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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, 2005
---------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission file number 01-21617
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
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(215) 345-0919
-------------------------------
(Registrant's Telephone Number,
Including Area Code)
N/A
- ----------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of May 2, 2005, there were 11,660,078 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 3-13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14-20
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
Item 4. Controls and Procedures 20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 20-21
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits 21
Signatures 22
-2-
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THE QUIGLEY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS March 31, 2005 December 31, 2004
(Unaudited)
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 16,480,576 $ 14,366,441
Accounts receivable (net of doubtful accounts 3,270,361 6,375,979
of $372,342 and$311,764)
Inventory 3,417,403 3,454,682
Prepaid expenses and other current assets 1,018,027 764,359
------------ ------------
TOTAL CURRENT ASSETS 24,186,367 24,961,461
------------ ------------
PROPERTY, PLANT AND EQUIPMENT - NET 6,161,508 6,473,688
------------ ------------
OTHER ASSETS:
Goodwill 30,763 30,763
Other assets 109,226 63,844
------------ ------------
TOTAL OTHER ASSETS 139,989 94,607
------------ ------------
TOTAL ASSETS $ 30,487,864 $ 31,529,756
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 428,571 $ 428,571
Accounts payable 970,571 978,401
Accrued royalties and sales commissions 1,795,366 1,796,081
Accrued advertising 312,613 1,919,011
Other current liabilities 2,776,569 1,986,487
------------ ------------
TOTAL CURRENT LIABILITIES 6,283,690 7,108,551
------------ ------------
LONG-TERM DEBT 2,357,143 2,464,286
MINORITY INTEREST 59,312 54,980
COMMITMENTS AND CONTINGENCIES (NOTE 7)
STOCKHOLDERS' EQUITY:
Common stock, $.0005 par value; authorized 50,000,000;
Issued: 16,306,131 and 16,285,796 shares 8,153 8,143
Additional paid-in-capital 35,244,081 35,203,816
Retained earnings 11,723,644 11,878,139
Less: Treasury stock, 4,646,053 and 4,646,053 shares, at cost
(25,188,159) (25,188,159)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 21,787,719 21,901,939
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 30,487,864 $ 31,529,756
============ ============
See accompanying notes to consolidated financial statements
-3-
THE QUIGLEY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
March 31, 2005 March 31, 2004
------------ ------------
NET SALES $ 11,753,270 $ 9,605,617
------------ ------------
COST OF SALES 6,050,298 5,085,374
------------ ------------
GROSS PROFIT 5,702,972 4,520,243
------------ ------------
OPERATING EXPENSES:
Sales and marketing 1,834,831 1,623,066
Administration 2,994,769 2,750,499
Research and development 1,068,303 947,002
------------ ------------
TOTAL OPERATING EXPENSES 5,897,903 5,320,567
------------ ------------
LOSS FROM OPERATIONS (194,931) (800,324)
------------ ------------
OTHER INCOME (EXPENSE)
Interest and other income 69,489 18,693
Interest expense (29,053) --
------------ ------------
TOTAL OTHER INCOME (EXPENSE) 40,436 18,693
------------ ------------
LOSS FROM OPERATIONS BEFORE TAXES (154,495) (781,631)
------------ ------------
INCOME TAXES (BENEFIT) -- --
------------ ------------
NET LOSS ($ 154,495) ($ 781,631)
============ ============
NET LOSS PER COMMON SHARE:
------------ ------------
Basic ($ 0.01) ($ 0.07)
============ ============
------------ ------------
Diluted ($ 0.01) ($ 0.07)
============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 11,654,796 11,510,687
============ ============
Diluted 11,654,796 11,510,687
============ ============
See accompanying notes to consolidated financial statements
-4-
THE QUIGLEY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
March 31, 2005 March 31, 2004
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 2,214,737 $ 4,218,445
------------ ------------
INVESTING ACTIVITIES:
Capital expenditures (33,734) (37,943)
------------ ------------
NET CASH FLOWS USED IN INVESTING ACTIVITIES (33,734) (37,943)
------------ ------------
FINANCING ACTIVITIES:
Proceeds from exercise of options and warrants 40,275 14,011
Principal payments on long-term debt (107,143) --
------------ ------------
NET CASH FLOWS PROVIDED BY (USED IN) FINANCING
ACTIVITIES (66,868) 14,011
------------ ------------
NET INCREASE IN CASH 2,114,135 4,194,513
------------ ------------
CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD 14,366,441 11,392,089
------------ ------------
CASH & CASH EQUIVALENTS, END OF PERIOD $ 16,480,576 $ 15,586,602
============ ============
See accompanying notes to 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 distributors.
In January 2001, the Company formed an Ethical Pharmaceutical segment which is
now Quigley Pharma Inc. ("Pharma"), a wholly-owned subsidiary of the Company,
which may enable the Company to diversify into the prescription drug market.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The Consolidated Financial Statements include the accounts of the Company and
its wholly owned subsidiaries. All inter-company transactions and balances have
been eliminated. Effective March 31, 2004, the financial statements include
consolidated variable interest entities ("VIEs") of which the Company is the
primary beneficiary (see discussion in Note 3, "Variable Interest Entity").
These financial statements have been prepared by management without audit and
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2004. In the opinion of management, all adjustments necessary
for a fair presentation of the consolidated financial position, consolidated
results of operations and consolidated cash flows, for the periods indicated,
have been made.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent liabilities at the dates of the financial statements and the reported
amounts of revenues and expenses during the reporting periods. Actual results
could differ from those estimates.
CASH EQUIVALENTS
The Company considers all highly liquid investments with an initial maturity of
three months or less at the time of purchase to be cash equivalents. Cash
equivalents include cash on hand and monies invested in money market funds. The
carrying amount approximates the fair market value due to the short-term
maturity of these investments.
INVENTORIES
Inventories are stated at the lower of cost or market. The Company uses the
first-in, first-out ("FIFO") method of determining cost for all inventories.
Inventories included raw material, work in progress and packaging amounts of
approximately $1,113,000 and $651,000 at March 31, 2005 and December 31, 2004,
respectively, with the remainder comprising finished goods.
-6-
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. The Company uses a
combination of straight-line and accelerated methods in computing depreciation
for financial reporting purposes. The annual provision for depreciation has been
computed in accordance with the following ranges of estimated asset lives:
building and improvements - twenty to thirty nine years; machinery and equipment
- - five to seven years; computer software - three years; and furniture and
fixtures - seven years.
GOODWILL AND INTANGIBLE ASSETS
Goodwill is not amortized but reviewed for impairment on an annual basis or when
events and circumstances indicate the carrying amount may not be recoverable.
CONCENTRATION OF RISKS
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash investments and trade
accounts receivable.
The Company maintains cash and cash equivalents with four major financial
institutions. Since the Company maintains amounts in excess of guarantees
provided by the Federal Depository Insurance Corporation, the Company performs
periodic evaluations of the relative credit standing of these financial
institutions and limits the amount of credit exposure with any one institution.
Trade accounts receivable potentially subject the Company to credit risk. The
Company extends credit to its customers based upon an evaluation of the
customer's financial condition and credit history and generally does not require
collateral. The Company'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 22% and 18%
of sales volume for the respective three month periods ended March 31, 2005 and
2004. Customers comprising the five largest accounts receivable balances
represented 60% and 48% of total trade receivable balances at March 31, 2005 and
December 31, 2004, respectively. During the three month periods ended March 31,
2005 and 2004, 92% of the Company's net sales originated in the United States.
The Company's revenues are currently generated from the sale of the Cold-Eeze(R)
products which approximated 49% of total revenue in the three month period ended
March 31, 2005, with the remaining revenues in such period coming from the
Health and Wellness segment, which approximated 43%, and the Contract
Manufacturing segment, which approximated 8%.
Raw materials used in the production of the products are available from numerous
sources. Raw Materials for the Cold-Eeze(R) lozenge product is currently
procured from a single vendor in order to secure purchasing economies. In a
situation where this one vendor is not able to supply QMI with the ingredients,
other sources have been identified. Should these product sources terminate or
discontinue for any reason, the Company has formulated a contingency plan in
order to prevent such discontinuance from materially affecting the Company's
operations. Any such termination may, however, result in a temporary delay in
production until the replacement facility is able to meet the Company's
production requirements.
Darius' products for resale are sourced from several suppliers. In the event
that such sources were no longer in a position to supply Darius with products,
other vendors have been identified as reliable alternatives 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. Sales returns and
allowances are provided for in the period that the related sales are recorded.
Provisions for these reserves are based on historical experience. The 2005 and
2004 reserve balances include a returns provision at March 31, 2005 and December
-7-
31, 2004 of approximately $542,000 and $626,000, respectively, in the event of
future product returns following the discontinuation of the Cold-Eeze(R) Cold
Remedy Nasal Spray product in September 2004.
SHIPPING AND HANDLING
Product sales relating to Health and Wellness products carry an additional
identifiable shipping and handling charge to the purchaser, which is classified
as revenue. For the Cold Remedy and Contract Manufacturing segments, such costs
are included as part of the invoiced price. In all cases costs related to
shipping and handling are recorded in cost of sales.
STOCK COMPENSATION
Stock options and warrants for purchase of the Company's common stock have been
granted to both employees and non-employees since the date the Company became
publicly traded. Options and warrants are exercisable during a period determined
by the Company, but in no event later than ten years from the date granted.
The Company applies Accounting Principles Board Opinion No. 25 ("APB 25") in
accounting for its grants of options to employees. Under the intrinsic value
method prescribed by APB 25, no compensation expense relating to grants to
employees has been recorded by the Company in the periods reported.
In accordance with SFAS 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure," the effect on net income and earnings per share if
the Company had applied the fair value recognition provisions of SFAS 123,
"Accounting for Stock-Based Compensation," to stock-based employee compensation
would result in no additional expense compared to APB 25 for the periods
reported.
Expense relating to options granted to non-employees has been appropriately
recorded in the periods presented based on either fair values agreed upon with
the grantees or fair values as determined by the Black-Scholes pricing model
dependent upon the circumstances relating to the specific grants.
No stock options were granted to employees in the three month periods ended
March 31, 2005 and 2004.
ROYALTIES AND COMMISSIONS
The Company includes royalties and founders' commissions incurred relating to
the Cold Remedy segment and commissions relating to the independent
representatives of the Health and Wellness segment as part of cost of sales. An
additional Health and Wellness segment cost, which is included in administration
expenses, relates to the Company's agreement with the former owners of the
Utah-based direct marketing and selling company, whereby they receive payments,
currently totaling 5% of net sales collected, for use of product formulations,
consulting, confidentiality and non-compete agreements with such expense being
expensed as incurred. Commissions expense related to independent brokers
associated with the Cold Remedy and Contract Manufacturing segments is included
in administration expenses.
ADVERTISING
Advertising costs are expensed within the period in which they are utilized.
Advertising expense is comprised of media advertising, presented as part of
sales and marketing expense; co-operative advertising, which is accounted for as
a deduction from sales; and bonus product, which is accounted for as part of
cost of sales. Advertising costs incurred for the three month periods ended
March 31, 2005 and 2004 were $1,694,832 and $1,209,572, respectively. Included
in prepaid expenses and other current assets was $73,775 and $41,375 at March
31, 2005 and December 31, 2004, respectively, relating to prepaid advertising
expenses.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations in the period incurred.
Expenditures for the three month periods ended March 31, 2005 and 2004 were
$1,068,303 and $947,002, respectively. Principally, research and development
costs are related to Pharma's study activities and costs associated with
Cold-Eeze(R) products.
-8-
INCOME TAXES
The Company utilizes an asset and liability approach which requires the
recognition of deferred tax assets and liabilities for the future tax
consequences of events that have been recognized in the Company's financial
statements or tax returns. In estimating future tax consequences, the Company
generally considers all expected future events other than enactments of changes
in the tax law or rates. Until sufficient taxable income to offset the temporary
timing differences attributable to operations and the tax deductions
attributable to option, warrant and stock activities are assured, a valuation
allowance equaling the total deferred tax asset is being provided. See Note 9 -
Income Taxes for further discussion.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash and cash equivalents, accounts receivable and accounts payable are
reflected in the consolidated financial statements at carrying value which
approximates fair value because of the short-term maturity of these instruments.
The fair value of long-term debt was approximately equivalent to its carrying
value due to the fact that the interest rates currently available to the Company
for debt with similar terms are approximately equal to the interest rates for
its existing debt. Determination of the fair value of related party payables is
not practicable due to their related party nature.
RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement No. 123 (revised 2004), Share-Based Payment (Statement 123(R)), which
replaces Statement No. 123, "Accounting for Stock-Based Compensation," and
supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees."
Statement 123 (R) requires all companies to measure compensation cost for all
share-based payments (including employee stock options) at fair value and
recognize the cost in the financial statements. The pro forma disclosures
previously permitted under Statement 123 will no longer be an alternative to
financial statement recognition. This statement applies to all awards granted
after the date of adoption and to awards modified, repurchased, or cancelled
after that date. The cumulative effect of initially applying Statement 123(R),
if any, will be recognized as of the date of adoption.
In April 2005, the SEC delayed the effective date of SFAS 123(R) to fiscal years
beginning after June 15, 2005. As a result SFAS 123(R) will be effective for the
Company beginning in the first quarter of 2006. The Company has not completed
its evaluation of the impact that adopting SFAS 123(R) will have on its
financial statements.
NOTE 3 - VARIABLE INTEREST ENTITY
In December 2003, FASB issued FASB Interpretation No. 46 (revised December
2003), CONSOLIDATION OF VARIABLE INTEREST ENTITIES (FIN 46R), to address certain
implementation issues. 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 $59,312 and $54,980 on the Consolidated
Balance Sheets at March 31, 2005 and December 31, 2004, respectively, which
represented the difference between the assets and the liabilities recorded upon
the consolidation of the VIE.
The liabilities recognized as a result of consolidating the VIE do not represent
additional claims on the Company's general assets. Rather, they represent claims
against the specific assets of the consolidated VIE. Conversely, assets
recognized as a result of consolidating this VIE do not represent additional
assets that could be used to satisfy claims against the Company's general
assets. Reflected on the Company's Consolidated Balance Sheets at March 31, 2005
and December 31, 2004 were $57,401 and $96,051, respectively, of VIE assets,
representing all of the assets of the VIE. The VIE assists the Company in
acquiring licenses and performing research and development activities in certain
countries.
-9-
NOTE 4 - PATENT RIGHTS AND RELATED ROYALTY COMMITMENTS
During 1996, the Company entered into a licensing agreement resulting in the
utilization of the zinc gluconate patent. In return for the acquisition of this
license, the Company issued a total of 240,000 shares of common stock to the
patent holder and attorneys during 1996 and 1997. The related intangible asset,
approximating $490,000, was valued at the fair value of these shares at the date
of the grant. This asset value was amortized over the remaining life of the
patent that expired in March 2002. The Company was required to pay a 3% royalty
on sales collected, less certain deductions, to the patent holder throughout the
term of this agreement, which also expired in 2002.
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 has been recorded. A
founder's commission totaling 5% on sales collected, less certain deductions, is
paid to two of the officers, who are also directors and stockholders of the
Company, and whose agreements expire in 2005 (see Note 11).
In August 2003, the Company entered into a licensing agreement with a patent
holder relating to the utilization of a nasal spray product in the treatment of
symptoms of the common cold. The Company agreed to pay the patent holder a two
percent royalty on net sales of nasal spray products, less certain deductions,
throughout the term of this agreement, expiring no later than April 2014. As the
nasal spray product has now been discontinued, no further obligations are
expected to materialize in relation to this agreement.
The expenses for the respective periods relating to such agreements amounted to
$535,102, and $333,346 for the three month periods ended March 31, 2005 and
2004, respectively. Amounts accrued for these expenses at March 31, 2005 and
December 31, 2004 were $1,148,117 and $1,129,654, respectively.
Amounts included in accrued royalties and sales commissions in the balance
sheets at March 31, 2005 and December 31, 2004, apportioned between related
party and other balances, are as follows:
2005 2004
--------------------------
Related party balances (see Note 11) $196,722 $459,583
Other non-related party balances 1,598,644 1,336,498
--------------------------
Total accrued royalties and sales commissions $1,795,366 $1,796,081
--------------------------
NOTE 5 - LONG-TERM DEBT
In connection with the Company's acquisition of certain assets of JoEl, Inc. in
October 2004, the Company entered into a term loan in the amount of $3 million
payable to PNC Bank, N.A. which is collateralized by mortgages on real property
located in each of Lebanon and Elizabethtown, Pennsylvania. The Company can
elect interest rate options at either the Prime Rate or LIBOR plus 200 basis
points. The loan is payable in eighty-four equal monthly principal payments of
$35,714 that commenced on November 1, 2004. The Company is in compliance with
all related loan covenants. The entire loan balance was under a six-month LIBOR
rate of 4.17%, which expired on March 31, 2005. A further six-month LIBOR rate
of 5.39% commenced on April 1, 2005 and expires on September 30, 2005.
The schedule of principal payments of long-term debt is as follows:
December 31,
2005 (remaining) $321,428
2006 428,571
2007 428,571
2008 428,571
2009 428,571
Thereafter 750,002
---------------------
2,785,714
Less - current portion
(428,571)
---------------------
$2,357,143
=====================
-10-
NOTE 6 - OTHER CURRENT LIABILITIES
Included in other current liabilities are $1,356,861 and $717,038 related to
accrued compensation at March 31, 2005 and December 31, 2004, respectively.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
Certain operating leases for office and warehouse space maintained by the
Company resulted in rent expense for the three month periods ended March 31,
2005 and 2004 of $55,316 and $79,819, respectively. The Company has approximate
future obligations for the remainder of 2005 and over the next five fiscal years
as follows:
Property
Research and and Other
Year Development Leases Advertising Other Total
- ---------- ------------------ -------------- ----------------- ---------------- -----------------
2005 $1,331,000 $132,000 $2,500,000 $74,000 $4,037,000
2006 1,687,000 136,000 - - 1,823,000
2007 - 64,000 - - 64,000
2008 - - - - -
2009 - - - - -
2010 - - - - -
- ---------- ------------------ -------------- ----------------- ---------------- -----------------
Total $3,018,000 $332,000 $2,500,000 $74,000 $5,924,000
- ---------- ------------------ -------------- ----------------- ---------------- -----------------
Additional advertising and research and development costs are expected to be
incurred for the remainder of 2005 and during 2006.
The Company has an agreement with the former owners of the Utah-based direct
marketing and selling company, whereby they receive payments, currently totaling
5% of net sales collected, for use of product formulations, consulting,
confidentiality and non-compete agreements with such expense being expensed as
incurred. Amounts paid or payable under such agreement during the three month
periods ended March 31, 2005 and 2004 were $199,339 and $217,638, respectively.
Amounts payable under such agreement at March 31, 2005 and December 31, 2004
were $72,718 and $60,876, respectively.
The Company has several licensing and other contractual agreements, see Note 4.
CYNTHIA AARON VS. THE QUIGLEY CORPORATION, ET AL
On March 15, 2005, a Complaint was filed in the Superior Court for San Diego
County, California. This complaint was served on The Quigley Corporation on
April 21, 2005. The plaintiff's complaint consists of causes of action sounding
in negligence, negligent products liability, breach of warranty of
merchantability, breach of express warranty, strict products liability and
failure to warn.
The Company believes plaintiff's claims are without merit and is vigorously
defending those claims. Based upon the information the Company has at this time,
it believes the action will not have a material impact on the Company. However,
at this time no prediction as to the outcome can be made. At the present time
this matter is being defended by the Company's liability insurance carrier.
DISCONTINUED ACTIONS
LITIGATION - FORMER EMPLOYEES
On April 12, 2002, the Company commenced a complaint in Equity in the Court of
Common Pleas of Bucks County, Pennsylvania, against the former President of
Darius International Inc., its wholly owned subsidiary, following termination of
such President. The allegations in the complaint include, but are not limited
to, an alleged breach of fiduciary duty owed to the Company. The Company is
seeking both injunctive and monetary relief. On or about May 1, 2002, the
defendant filed a counterclaim requesting that the Court declare him the lawful
owner of 55,000 stock options, unspecified damages relating to an alleged breach
of an oral contract and for commissions allegedly owed. In addition, the
defendant requested the return of certain intellectual property used to commence
and continue Darius' operations.
On April 15, 2005, a Settlement Agreement and Mutual Release was executed
between The Quigley Corporation, Subsidiaries, and Defendants, Ronald Howell,
-11-
Deborah Howell, Pro Pool, LLC, One Source, LLC, Pro Marketing LLC, and Eric
Kaytes. All of defendants' counterclaims were withdrawn and dismissed with
prejudice. In addition to the monetary consideration, Howell surrendered to The
Quigley Corporation for cancellation 40,993 shares of The Quigley Corporation
and agreed to forego any claim for any additional stock, warrants, stock options
or other securities of or interest in The Quigley Corporation, Darius
International Inc., Darius Marketing Inc., and Innerlight Inc. that were or
could have been made in the lawsuits. Defendant Kaytes surrendered
options/warrants in the Company.
NOTE 8 - TRANSACTIONS AFFECTING STOCKHOLDERS' EQUITY
On September 8, 1998, the Company's Board of Directors declared a dividend
distribution of Common Stock Purchase Rights (individually, a "Right" and
collectively, the "Rights"), thereby creating a Stockholder Rights Plan (the
"Plan"). The dividend was payable to the stockholders of record on September 25,
1998. Each Right entitles the stockholder of record to purchase from the Company
that number of common shares having a combined market value equal to two times
the Rights exercise price of $45. The Rights are not exercisable until the
distribution date, which will be the earlier of a public announcement that a
person or group of affiliated or associated persons has acquired 15% or more of
the outstanding common shares, or the announcement of an intention by a
similarly constituted party to make a tender or exchange offer resulting in the
ownership of 15% or more of the outstanding common shares. The dividend has the
effect of giving the stockholder a 50% discount on the share's current market
value for exercising such right. In the event of a cashless exercise of the
Right, and the acquirer has acquired less than 50% beneficial ownership of the
Company, a stockholder may exchange one Right for one common share of the
Company. The final expiration date of the Plan is September 25, 2008.
Since the inception of the stock buy-back program in January 1998, the Board has
subsequently increased the authorization on five occasions, for a total
authorized buy-back of 5,000,000 shares or approximately 38% of the previous
shares outstanding. Such shares are reflected as treasury stock and will be
available for general corporate purposes. From the initiation of the plan until
March 31, 2005, 4,159,191 shares have been repurchased at a cost of $24,042,801
or an average cost of $5.78 per share. No shares were repurchased during 2004 or
2005 to date.
NOTE 9 - INCOME TAXES
Certain exercises of options and warrants, and restricted stock issued for
services that became unrestricted, resulted in reductions to taxes currently
payable and a corresponding increase to additional-paid-in-capital for prior
years. Certain tax benefits for option and warrant exercises totaling $3,887,487
are deferred and will be credited to additional-paid-in-capital when existing
net operating losses are used. The cumulative tax deduction attributable to
options, warrants and restricted stock is $47,558,315 which resulted in the net
operating loss carry-forwards that approximate $12.3 million for federal
purposes, of which $3.5 million will expire in 2019, $4.0 million in 2020 and
$4.8 million in 2022 and $15.0 million for state purposes, of which $9.7 million
will expire in 2009, $3.0 million in 2010, and $2.3 million in 2012. Until
sufficient taxable income to offset the temporary timing differences
attributable to operations and the tax deductions attributable to option,
warrant and stock activities are assured, a valuation allowance equaling the
total deferred tax asset is being provided.
NOTE 10 - EARNINGS PER SHARE
Basic earnings per share ("EPS") excludes dilution and is computed by dividing
income available to common stockholders by the weighted - average number of
common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that shared in the earnings of the entity. Diluted EPS also
utilizes the treasury stock method which prescribes a theoretical buy-back of
shares from the theoretical proceeds of all options and warrants outstanding
during the period. Since there is a large number of options and warrants
outstanding, fluctuations in the actual market price can have a variety of
results for each period presented.
A reconciliation of the applicable numerators and denominators of the income
statement periods presented, as reflects the results of continuing operations,
is as follows (millions, except earnings per share amounts):
Three Months Ended Three Months Ended
March 31, 2005 March 31, 2004
-------- -------- --------- -------- -------- ---------
Loss Shares EPS Loss Shares EPS
-------- -------- --------- -------- -------- ---------
Basic EPS ($0.2) 11.7 ($0.01) ($0.8) 11.5 ($0.07)
Dilutives:
Options/Warrants - - - -
-------- -------- -------- -------- -------- --------
Diluted EPS ($0.2) 11.7 ($0.01) ($0.8) 11.5 ($0.07)
======== ======== ======== ======== ======== ========
-12-
Options and warrants outstanding at March 31, 2005 and 2004 were 4,287,250 and
3,837,500, respectively. They were not included in the computation of diluted
earnings for periods reporting losses because the effect would be anti-dilutive.
NOTE 11 - RELATED PARTY TRANSACTIONS
An agreement between the Company and the founders, Mr. Guy J. Quigley and Mr.
Charles A. Phillips, both officers and stockholders of the Company, was entered
into on June 1, 1995. The founders, in consideration of the acquisition of the
Cold-Eeze(R) cold therapy product, are to share a total commission of five
percent (5%) on sales collected, less certain deductions, until the expiration
of this agreement on May 31, 2005. For the three month periods ended March 31,
2005 and 2004, amounts of $267,551 and $165,104, respectively, were paid or
payable under such founders' commission agreements. Amounts payable under such
agreements at March 31, 2005 and December 31, 2004 were $196,722 and $459,583,
respectively.
The Company is in the process of acquiring licenses in certain countries through
related party entities whose stockholders include Mr. Gary Quigley, a relative
of the Company's Chief Executive Officer. Fees amounting to $86,298 and $109,520
have been paid or are payable to a related entity in the three month periods
ended March 31, 2005 and 2004, respectively, to assist with the regulatory
aspects of obtaining such licenses.
NOTE 12 - SEGMENT INFORMATION
The basis for presenting segment results generally is consistent with overall
Company reporting. The Company reports information about its operating segments
in accordance with Financial Accounting Standard Board Statement No. 131,
"Disclosure About Segments of an Enterprise and Related Information," which
establishes standards for reporting information about a company's operating
segments. All consolidating items are included in Corporate & Other.
The Company has divided its operations into four reportable segments as follows:
The Quigley Corporation (Cold Remedy), whose main product is Cold-Eeze(R), a
proprietary zinc gluconate glycine lozenge for the common cold; Darius (Health
and Wellness), whose business is the sale and direct marketing of a range of
health and wellness products; Quigley Manufacturing (Contract Manufacturing),
which operates the production facility for the Cold-Eeze(R) lozenge product and
also performs contract manufacturing services for third party customers, and
Pharma (Ethical Pharmaceutical), currently involved in research and development
activity to develop patent applications for potential pharmaceutical products.
Financial information relating to 2005 and 2004 operations, by business segment,
follows:
- -------------------------------- ------------- -------------- --------------- --------------- --------------- -------------
FOR THE THREE MONTHS ENDED Health and Contract Ethical Corporate &
MARCH 31, 2005 Cold Remedy Wellness Manufacturing Pharmaceutical Other Total
- -------------------------------- ------------- -------------- --------------- --------------- --------------- -------------
Revenues
Customers-domestic $5,746,641 $4,113,318 $1,010,624 - - $10,870,583
Customers-international - 882,687 - - - 882,687
Inter-segment - - 1,442,297 - ($1,442,297) -
Segment operating profit
(loss) $356,243 $393,345 $160,358 ($1,043,482) ($61,395) ($194,931)
- -------------------------------- ------------- -------------- --------------- --------------- --------------- -------------
FOR THE THREE MONTHS ENDED Cold Remedy Health and Contract Ethical Corporate &
MARCH 31, 2004 Wellness Manufacturing Pharmaceutical Other Total
- -------------------------------- ------------- -------------- --------------- --------------- --------------- -------------
Revenues
Customers-domestic $4,113,592 $4,730,095 - - - $8,843,687
Customers-international - 761,930 - - - 761,930
Inter-segment - - - - - -
Segment operating profit
(loss) ($301,756) $436,780 - ($935,348) - ($800,324)
-13-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Report contains forward-looking
statements. These forward-looking statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
reflected in these forward-looking statements. Factors that might cause such a
difference include, but are not limited to, management of growth, competition,
pricing pressures on the Company's 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 or any other regulatory agency will grant an Investigational
New Drug or take any other action to allow its formulations to be studied or
marketed. Furthermore, no claim is made that potential medicine discussed herein
is safe, effective, or approved by the Food and Drug Administration.
Additionally, data that demonstrates activity or effectiveness in animals or in
vitro tests do not necessarily mean such formula test compound, referenced
herein, will be effective in humans. Safety and effectiveness in humans will
have to be demonstrated by means of adequate and well controlled clinical
studies before the clinical significance of the formula test compound is known.
Readers should carefully review the risk factors described in other sections of
the filing as well as in other documents the Company files from time to time
with the Securities and Exchange Commission.
OVERVIEW
The Company, headquartered in Doylestown, Pennsylvania, is a leading
manufacturer, marketer and distributor of a diversified range of homeopathic and
health products which comprise the Cold Remedy, Health and Wellness and Contract
Manufacturing segments. The Company is also involved in the research and
development of potential prescription products that comprise the Ethical
Pharmaceutical segment.
The Company's business is the manufacture and distribution of cold remedy
products to the consumer through the over-the-counter marketplace together with
the sale of proprietary health and wellness products through its direct selling
subsidiary. One of the Company's key products in its Cold Remedy segment is
Cold-Eeze(R), a zinc gluconate glycine product proven in two double-blind
clinical studies to reduce the duration and severity of the common cold symptoms
by nearly half. Cold-Eeze(R) is now an established product in the health care
and cold remedy market. Effective October 1, 2004, the Company acquired
substantially all of the assets of JoEl, Inc., the previous manufacturer of the
Cold-Eeze(R) lozenge product. This manufacturing entity, now called Quigley
Manufacturing Inc. ("QMI"), a wholly owned subsidiary of the Company, will
continue to produce lozenge product along with performing such operational tasks
as warehousing and shipping the Company's Cold-Eeze(R) products. In addition,
QMI produces a variety of hard and organic candy for sale to third party
customers in addition to performing contract manufacturing activities for
non-related entities. The Cold-Eeze(R) products reported a strong sales
performance in the first quarter of 2005 as a result of a prolonged cough/cold
season, increased consumer demand and increased household penetration. The
presence of QMI in 2005 contributed net sales of approximately one million
dollars to first quarter net sales.
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 distributors.
Darius is a direct selling organization specializing in proprietary health and
wellness products. The formation of Darius has provided diversification to the
Company in both the method of product distribution and the broader range of
products available to the marketplace, serving as a balance to the seasonal
revenue cycles of the Cold-Eeze(R) branded products. This segment's 2005 net
sales decreased over the comparable 2004 period due to a decline in the number
of active domestic independent representatives; however, international sales
activity improved in the 2005 period.
In January 2001, the Company formed an Ethical Pharmaceutical segment, Quigley
Pharma Inc. ("Pharma"), that is under the direction of its Executive Vice
President and Chairman of its Medical Advisory Committee. Pharma was formed for
the purpose of developing naturally derived prescription drugs, cosmeceuticals,
and dietary supplements. Pharma is currently undergoing research and development
activity in compliance with regulatory requirements. The Company is in the
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initial stages of what may be a lengthy process to develop these patent
applications into commercial products.
Future revenues, costs, margins, and profits will continue to be influenced by
the Company's ability to maintain its manufacturing availability and capacity
together with its marketing and distribution capabilities and the requirements
associated with the development of Pharma's potential prescription drugs in
order to continue to compete on a national and international level. The
continued expansion of Darius is dependent on the Company retaining existing
independent representatives and recruiting additional active representatives
both internationally and within the United States, continued conformity with
government regulations, a reliable information technology system capable of
supporting continued growth and continued reliable sources for product and
materials to satisfy consumer demand.
COLD REMEDY
Cold-Eeze(R), a zinc gluconate glycine formulation (ZIGG(TM)), is an
over-the-counter consumer product used to reduce tHE duration and severity of
the common cold and is currently sold in lozenge, sugar-free tablet and gum
form. During 2003, the Company launched a Kidz-EEZE(TM) Sore Throat Pops
product.
In May 1992, the Company entered into an exclusive agreement for worldwide
representation, manufacturing and marketing of Cold-Eeze(R) products in the
United States. A randomized double-blind placebo-controlled study, conducted at
Dartmouth College of Health Science, Hanover, New Hampshire, concluded that the
lozenge formulation treatment, initiated within 48 hours of symptom onset,
resulted in a significant reduction in the total duration of the common cold.
On May 22, 1992, "ZINC AND THE COMMON COLD, A CONTROLLED CLINICAL STUDY," was
published in England in the "Journal of International Medical Research," Volume
20, Number 3, Pages 234-246. According to this publication, (a) flavorings used
in other Zinc lozenge products (citrate, tartrate, separate, orotate,
picolinate, mannitol or sorbitol) render the Zinc inactive and unavailable to
the patient's nasal passages, mouth and throat where cold symptoms have to be
treated, (b) this patented formulation delivers approximately 93% of the active
Zinc to the mucosal surfaces and (c) the patient has the same sequence of
symptoms as in the absence of treatment but goes through the phases at an
accelerated rate and with reduced symptom severity.
On July 15, 1996, results of a new randomized double-blind placebo-controlled
study on the common cold, which commenced at the CLEVELAND CLINIC FOUNDATION on
October 3, 1994 were published. The study called "ZINC GLUCONATE LOZENGES FOR
TREATING THE COMMON COLD" was completed and published in THE ANNALS OF INTERNAL
MEDICINE - VOL. 125 NO. 2. Using a 13.3mg lozenge (almost half the strength of
the lozenge used in the Dartmouth Study), the result still showed a 42%
reduction in the duration of common cold symptoms.
In April 2002, the Company announced the statistical results of a retrospective
clinical adolescent study at the Heritage School facility in Provo, Utah that
suggests that Cold-Eeze(R) is also an effective means of preventing the common
cold and statistically (a) lessens the number of colds an individual suffers per
year, reducing the median from 1.5 to zero and (b) reduces the use of
antibiotics for respiratory illnesses from 39.3% to 3.0% when Cold-Eeze(R) is
administered as a first-line treatment approach to the common cold.
In April 2002, the Company was assigned a Patent Application which was filed
with the Patent Office of the United States Commerce Department for the use of
Cold-Eeze(R) as a prophylactic for cold prevention. The new patent application
follows the results of the adolescent study at the Heritage School facility.
In May 2003, the Company announced the findings of a prospective study,
conducted at the Heritage School facility in Provo, Utah, in which 178 children,
ages 12 to 18 years, were given Cold-Eeze(R) lozenges both symptomatically and
prophylactically from October 5, 2001 to May 30, 2002. The study found a 54%
reduction in the most frequently observed cold duration. Those subjects not
receiving treatment most frequently experienced symptom duration of 11 days
compared with 5 days when Cold-Eeze(R) lozenges were administered, a reduction
of 6 days.
The business of the Company is subject to federal and state laws and regulations
adopted for the health and safety of users of the Company's products.
Cold-Eeze(R) is a homeopathic remedy that is subject to regulations by various
federal, state and local agencies, including the United States Food and Drug
Administration ("FDA") and the Homeopathic Pharmacopoeia of the United States.
-15-
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. During the fourth quarter of 2004, Darius
launched an exclusive skin care line under the Beverly Sassoon brand name to
diversify this segment's product range.
The continued success of this segment is dependent, among other things, on the
Company's ability:
o To maintain existing independent representatives and recruit
additional successful independent representatives. Additionally, the
loss of key high-level distributors could negatively impact future
growth and revenues;
o To continue to develop and make available new and desirable products
at an acceptable cost;
o To maintain safe and reliable multiple-location sources for product
and materials;
o To maintain a reliable information technology system and internet
capability. The Company has expended significant resources on
systems enhancements in the past and will continue to do so to
ensure prompt customer response times, business continuity and
reliable reporting capabilities. Any interruption to computer
systems for an extended period of time could be harmful to the
business;
o To execute conformity with various federal, state and local
regulatory agencies both within the United States and abroad. With
the 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 Quigley
Manufacturing Inc. ("QMI"), a wholly owned subsidiary of the Company, has
continued to produce lozenge product along with performing such operational
tasks as warehousing and shipping the Company's Cold-Eeze(R) products. In
addition to that function, QMI produces a variety of hard and organic candy for
sale to third party customers in addition to performing contract manufacturing
activities for non-related entities. QMI is an FDA-approved facility.
ETHICAL PHARMACEUTICAL
Pharma's current activity is the development of naturally-derived prescription
drugs with the goal to improve the quality of life and health of those in need
through scientific research and development. Research and development will focus
on the identification, isolation and direct use of active medicinal substances.
One aspect of Pharma's research will focus on the combination of isolated active
constituents and whole plant components. The search for new natural sources of
medicinal substances will focus not only on world plants, fungi, and other
natural substances, but also on an intense investigation into traditional
medicinals and historic therapeutics.
The pre-clinical development, clinical trials, product manufacturing and
marketing of Pharma's potential new products are subject to federal and state
regulation in the United States and other countries. Obtaining FDA regulatory
approval for these pharmaceutical products can require substantial resources and
-16-
take several years. The length of this process depends on the type, complexity
and novelty of the product and the nature of the disease or other indications to
be treated. If the Company cannot obtain regulatory approval of these new
products in a timely manner or if the patents are not granted or if the patents
are subsequently challenged, these possible events could have a material effect
on the business and financial condition of the Company. The strength of the
Company's patent position may be important to its long-term success. There can
be no assurance that these patents and patent applications will effectively
protect the Company's products from duplication by others.
The areas of focus are:
o A Patent (No. 6,555,573 B2) entitled "Method and Composition for the
Topical Treatment of Diabetic Neuropathy." The patent extends
through March 27, 2021.
o A Patent (No. 6,592,896 B2) entitled "Medicinal Composition and
Method of Using It" (for Treatment of Sialorrhea and other
Disorders) for a product to relieve sialorrhea (drooling) in
patients suffering from Amyotrophic Lateral Sclerosis (ALS),
otherwise known as Lou Gehrig's Disease. The patent extends through
August 6, 2021.
o A Patent (No. 6,596,313 B2) entitled "Nutritional Supplement and
Method of Using It" for a product to relieve sialorrhea (drooling)
in patients suffering from Amyotrophic Lateral Sclerosis (ALS),
otherwise known as Lou Gehrig's Disease. The patent extends through
April 15, 2022.
o A Patent (No. 6,753,325 B2) entitled "Composition and Method for
Prevention, Reduction and Treatment of Radiation Dermatitis," a
composition for preventing, reducing or treating radiation
dermatitis. The patent extends through November 5, 2021.
o A Patent (No. 6,827,945 B2) entitled "Nutritional Supplement and
Method of Using It" for a method of treating at least one symptom of
arthritis. The patent extends through April 22, 2023.
o In September 2002, the Company filed a foreign patent application
entitled "Method and Composition for the Topical Treatment of
Diabetic Neuropathy" in Europe and other foreign markets.
In April 2002, the Company initiated a Phase II Proof of Concept Study in France
for treatment of diabetic neuropathy, which was concluded in 2003. In April
2003, the Company announced that an independently monitored analysis of the
Phase II Proof of Concept Study concluded that subjects using this formulation
had 67% of their symptoms improve, suggesting efficacy. In March 2004, the
Company announced that it had completed its first meeting at the FDA prior to
submitting the Company's Investigational New Drug ("IND") application for the
relief of symptoms of diabetic symmetrical peripheral neuropathy. The FDA's
pre-IND meeting programs are designed to provide sponsors with advance guidance
and input on drug development programs.
In September 2003, the Company announced its intention to file for permission to
study its patent pending potential treatment for psoriasis and other skin
disorders. Continued testing will therefore have to be conducted under an IND
application following positive preliminary results.
In December 2003, the Company announced positive test results of a preliminary
independent in vitro study indicating that a test compound of the Company
previously tested on the Influenza virus showed "significant virucidal activity
against a strain of the Severe Acute Respiratory Syndrome (SARS) virus." In
January 2004 the Company announced that it intends to conduct two further
studies. The first study is intended to repeat the previously announced results,
which demonstrated the compound to be 100 percent effective in preventing
non-infected ferrets in close proximity to an infected ferret from becoming
infected with the Influenza A virus. The second study is a dose ranging study on
the test compound. Upon dosage determination and confirmation results from this
forthcoming animal model study, a human proof of concept study using a virus
challenge with Influenza A virus in a quarantine unit can be the next step. In
January 2004, the Company also reported that its compound has shown virucidal
and virustatic activity against the strain 3B of the Human Immunodeficiency
Virus Type 1 (HIV-1) in an in-vitro study.
In January 2004, a broad anti-viral compound was determined to be effective in
in-vitro and in-vivo studies for applications such as Influenza A&B, SARS, and
Herpes Simplex 1, and since this Sialorrhea formulation is a derivative compound
of the anti-viral formulation, ongoing testing for this Sialorrhea compound is
being reconsidered and probably will be discontinued.
-17-
In April 2004, the Company announced the results of a preliminary, pre-clinical
animal study which measured the effect of its proprietary patent applied for
formulation against ionizing (nuclear) radiation. This study determined that
parenteral (injection) administration of the study compound was protective
against the effects of a lethal, whole body ionizing radiation dose in a mouse
model. This compound is being investigated to potentially reduce the effects of
radiation exposure on humans.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement No. 123 (revised 2004), Share-Based Payment (Statement 123(R)), which
replaces Statement No. 123, "Accounting for Stock-Based Compensation," and
supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees."
Statement 123 (R) requires all companies to measure compensation cost for all
share-based payments (including employee stock options) at fair value and
recognize the cost in the financial statements. The pro forma disclosures
previously permitted under Statement 123 will no longer be an alternative to
financial statement recognition. This statement applies to all awards granted
after the date of adoption and to awards modified, repurchased, or cancelled
after that date. The cumulative effect of initially applying Statement 123(R),
if any, will be recognized as of the date of adoption.
In April 2005, the SEC delayed the effective date of SFAS 123(R) to fiscal years
beginning after June 15, 2005. As a result SFAS 123(R) will be effective for the
Company beginning in the first quarter of 2006. The Company has not completed
its evaluation of the impact that adopting SFAS 123(R) will have on its
financial statements.
CRITICAL ACCOUNTING POLICIES
As previously described, the Company is engaged in the development,
manufacturing, and marketing of health and homeopathic products that are being
offered to the general public and is also involved in the research and
development of potential prescription products. Certain key accounting policies
that may affect the results of the Company are the timing of revenue recognition
and sales incentives, particularly co-operative advertising; the classification
of royalties and commissions; the classification of advertising expenses; and
the fact that all research and development costs are expensed as incurred. Note
1, Organization and Business, describes the Company's other significant
accounting policies.
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. Sales returns and
allowances are provided for in the period that the related sales are recorded.
Provisions for these reserves are based on historical experience. The 2005 and
2004 reserve balances include a returns provision at March 31, 2005 and December
31, 2004 of approximately $542,000 and $626,000, respectively, in the event of
future product returns following the discontinuation of the Cold-Eeze(R) Cold
Remedy Nasal Spray product in September 2004.
ADVERTISING
Advertising costs are expensed within the period in which they are utilized.
Advertising expense is comprised of media advertising, presented as part of
sales and marketing expense; co-operative advertising, which is accounted for as
a deduction from sales; and bonus product, which is accounted for as part of
cost of sales. Advertising costs incurred for the three month periods ended
March 31, 2005 and 2004 were $1,694,832 and $1,209,572, respectively. Included
in prepaid expenses and other current assets was $73,775 and $41,375 at March
31, 2005 and December 31, 2004, respectively, relating to prepaid advertising
expenses.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations in the period incurred.
Expenditures for the three month periods ended March 31, 2005 and 2004 were
$1,068,303 and $947,002, respectively. Principally, research and development
costs are related to Pharma's study activities and costs associated with
Cold-Eeze(R) products.
-18-
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2005 COMPARED WITH THREE MONTHS ENDED MARCH 31,
2004
Net sales for the three month period ended March 31, 2005 were $11,753,270,
reflecting an increase of $2,147,653 over the net sales of $9,605,617 for the
comparable three month period ended March 31, 2004. The Cold Remedy segment
reported net sales in 2005 of $5,746,641, an increase of $1,633,049, or 40%,
over the comparable 2004 period of $4,113,592. The Health and Wellness segment
reported net sales in 2005 of $4,996,005, a reduction of $496,020, or 9%, over
the net sales of $5,492,025 for the comparable 2004 period. The Contract
Manufacturing segment reported net sales of $1,010,624 in the 2005 period with
no comparable amount in the 2004 period as this segment commenced business as a
part of The Quigley Corporation on October 1, 2004.
Net sales of the Cold Remedy segment were favorably affected by the prolonged
nature of the recent cold season, increased consumer demand and increased
household penetration. In addition, the Company continued to generate increased
sales and greater market penetration for the Cold-Eeze(R) products due to
continued product support and promotion.
The Health and Wellness segment's net sales decreased in the 2005 period as a
result of a decline in the number of active domestic independent
representatives. This decline was partially offset by an increase in European
sales of 15.8% over the 2004 comparable period.
Cost of sales as a percentage of net sales for the three months ended March 31,
2005 was 51.4% compared to 52.9% for the comparable 2004 period, a decrease of
1.5%. This decrease was primarily due to the influence of the lower cost Cold
Remedy segment on the consolidated results in 2005, particularly as a result of
this segment's significant net sales increase in the 2005 period. Cost of sales
of the remaining segments were largely consistent between periods.
Sales and marketing expense for the three month period ended March 31, 2005 were
$1,834,831, an increase of $211,765 over the comparable 2004 period amount of
$1,623,066. The increase was primarily due to increased media advertising in the
2005 period in support of the Cold-Eeze(R) products.
General and administration costs for the three month period ended March 31, 2005
was $2,994,769 compared to $2,750,499 during the 2004 period, an increase of
$244,270 between the periods. The increase in 2005 was primarily due to
increased payroll costs for the period and 2005 costs associated with the
contract manufacturing segment for which there are no comparable 2004 costs as
this segment commenced business as a part of the Company on October 1, 2004.
Research and development costs during the three months ended March 31, 2005 were
$1,068,303 compared to $947,002 during the 2004 comparable period, reflecting an
increase in 2005 of $121,301, primarily as a result of increased Pharma segment
costs and study activity related to the Cold-Eeze(R) products.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $17,902,677 and $17,852,910 at March 31, 2005
and December 31, 2004, respectively, resulting in an increase of $49,767.
Changes in working capital overall have been primarily due to the following
items: cash balances increased by $2,114,135; accounts receivable decreased by
$3,105,618 due to seasonal fluctuations and effective cash collections;
advertising liabilities decreased by $1,606,398 as a result of the seasonality
of the cold remedy products and related co-operative and media advertising
activity; and other current liabilities increased by $790,082 principally due to
increased payroll liabilities at March 31, 2005. Total cash balances at March
31, 2005 were $16,480,576 compared to $14,366,441 at December 31, 2004. The
increase in cash was due to the movements in working capital as reported. In
April 2005, the Company prepaid an amount of $1.0 million against the
outstanding balance on the long-term loan.
Management believes that its revised strategy to establish Cold-Eeze(R) as a
recognized brand name, its broader range of products, its diversified
distribution methods as it relates to the Health and Wellness business segment,
adequate manufacturing capacity and growth in international sales, together with
its current working capital, should provide an internal source of capital to
fund the Company's business operations. In addition to anticipated funding from
operations, the Company and its subsidiaries may, in the short and long term,
raise capital through the issuance of equity securities to finance anticipated
growth.
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Management is not aware of any trends or uncertainties that may have a material
negative impact upon the Company's (a) short-term or long-term liquidity, or (b)
net sales or income from continuing operations. Any challenge to the Company's
patent rights could have a material adverse effect on future liquidity of the
Company; however, the Company is not aware of any condition that would make such
an event probable.
Management believes that cash generated from operations along with its current
cash balances will be sufficient to finance working capital and capital
expenditure requirements for at least the next twelve months.
CAPITAL EXPENDITURES
Capital expenditures during the remainder of 2005 are not expected to be
material.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's operations are not subject to risks of material foreign currency
fluctuations, nor does it use derivative financial instruments in its investment
practices. The Company places its marketable investments in instruments that
meet high credit quality standards. The Company does not expect material losses
with respect to its investment portfolio or exposure to market risks associated
with interest rates. The impact on the Company's results of a one percentage
point change in short-term interest rates would not have a material impact on
the Company's future earnings, fair value, or cash flows related to investments
in cash equivalents or interest-earning marketable securities. At March 31,
2005, the Company had $2.8 million of variable rate debt. If the interest rate
on the debt were to increase or decrease by 1% for the year, annual interest
expense would increase or decrease by approximately $28,000.
ITEM 4. CONTROLS AND PROCEDURES
Based on their evaluation as of the end of the period covered by this report,
the Company's Chief Executive Officer and Chief Financial Officer have concluded
that the Company's disclosure controls and procedures (as defined in Rules
13a-14 and 15d-14 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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
CYNTHIA AARON VS. THE QUIGLEY CORPORATION, ET AL
On March 15, 2005, a Complaint was filed in the Superior Court for San Diego
County, California. This complaint was served on The Quigley Corporation on
April 21, 2005. The plaintiff's complaint consists of causes of action sounding
in negligence, negligent products liability, breach of warranty of
merchantability, breach of express warranty, strict products liability and
failure to warn.
The Company believes plaintiff's claims are without merit and is vigorously
defending those claims. Based upon the information the Company has at this time,
it believes the action will not have a material impact on the Company. However,
at this time no prediction as to the outcome can be made. At the present time
this matter is being defended by the Company's liability insurance carrier.
DISCONTINUED ACTIONS
LITIGATION - FORMER EMPLOYEES
On April 12, 2002, the Company commenced a complaint in Equity in the Court of
Common Pleas of Bucks County, Pennsylvania, against the former President of
Darius International Inc., its wholly owned subsidiary, following termination of
such President. The allegations in the complaint include, but are not limited
to, an alleged breach of fiduciary duty owed to the Company. The Company is
seeking both injunctive and monetary relief. On or about May 1, 2002, the
defendant filed a counterclaim requesting that the Court declare him the lawful
owner of 55,000 stock options, unspecified damages relating to an alleged breach
of an oral contract and for commissions allegedly owed. In addition, the
defendant requested the return of certain intellectual property used to commence
and continue Darius' operations.
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On April 15, 2005, a Settlement Agreement and Mutual Release was executed
between The Quigley Corporation, Subsidiaries, and Defendants, Ronald Howell,
Deborah Howell, Pro Pool, LLC, One Source, LLC, Pro Marketing LLC, and Eric
Kaytes. All of defendants' counterclaims were withdrawn and dismissed with
prejudice. In addition to the monetary consideration, Howell surrendered to The
Quigley Corporation for cancellation 40,993 shares of The Quigley Corporation
and agreed to forego any claim for any additional stock, warrants, stock options
or other securities of or interest in The Quigley Corporation, Darius
International Inc., Darius Marketing Inc., and Innerlight Inc. that were or
could have been made in the lawsuits. Defendant Kaytes surrendered
options/warrants in the Company.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
(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 6, 2005
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