product liability (design defect).
-26-
A trial date has been set for August 27, 2007. The Company believes the
plaintiff's claims are without merit and is vigorously defending this lawsuit.
At the present time this matter is being defended by the Company. Based upon the
information the Company has at this time, it believes the action is without
merit. However, at this time no prediction as to the outcome can be made.
INNERLIGHT INC. VS. THE MATRIX GROUP, LLC
(FOURTH JUDICIAL DISTRICT COURT, UTAH COUNTY, STATE OF UTAH)
On March 13, 2006 Innerlight Inc. filed a declaratory judgment action in the
Fourth Judicial District, Utah County, State of Utah, requesting a declaration
that there is no valid contract between the parties. The Matrix Group, LLC has
alleged there is a contract between the parties obligating Innerlight Inc. to
purchase $750,000 of products for the 12-month period commencing October 18,
2004 and ending October 17, 2005, $1,500,000 for the period commencing October
18, 2005 and ending October 17, 2006, and for each 12-month period thereafter,
through and including October 17, 2013, at least $4,000,000 of products from The
Matrix Group, LLC. The document on which Matrix relies was drafted by Matrix and
states that the acceptance of the appointment by distributor (Innerlight Inc.)
is conditioned upon distributor's written acceptance of the Company's product
price list. No written acceptance of the product price list was ever made by
Innerlight Inc.
The Matrix Group, LLC filed a Utah Rule of Civil Procedure 12(b)(3) motion
asking that the complaint be dismissed. On July 13, 2006 the Court for the
Fourth Judicial District, Utah County, State of Utah, entered an order denying
defendant's motion to dismiss under Rule 12(b)(3) based on Innerlight's
assertion that a material condition precedent remains to be satisfied to
establish an enforceable agreement between the parties. The Utah County Court
has maintained jurisdiction of this action to make a final determination on the
merits of Innerlight's claim.
Thereafter, Matrix filed a counterclaim alleging that a contract did exist and
that Innerlight had breached this contract. Both parties then agreed to stay
discovery, concluding that discovery was not necessary and both filed motions
for summary judgment to resolve the case.
On January 17, 2007, arguments were presented to the Court on the parties' cross
motions for summary judgment and the Court ruled in Innerlight's favor, finding
that no contract existed between the parties and that Innerlight was entitled to
return over $150,000 in product to Matrix for reimbursement. The wording of the
final Order granting Innerlight's motion and rejecting Matrix's were entered by
the Court on April 10, 2007. Matrix has the right to appeal. Matrix has
expressed its intent to appeal the Court's summary judgment ruling and related
rulings, and has filed a motion to stay enforcement of the Court's order pending
appeal, and for an order excusing Matrix from the requirement of filing a bond.
Innerlight intends to oppose Matrix's motion and any appeal vigorously.
For the reasons stated by the Court in the case, as well as for other reasons,
the Company believes that plaintiffs' case on appeal lacks merit; however, no
prediction as to the outcome of the appeal can be made.
TERMINATED LEGAL PROCEEDINGS
ZANG ANGELFIRE, TRACEY ARVIN, SHANE HOHNSTEIN, TAMMY LAURENT,
BARBARA SEOANE, DONNA SMALLEY, AND JOHN WILLIAMS
VS. THE QUIGLEY CORPORATION
(PA. C.C.P., BUCKS COUNTY, DOCKET NO. 2004-07364-27-2)
On November 4, 2004, the above plaintiffs filed an action in the Court of Common
Pleas of Bucks County against the Company. The complaint was amended on March
11, 2005. The action alleged that the plaintiffs suffered certain losses and
injuries as a result of using the Company's nasal spray product. The plaintiffs
claimed the Company was liable to them based on the following allegations:
negligence, strict products liability (failure to warn and defective design),
breach of express warranty, breach of implied warranty, and a violation of the
Pennsylvania Unfair Trade Practices and Consumer Protection Law and other
consumer protection statutes.
These actions were recently settled at the direction of the insurance carrier
out of insurance proceeds.
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BRIGITTE YVON & KLAUS YVON VS. THE QUIGLEY CORPORATION, ET AL.
On October 12, 2005, the Plaintiffs instituted an action against Caribbean
Pacific Natural Products, Inc. and other defendants for personal injuries as a
result of being hit by a chair on the pool deck of Waikoloa Beach Marriott Hotel
d/b/a Outrigger Enterprises, Inc. in Honolulu, Hawaii. On December 9, 2005, The
Quigley Corporation was added as an additional defendant without notice to this
case. The main defendant in the case is Caribbean Pacific Natural Products, Inc.
in which The Quigley Corporation formerly held stock. On January 22, 2003 all
shares of The Quigley Corporation stock were sold to Suncoast Naturals, Inc. in
return for stock of Suncoast Naturals, Inc. At the time of the accident, The
Quigley Corporation had no ownership interest in Caribbean Pacific Natural
Products, Inc. On April 26, 2007, counsel for all parties entered into a
stipulation for partial dismissal without prejudice against The Quigley
Corporation.
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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: May 7, 2007
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