SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 2003
-------------------
OR
( ) THE TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ______________ to ______________
Commission File Number 01-21617
THE QUIGLEY CORPORATION
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(Exact name of registrant as specified in its charter)
Nevada 23-2577138
--------------------------------------------------------------------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
(MAILING ADDRESS: PO Box 1349, Doylestown, PA 18901.)
Kells Building, 621 Shady Retreat Road, Doylestown, PA 18901
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(Address of principle executive offices) (Zip Code)
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK ($.0005 Par Value)
COMMON SHARE PURCHASE RIGHTS
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). [ ] Yes [X] No
Indicate the number of shares of each of the Registrant's classes of securities
(all of one class of $.0005 par value Common Stock) outstanding on October 29,
2003: 11,503,026.
TABLE OF CONTENTS
Page No.
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements 3-19
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 19-24
Item 3. Quantitative and Qualitative Disclosure About
Market Risk 24
Item 4. Controls and Procedures 24
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 2. Changes in Securities and Use of Proceeds 25
Item 3. Defaults Upon Senior Securities 25
Item 4. Submission of Matters to a
Vote of Security Holders 25
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K 26
Signatures 27
Certifications 28-31
-2-
THE QUIGLEY CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS September 30, 2003 December 31, 2002
(Unaudited)
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 10,647,170 $ 12,897,080
Accounts receivable (net of doubtful accounts of $809,698 and $737,782) 4,600,276 4,188,123
Inventory 4,526,205 4,526,761
Prepaid expenses and other current assets 716,543 490,117
Assets of discontinued operations -- 374,007
------------ ------------
TOTAL CURRENT ASSETS 20,490,194 22,476,088
------------ ------------
PROPERTY, PLANT AND EQUIPMENT - net 2,398,104 2,336,736
------------ ------------
OTHER ASSETS:
Goodwill, net 30,763 30,763
Other assets 80,365 1,000
Assets of discontinued operations -- 90,369
------------ ------------
TOTAL OTHER ASSETS 111,128 122,132
------------ ------------
TOTAL ASSETS $ 22,999,426 $ 24,934,956
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 421,560 $ 394,675
Accrued royalties and sales commissions 991,719 1,146,495
Accrued advertising 897,651 1,559,575
Accrued consulting 1,673,000 1,673,000
Other current liabilities 2,444,002 1,353,383
Liabilities of discontinued operations -- 385,011
------------ ------------
TOTAL CURRENT LIABILITIES 6,427,932 6,512,139
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.0005 par value; authorized 50,000,000;
Issued: 16,148,649 and 16,102,670 shares 8,074 8,051
Additional paid-in-capital 32,608,449 32,592,222
Retained earnings 9,143,130 11,010,703
Less: Treasury stock, 4,646,053 and 4,646,053 shares, at cost (25,188,159) (25,188,159)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 16,571,494 18,422,817
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 22,999,426 $ 24,934,956
============ ============
See accompanying notes to financial statements
-3-
THE QUIGLEY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
September 30, 2003 September 30, 2002 September 30, 2003 September 30, 2002
------------------ ------------------ ------------------ ------------------
SALES:
Sales $ 10,573,928 $ 8,548,654 $ 26,351,211 $ 18,994,401
Co-operative advertising promotions 661,701 714,329 1,243,312 1,121,923
------------ ------------ ------------ ------------
NET SALES 9,912,227 7,834,325 25,107,899 17,872,478
LICENSING FEES -- -- -- 148,866
------------ ------------ ------------ ------------
TOTAL REVENUE 9,912,227 7,834,325 25,107,899 18,021,344
------------ ------------ ------------ ------------
COST OF SALES 5,424,380 4,723,263 14,160,353 10,844,358
------------ ------------ ------------ ------------
GROSS PROFIT 4,487,847 3,111,062 10,947,546 7,176,986
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Sales and marketing 1,095,486 788,719 3,438,840 2,518,265
Administration 2,046,915 1,987,058 6,800,522 6,237,782
Research and development 1,230,245 666,002 2,599,250 1,897,403
------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSES 4,372,646 3,441,779 12,838,612 10,653,450
------------ ------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS 115,201 (330,717) (1,891,066) (3,476,464)
INTEREST AND OTHER INCOME 18,928 41,864 77,842 117,871
------------ ------------ ------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE TAXES 134,129 (288,853) (1,813,224) (3,358,593)
------------ ------------ ------------ ------------
INCOME TAXES -- -- -- --
------------ ------------ ------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 134,129 (288,853) (1,813,224) (3,358,593)
------------ ------------ ------------ ------------
DISCONTINUED OPERATIONS:
Loss from discontinued operations -- (211,542) (54,349) (292,790)
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 134,129 ($ 500,395) ($ 1,867,573) ($ 3,651,383)
============ ============ ============ ============
Basic earnings per common share:
Income (loss) from continuing operations $ 0.01 ($ 0.03) ($ 0.16) ($ 0.31)
Loss from discontinued operations -- (0.02) -- (0.03)
------------ ------------ ------------ ------------
Net Income (loss) $ 0.01 ($ 0.05) ($ 0.16) ($ 0.34)
============ ============ ============ ============
Diluted earnings per common share:
Income (loss) from continuing operations $ 0.01 ($ 0.03) ($ 0.16) ($ 0.31)
Loss from discontinued operations -- (0.02) -- (0.03)
------------ ------------ ------------ ------------
Net Income (loss) $ 0.01 ($ 0.05) ($ 0.16) ($ 0.34)
============ ============ ============ ============
Weighted average common shares outstanding:
Basic 11,475,746 10,964,597 11,464,105 10,870,393
============ ============ ============ ============
Diluted 14,397,286 10,964,597 11,464,105 10,870,393
============ ============ ============ ============
See accompanying notes to financial statements
-4-
THE QUIGLEY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONDENSED)
(Unaudited)
Nine Months Ended
September 30, 2003 September 30, 2002
------------------ ------------------
NET CASH USED IN OPERATING ACTIVITIES ($ 1,989,766) ($ 1,465,160)
------------ ------------
INVESTING ACTIVITIES:
Capital expenditures (410,108) (432,508)
------------ ------------
NET CASH FLOWS USED IN INVESTING
ACTIVITIES (410,108) (432,508)
------------ ------------
FINANCING ACTIVITIES:
Proceeds from exercise of options and warrants 16,250 3,250,000
------------ ------------
NET CASH FLOWS PROVIDED BY FINANCING
ACTIVITIES 16,250 3,250,000
------------ ------------
NET CASH PROVIDED BY DISCONTINUED
OPERATIONS 133,714 181,595
------------ ------------
NET (DECREASE) INCREASE IN CASH (2,249,910) 1,533,927
CASH & CASH EQUIVALENTS, BEGINNING OF
PERIOD 12,897,080 9,684,305
------------ ------------
CASH & CASH EQUIVALENTS,
END OF PERIOD $ 10,647,170 $ 11,218,232
============ ============
See accompanying notes to financial statements
-5-
THE QUIGLEY CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND BUSINESS
The Quigley Corporation (WWW.QUIGLEYCO.COM, the "Company"), organized under the
laws of the state of Nevada, is engaged in the development, manufacturing, and
marketing of health and homeopathic products that are being offered to the
general public, and the research and development of potential prescription
products. The Company is organized into three business segments, which are, Cold
Remedy, Health and Wellness, and Ethical Pharmaceutical. For the fiscal periods
presented, the Company's revenues have come from the Company's Cold Remedy
business segment and the Health and Wellness business segment.
Darius International Inc., ("Darius") a wholly owned subsidiary of the Company,
the Health and Wellness segment, was formed in January 2000 to introduce new
products to the marketplace through a network of independent distributors.
Darius is a direct selling organization specializing in proprietary health and
wellness products, which commenced shipping product to customers in the third
quarter of 2000. On January 2, 2001, the Company acquired certain assets and
assumed certain liabilities of a privately held company involved in the direct
marketing and distribution of health and wellness products.
The formation of Darius has provided diversification to the Company in both the
method of product distribution and the broader range of products available to
the marketplace serving as a balance to the seasonal revenue cycles of the
Cold-Eeze(R) branded products.
In January 2001, the Company formed an Ethical Pharmaceutical Unit which is now
Quigley Pharma Inc. ("Pharma"), a wholly-owned subsidiary of the Company, the
Ethical Pharmaceutical segment, that is under the direction of its Executive
Vice President and Chairman of its Medical Advisory Committee. The formation of
Pharma follows the Patent Office of The United States Commerce Department
confirming the assignment to the Company of a Patent Application for the "Method
and Composition for the Topical Treatment of Diabetic Neuropathy" which was
issued and extends through March 27, 2021. The establishment of a dedicated
pharmaceutical subsidiary may enable the Company to diversify into the
prescription drug market and to ensure safe and effective distribution of these
important potential new products currently under development. At this time,
three patents have been issued and assigned to the Company resulting from
research activity of Pharma.
During 2000, the Company acquired a 60% ownership position in Caribbean Pacific
Natural Products, Inc. ("CPNP"), a leading developer and marketer of all-natural
sun-care and skincare products for luxury resorts, theme parks and spas. In
December 2002, the Board of Directors of the Company approved a plan to sell
CPNP. On January 22, 2003, the Company completed the sale of the Company's 60%
equity interest in CPNP to Suncoast Naturals, Inc. ("Suncoast"). See discussion
in Notes to Financial Statements, Note 3 - Discontinued Operations.
COLD REMEDY
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Cold-Eeze(R), a zinc gluconate glycine formulation (ZIGG(TM)) is an
over-the-counter consumer product used to reduce the duration and severity of
the common cold and is sold in lozenge and sugar-free tablet form. During the
third quarter of 2003 the Company launched Cold-EEZE(R) Cold Remedy Nasal Spray
and Kidz-EEZE(TM) Sore Throat Pop with Pectin. The nasal spray product is a
moisturizing nasal spray containing Aloe Vera gel and Zinc Gluconate.
In May 1992, the Company entered into an exclusive agreement for worldwide
representation, manufacturing, marketing and distribution rights to a zinc
gluconate glycine lozenge formulation which was patented in the United States,
United Kingdom, Sweden, France, Italy, Canada, Germany, and is pending in Japan.
This product is presently being marketed by the Company and also through
independent brokers and marketers in the United States under the trade name
Cold-Eeze(R). Under a Food and Drug Administration ("FDA") approved
Investigational New Drug Application, a randomized double-blind
placebo-controlled study, conducted at Dartmouth College of Health Science,
Hanover, New Hampshire, concluded that the lozenge formulation treatment,
initiated within 48 hours of symptom onset, resulted in a significant reduction
in the total duration of the common cold.
On May 22, 1992, "Zinc and the Common Cold, a Controlled Clinical Study," was
published in England, in the "Journal of International Medical Research", Volume
20, Number 3, Pages 234-246. According to this publication, (a) flavorings used
in other Zinc lozenge products (citrate, tartrate, separate, orotate,
picolinate, mannitol or sorbitol) render the Zinc inactive and unavailable to
the patient's nasal passages, mouth and throat, where cold symptoms have to be
treated, (b) this patented formulation delivers approximately 93% of the active
Zinc to the mucosal surfaces and (c) the patient has the same sequence of
symptoms as in the absence of treatment, but goes through the phases at an
accelerated rate and with reduced symptom severity.
-6-
On July 15, 1996, results of a new randomized double-blind placebo-controlled
study on the common cold were published, which commenced at the Cleveland Clinic
Foundation on October 3, 1994. The study called "ZINC GLUCONATE LOZENGES FOR
TREATING THE COMMON COLD" was completed and published in THE ANNALS OF INTERNAL
MEDICINE - VOL. 125 NO. 2. Using a 13.3mg lozenge (almost half the strength of
the lozenge used in the Dartmouth Study), the result still showed a 42%
reduction in the duration of the common cold symptoms.
In April 2002, the Company announced the statistical results of a retrospective
clinical study that suggests that Cold-Eeze(R) is also an effective means of
preventing the common cold. This adolescent study indicated that when taken
daily, Cold-Eeze(R) statistically lessens the number of colds an individual
suffers per year, reducing the median from 1.5 to zero. These findings are the
result of analyzing three years of clinical data at the Heritage School facility
in Provo, Utah. The study also found that the use of Cold-Eeze(R) to treat a
cold statistically reduces the use of antibiotics for respiratory illnesses from
39.3% to 3.0% when Cold-Eeze(R) is administered as a first line treatment
approach to the common cold. Additionally, the study reinforces the original
clinical trials, concluding that Cold-Eeze(R) reduces the median duration of a
cold by four days. In April 2002, the Company was assigned a Patent Application
which was filed with the Patent Office of the United States Commerce Department
for the use of Cold-Eeze(R) as a prophylactic for cold prevention. The new
patent application follows the results of the adolescent study at the Heritage
School facility.
In May 2003, the Company announced the study findings of a prospective study,
conducted at the Heritage School facility in Provo, Utah, 178 children ages 12
to 18 years were given Cold-Eeze(R) lozenges both symptomatically and
prophylactically from October 5, 2001 to May 30, 2002. The study found a 54%
reduction in the most frequently observed cold duration. Those subjects not
receiving treatment most frequently experienced symptom duration at 11 days
compared with 5 days when lozenges were administered, a reduction of 6 days.
The study also found that there was a 25% reduction in the number of colds
experienced when Cold-Eeze(R) was administered once a day as a preventative.
With prophylaxis, 61% of the subjects experienced one or fewer colds, far less
than the national average of 6-10 colds a year in children, as reported by the
National Institute of Allergy and Infectious Diseases.
In the second half of 1998, the Company launched Cold-Eeze(R) in a sugar free
version of the product to benefit diabetics and other consumers concerned with
their sugar intake.
The business of the Company is subject to federal and state laws and regulations
adopted for the health and safety of users of the Company's products.
Cold-Eeze(R) is a homeopathic remedy that is subject to regulations by various
federal, state and local agencies, including the FDA and the Homeopathic
Pharmacopoeia of the United States.
The Company competes with suppliers varying in range and size in the cold remedy
products arena. Because Cold-Eeze(R) has been clinically proven, it offers a
significant advantage over other suppliers in the over-the-counter cold remedy
market. The management of the Company believes there should be no impediment on
the ability to compete in the marketplace now, or in the immediate future, since
factors concerning the product, such as price, product quality, availability,
reliability, credit terms, name recognition, delivery and support are all
properly positioned. The Company has several Broker, Distributor and
Representative Agreements, both nationally and internationally and the product
is distributed through numerous independent and chain drug and discount stores
throughout the United States.
The Company continues to use the resources of independent national and
international brokers complementing its own personnel to represent the Company's
over-the-counter products, thereby saving capital and other ongoing expenditures
that would otherwise be incurred.
HEALTH AND WELLNESS
-------------------
Darius, through Innerlight Inc., its wholly owned subsidiary, is a direct
selling company specializing in the development and distribution of proprietary
health and wellness products primarily within the United States with the
commencement of international business activity during the second quarter of
2003. The Company develops and markets products that are suitable for
distribution within a direct selling business environment. The products marketed
and sold by Darius are herbal vitamins and dietary supplements for the human
condition, in the areas of health, immunity, energy and pain.
Within the framework of a direct selling business environment, the Company sells
its products through a network of independent representatives, who are not
employees of the Company. These purchases by the distributors may be used for
-7-
personal consumption or used for resale to consumers. The representatives
receive compensation for sales achieved by means of a commission structure or
compensation plan based on their product sales and those of personnel within
their down-line distributor network. As the independent representatives pay for
product in advance of shipments being made, the accounts receivable balances at
any time are negligible.
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 resource on systems
enhancements in the past and will continue to do so to ensure prompt
customer response times, business continuity and reliable reporting
capabilities. Any interruption to computer systems for an extended period
of time could be harmful to the business;
o To execute conformity with various federal, state and local regulatory
agencies both within the United States and abroad. With the commencement of
international business, difficulties with foreign regulatory requirements
could have a significant negative impact on future growth. Any inquiries
from government authorities relating to our business and compliance with
laws and regulations could be harmful to the Company;
o To compete with larger more mature organizations operating within the same
market and to remain competitive in terms of product relevance and business
opportunity;
o To successfully implement methods for progressing the direct selling
philosophy internationally; and
o To plan strategically for general economic conditions.
Any or all of the above risks could result in significant reductions in revenues
and profitability of the Health and Wellness segment.
ETHICAL PHARMACEUTICAL
----------------------
The establishment of Pharma may enable the Company to diversify into the
development of naturally derived prescription drugs, cosmeceuticals, and dietary
supplements. Research and development will focus on the identification,
isolation and direct use of active medicinal substances. One aspect of Pharma's
research will focus on the combination of isolated active constituents and whole
plant components. The search for new natural sources of medicinal substances
will focus not only on world plants, fungi, and other natural substances, but an
intense investigation into traditional medicinals and historic therapeutics.
Pharma is currently undergoing research and development activity in compliance
with regulatory requirements. During the course of its research and development,
certain formulas have led to three patents and several patent applications,
which the Patent Office of the United States Commerce Department has confirmed
the assignment to the Company. The Company, through Pharma, is at the initial
stages of what may be a lengthy process to develop these patents and patent
applications into commercial products.
-8-
The areas of focus are:
o A Patent (No. 6,555,573 B2) entitled "Method and Composition for the
Topical Treatment of Diabetic Neuropathy." The patent extends through March
27, 2021.
o A Patent (No. 6,592,896 B2) entitled "Medicinal Composition and Method of
Using It" (for Treatment of Sialorrhea and other Disorders) for a product
to relieve sialorrhea (drooling) in patients suffering from Amyotrophic
Lateral Sclerosis (ALS), otherwise known as Lou Gehrig's Disease. The
patent extends through August 6, 2021.
o A Patent (No. 6,596,313 B2) entitled "Nutritional Supplement and Method of
Using It" for a product to relieve sialorrhea (drooling) in patients
suffering from Amyotrophic Lateral Sclerosis (ALS), otherwise known as Lou
Gehrig's Disease. The patent extends through April 15, 2022.
o A Patent Application entitled "Composition and Method for Prevention,
Reduction and Treatment of Radiation Dermatitis" with the Patent Office of
The United States Commerce Department.
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.
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.
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. It indicated
that subjects using this formulation had 67% of their symptoms improve,
suggesting efficacy. Because the Company's formulation for relief of
diabetes-related pain is a topical treatment and its ingredients are GRAS listed
(Generally Regarded As Safe) as identified in the Code of Federal Regulations,
FDA approval could potentially be obtained earlier than what is normally
required in the FDA process.
In July 2002, the Company announced the commencement of testing on a new
formulation being developed by the Company to relieve Sialorrhea (excess
secretions of the salivary glands, causing drooling) in patients suffering from
diseases including Amyotrophic Lateral Sclerosis (ALS), otherwise known as Lou
Gehrig's Disease, Cerebral Palsy, Parkinson's Disease, and Muscular Dystrophy.
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. 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, 2002. In the opinion of management, all
adjustments necessary for a fair presentation of the consolidated financial
position, consolidated results of operations and consolidated cash flows, for
the periods indicated, have been made. Prior period amounts have been
reclassified to conform with this presentation.
On January 2, 2001, the Company acquired certain assets and assumed certain
liabilities of a privately held company, located in Utah, involved in the direct
marketing and distribution of health and wellness products. This acquisition
required cash payments that approximated $110,000 and 50,000 shares of the
Company's stock issued to the former owners of the net assets acquired. The net
assets acquired included assets totaling $536,000 and liabilities assumed
-9-
approximating $416,000. Also required were payments totaling $540,000 for the
use of product formulations; consulting; confidentiality and a non-compete
agreement. To maintain the continuous application of these arrangements, fees of
5% on net sales collected must be paid to the former owners. The operating
results have been included in the Company's Consolidated Statements of
Operations from the date of acquisition. Prior to January 1, 2002, the excess of
cost over net assets acquired had been subject to amortization on a
straight-line basis over a period of 15 years. Subsequent to 2001, the account
will only be reduced if the value becomes impaired.
During 2000, the Company acquired a 60% ownership position in CPNP. In December
2002, the Board of Directors of the Company approved a plan to sell CPNP. On
January 22, 2003, the Board of Directors of the Company completed the sale of
the Company's 60% equity interest in CPNP to Suncoast. Results of CPNP prior to
January 22, 2003 are presented as discontinued operations in the Consolidated
Statements of Operations and in the Consolidated Balance Sheets. See discussion
in Notes to Financial Statements, Note 3 - Discontinued Operations.
GOODWILL AND INTANGIBLE ASSETS
Patent rights have been amortized on a straight-line basis over the period of
the related licensing agreements, which approximated 67 months and were fully
amortized as of March 2002. Amortization costs incurred for both three months
periods were zero, with the costs for the nine months periods ended September
30, 2003 and 2002, having been zero and $21,940, respectively.
As of September 30, 2003 and December 31, 2002, intangible assets consist
principally of goodwill. Goodwill is not amortized but reviewed for impairment
when events and circumstances indicate the carrying amount may not be
recoverable or on an annual basis. In the fourth quarter of 2002, the Company
realized an impairment loss of $296,047 relating to goodwill in CPNP, which was
reflected in discontinued operations.
CONCENTRATION OF RISKS
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash investments and trade
accounts receivable.
The Company maintains cash and cash equivalents with four major financial
institutions. Since the Company maintains amounts in excess of guarantees
provided by the Federal Depository Insurance Corporation, the Company performs
periodic evaluations of the relative credit standing of these financial
institutions and limits the amount of credit exposure with any one institution.
Trade accounts receivable potentially subjects the Company to credit risk. The
Company extends credit to its customers based upon an evaluation of the
customer's financial condition and credit history and generally does not require
collateral. The Company has historically incurred minimal credit losses. The
Company's broad range of customers includes many large wholesalers, mass
merchandisers and multi-outlet pharmacy chains, five of which account for a
significant percentage of sales volume, representing 26% and 27% of sales volume
for the three months periods ended September 30, 2003 and 2002, respectively,
and 19% for both nine months periods ended September 30, 2003 and 2002.
Customers comprising the five largest accounts receivable balances represented
43% and 44% of total trade receivable balances at September 30, 2003 and
December 31, 2002, respectively. During the three and nine months periods ended
September 30, 2003, 95% and 97% of the Company's revenues originated in the
United States during the respective periods.
The Company uses separate suppliers to produce Cold-Eeze(R) in lozenge, nasal
spray and sugar-free tablet form. The Company's revenues are currently generated
from the sale of Cold-Eeze(R) products and the Health and Wellness segment. The
lozenge form is manufactured by a third party manufacturer a significant amount
of whose revenues are from the Company. The other forms are manufactured by
third parties that produce a variety of other products for other customers.
Should these relationships terminate or discontinue for any reason, the Company
has formulated a contingency plan in order to prevent such discontinuance from
materially affecting the Company's operations. Any such termination may,
however, result in a temporary delay in production until the replacement
facility is able to meet the Company's production requirements.
-10-
Raw material used in the production of the product is available from numerous
sources. Currently, it is being procured from a single vendor in order to secure
purchasing economies. In a situation where this one vendor is not able to supply
the contract manufacturer with the ingredients, other sources have been
identified.
Darius' product for resale is sourced from several suppliers. In the event that
such sources were no longer in a position to supply Darius with product, other
vendors have been identified as reliable alternatives with minimal adverse loss
of business.
LONG-LIVED ASSETS
The Company reviews its long-lived assets for impairment on an exception basis
whenever events or changes in circumstances indicate that the carrying amount of
the assets may not be recoverable through future cash flows. If it is determined
that an impairment loss has occurred based on the expected cash flows, a loss is
recognized in the Statement of Operations. In the fourth quarter of 2002, in
addition to its impairment loss in CPNP, the Company realized an additional
impairment loss of $337,186 from its investment in CPNP, which was reflected in
discontinued operations. The total impairment loss of $633,233 was reflected in
discontinued operations.
REVENUE RECOGNITION
Sales are recognized at the time ownership and risk of loss is transferred to
the customer, which is primarily the time the shipment is received by the
customer. 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. Total revenues for the three and nine months periods
ended September 30, 2002 include an amount of zero and $148,866, respectively,
related to licensing fees, which was the final installment as a result of the
settlement of the infringement suit, against Gel Tech, LLC, the developer of
Zicam(TM), and Gum Tech International, Inc., its distributor.
SHIPPING AND HANDLING
Product sales relating to the Health and Wellness products carry an additional
identifiable shipping and handling charge to the purchaser, which is classified
as revenue. For cold remedy products, such costs are included as part of the
invoiced price. In all cases, costs related to this revenue are recorded in cost
of sales.
STOCK COMPENSATION
Stock options and warrants for purchase of the Company's common stock have been
granted to both employees and non-employees since the date of the Company's
public inception. Options and warrants are exercisable during a period
determined by the Company, but in no event later than ten years from the date
granted. Stock options granted to employees vest immediately.
The Company applies Accounting Principles Board Opinion No. 25 ("APB 25") in
accounting for its grants of options to employees. Under the intrinsic value
method prescribed by APB 25, no compensation expense relating to grants to
employees has been recorded by the Company in periods reported. If compensation
expense for awards made during the nine months periods ended September 30, 2003
and 2002 had been determined under the fair value method of Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation," the Company's net income and earnings per share would have been
reduced to the pro forma amounts indicated below:
Nine Months Nine Months
Ended Ended
September 30, 2003 September 30, 2002
------------------ ------------------
Net loss
As reported ($ 1,867,573) ($ 3,651,383)
Compensation expense -- ($ 1,627,500)
Pro forma ($ 1,867,573) ($ 5,278,883)
Basic earnings (loss) per share
As reported ($0.16) ($0.34)
Pro forma ($0.16) ($0.49)
Diluted earnings (loss) per share
As reported ($0.16) ($0.34)
Pro forma ($0.16) ($0.49)
-11-
Expense relating to warrants granted to non-employees have been appropriately
recorded, which have been based on either fair values agreed upon with the
grantees or fair values as determined by the Black-Scholes pricing model
dependent upon the circumstances relating to the specific grants.
A total of 375,000 stock options were granted to employees in the nine months
period ended September 30, 2002 with no such grants having been made during the
comparable 2003 period.
ROYALTIES AND COMMISSIONS
The Company includes royalties and founders commissions incurred as cost of
sales for the Cold Remedy segment and in administration expenses for the Health
and Wellness segment based on agreement terms. Independent representative
commissions incurred by the Health and Wellness segment are included in cost of
sales. Commission expense related to independent brokers associated with the
Cold Remedy segment is included in administration expenses.
ADVERTISING
Advertising costs are expensed within the period in which they are utilized.
Advertising expense is comprised of media advertising, presented as part of
sales and marketing expense; co-operative advertising, which is accounted for as
a deduction from sales; and free product, which is accounted for as part of cost
of sales. Advertising costs incurred for the three months periods ended
September 30, 2003 and 2002 were $1,120,256 and $1,324,624, respectively, and
for the nine months periods ended September 30, 2003 and 2002 were $2,514,575
and $2,255,989, respectively. Included in prepaid expenses and other current
assets was $65,000 and $236,875 at September 30, 2003 and December 31, 2002,
respectively, relating to prepaid advertising expenses.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations in the period incurred.
Expenditures for the three months periods ended September 30, 2003 and 2002 were
$1,230,245 and $666,002, respectively, and for the nine months periods ended
September 30, 2003 and 2002 were $2,599,250 and $1,897,403, respectively.
Principally, research and development costs are related to Pharma's areas of
interest and study costs associated with Cold-Eeze(R).
INCOME TAXES
The Company utilizes an asset and liability approach which requires the
recognition of deferred tax assets and liabilities for the future tax
consequences of events that have been recognized in the Company's financial
statements or tax returns. In estimating future tax consequences, the Company
generally considers all expected future events other than enactments of changes
in the tax law or rates. See discussion in Notes to Financial Statements, Note 7
- Income Taxes.
NOTE 3 - DISCONTINUED OPERATIONS
Effective July 1, 2000, the Company acquired a 60% ownership position of CPNP
which is accounted for by the purchase method of accounting and accordingly, the
operating results have been included in the Company's consolidated financial
Statements from the date of acquisition. This majority ownership position
required a cash investment that approximated $812,000 and the provision for a $1
million line of credit, collateralized by inventory, accounts receivable and all
other assets of CPNP. The net assets of CPNP at the acquisition date principally
consisted of a product license and distribution rights with no recorded value,
inventory and fixed assets of $312,915 and $510,000 of working capital with a
contribution to minority interest of $329,166.
In December 2002, the Board of Directors of the Company approved a plan to sell
CPNP. On January 22, 2003, the Board of Directors of the Company completed the
sale of the Company's 60% equity interest in CPNP to Suncoast. In exchange for
its 60% equity interest in CPNP, the Company received: (i) 750,000 shares of
Suncoast's common stock, which Suncoast has agreed, at its cost and within 60
days from the closing, to register for public resale through an appropriate
registration statement; and (ii) 100,000 shares of Suncoast's Series A
Redeemable Preferred Stock, which bears interest at a rate of 4.25% per annum
and which is redeemable from time to time after March 31, 2003 in such amounts
as is equal to 50% of the free cash flow reported by Suncoast in the immediately
preceding quarterly financial statements divided by the redemption price of
$10.00 per share. The Company owns 19.5% of Suncoast's issued and outstanding
capital stock valued at $79,365, representing the Company's share of the fair
value of Suncoast at the time the transaction was recorded, this amount is
included in Other Assets in the Consolidated Balance Sheets. During August 2003,
a registration statement was filed but an effective date has not been
determined. The disposal of CPNP was completed in order to allow the Company to
focus resources on other activities and clinical research and development.
-12-
Sales of CPNP for all periods commencing on the date of acquisition on July 1,
2000 up to date of disposal on January 22, 2003, were $5,075,472, cumulative net
losses during that period were $2,232,620. The loss includes an amount of
$633,233 relating to the asset impairment, reported in the fourth quarter of
2002. Revenues of CPNP for the three months periods ended September 30, 2003 and
2002 were zero and $443,574, respectively, net losses for the same periods were
zero and $211,542. Revenues of CPNP for the nine months periods ended September
30, 2003 and 2002 were $59,824, and $1,643,898, respectively, net losses for the
same periods were $54,349 and $292,790. Results of CPNP are presented as
discontinued operations in the Consolidated Statements of Operations and in the
Consolidated Balance Sheets.
The major classes of balance sheet items of discontinued operations at December
31, 2002 were inventory, accounts receivable, property, plant and machinery and
accounts payable.
NOTE 4 - SEGMENT INFORMATION
The basis for presenting segment results is consistent with overall Company
reporting. The Company reports information about its operating segments in
accordance with Financial Accounting Standard Board Statement No. 131,
"Disclosure About Segments of an Enterprise and Related Information," which
establishes standards for reporting information about a company's operating
segments. All consolidating items are included in Corporate & Other.
The Company has divided its operations into three reportable segments as
follows: The Quigley Corporation (Cold Remedy), whose main product is
Cold-Eeze(R), a proprietary zinc gluconate glycine lozenge for the common cold;
Darius (Health and Wellness), whose business is the sale and direct marketing of
a range of health and wellness products, and Quigley Pharma (Ethical
Pharmaceutical), currently involved in research and development activity to
develop potential pharmaceutical products.
As discussed in Notes to Financial Statements, Note 3 - Discontinued Operations,
the Company disposed of its Sun-care and Skincare segment in January 2003.
Financial information relating to 2003 and 2002 operations, by business segment,
follows:
----------------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS Cold Ethical
ENDED SEPTEMBER 30, Remedy Health and Pharmaceutical Corporate and
2003 Products Wellness Products Other Total
----------------------------------------------------------------------------------------------------------------------
Net Sales
Customers $4,614,554 $5,297,673 - - $9,912,227
Segment operating
profit (loss) $460,438 $500,357 ($845,594) - $115,201
----------------------------------------------------------------------------------------------------------------------
AS OF AND FOR THE Cold Ethical
NINE MONTHS ENDED Remedy Health and Pharmaceutical Corporate and
SEPTEMBER 30, 2003 Products Wellness Products Other Total
----------------------------------------------------------------------------------------------------------------------
Net Sales
Customers $9,434,316 $15,673,583 - - $25,107,899
Segment operating
profit (loss) (1,540,584) 1,737,129 ($2,087,611) - (1,891,066)
Total Assets $21,303,599 $2,864,338 - ($1,168,511) $22,999,426
-13-
----------------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS Cold Ethical
ENDED SEPTEMBER 30, Remedy Health and Pharmaceutical Corporate and
2002 Products Wellness Products Other Total
----------------------------------------------------------------------------------------------------------------------
Net Sales
Customers $3,524,663 $4,309,662 - - $7,834,325
Licensing fees - - - - -
Segment operating
profit (loss) ($384,056) $509,656 ($470,682) $14,365 ($330,717)
----------------------------------------------------------------------------------------------------------------------
AS OF AND FOR THE Cold Ethical
NINE MONTHS ENDED Remedy Health and Pharmaceutical Corporate and
SEPTEMBER 30, 2002 Products Wellness Products Other Total
----------------------------------------------------------------------------------------------------------------------
Net Sales
Customers $7,268,302 $10,604,176 - - $17,872,478
Licensing fees 148,866 - - - 148,866
Segment operating
profit (loss) ($3,329,161) $931,248 ($1,119,163) $40,612 ($3,476,464)
----------------------------------------------------------------------------------------------------------------------
Cold Ethical
AS OF Remedy Health and Pharmaceutical Corporate and
DECEMBER 31, 2002 Products Wellness Products Other Total
----------------------------------------------------------------------------------------------------------------------
Total Assets $26,223,476 $1,401,867 - ($2,690,387) $24,934,956
NOTE 5 - OTHER CURRENT LIABILITIES
Other current liabilities of the Company at September 30, 2003 and December 31,
2002 were $2,444,002 and $1,353,383, respectively. The 2003 amount included
balances relating to sales tax accruals and research and development accruals of
approximately $562,000 and $798,000, respectively.
NOTE 6 - TRANSACTIONS AFFECTING STOCKHOLDERS' EQUITY
On September 8, 1998, the Company's Board of Directors declared a dividend
distribution of Common Stock Purchase Rights (the "Rights"), thereby creating a
Stockholder Rights Plan (the "Plan"). The dividend was payable to the
stockholders of record on September 25, 1998. Each Right entitles the
stockholder of record to purchase from the Company that number of Common Shares
having a combined market value equal to two times the Rights exercise price of
$45. The Rights are not exercisable until the distribution date, which will be
the earlier of a public announcement that a person or group of affiliated or
associated persons has acquired 15% or more of the outstanding common shares, or
the announcement of an intention to make a tender or exchange offer resulting in
the ownership of 15% or more of the outstanding common shares by a similarly
constituted party. The dividend has the effect of giving the stockholder a 50%
discount on the share's current market value for exercising such right. In the
event of a cashless exercise of the Right, and the acquirer has acquired less
than a 50% beneficial ownership of the Company, a stockholder may exchange one
Right for one common share of the Company. The Final Expiration of the Plan is
September 25, 2008.
Since the inception of the stock buy-back program in January 1998, the Board has
subsequently increased the authorization on five occasions, for a total
authorized buy-back of 5,000,000 shares or approximately 38% of the previous
shares outstanding. Such shares are reflected as treasury stock and will be
available for general corporate purposes. From the initiation of the plan until
September 30, 2003, 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 2002 or 2003 to date.
As a result of the litigation relating to the case against Nutritional Foods
Corporation, in March of 1998, a subsequent order of the Court of Common Pleas
of Bucks County modified the decree of January 23, 1997 to provide for a return
to treasury of 604,928 shares to the Company. As payment for legal services,
118,066 of these shares were reissued with a market value of approximately
$1,145,358. This value, the cost of reacquiring these shares, then became the
value of the net treasury stock ($2.35 per share) represented by 486,862 shares
returned to treasury.
-14-
On April 9, 2002, The Quigley Corporation entered into an agreement with
Forrester Financial LLC, ("Forrester") providing for Forrester to act as a
financial consultant to the Company. The consulting agreement commenced as of
March 7, 2002 for a term of twelve months, but may be terminated by the Company
in its sole discretion at any time. As compensation for services to be provided
by Forrester to the Company, the Company granted to Forrester, or its designees,
warrants to purchase up to a total of 1,000,000 shares of the Company's common
stock. The Company's financial statements reflect a $700,000 non-cash charge in
first quarter of 2002 resulting from the granting of these warrants. The
warrants have three exercise prices, 500,000 warrants exercisable at $6.50 per
share, which were exercised in May 2002 resulting in cash to the Company in the
amount of $3,250,000, 250,000 warrants exercisable at $8.50 per share, and
250,000 warrants exercisable at $11.50 per share. The warrants were initially
exercisable until the earlier to occur of (i) March 6, 2003 or (ii) the
termination of the Consulting Agreement.
On December 7, 2002, Forrester commenced an action by a Writ of Summons filed in
the Court of Common Pleas of Bucks County, PA against The Quigley Corporation.
No Complaint was filed detailing the claim of Forrester against The Quigley
Corporation. This action was terminated with prejudice by Forrester as part of
its agreement with The Quigley Corporation on February 2, 2003 whereby certain
warrants that were scheduled to expire on March 7, 2003 were extended to March
7, 2004 (warrants to purchase 250,000 shares at $8.50; warrants to purchase
250,000 shares at $11.50) are no longer cancelable by the Company. As an
additional part of this agreement, Forrester was granted warrants to purchase
250,000 shares at any time until March 7, 2004 at the price of $9.50 a share.
Pursuant to an agreement dated February 2, 2003, the Company entered into an
Amended and Restated Warrant Agreement (the "Amended Agreement") with Forrester.
As a result of this Amended Agreement the Company recorded a further non-cash
charge of $1,400,000 in the fourth quarter of 2002, amounting to a total expense
of $2,100,000, classified as administrative expense in the Consolidated
Statement of Operations, relating to this warrant agreement in 2002.
Additionally, $1,673,000 is reflected in the Consolidated Balance Sheets at
September 30, 2003 and December 31, 2002, which represents the value of the
unexercised warrants.
At September 30, 2003, there were 4,462,500 unexercised and vested option and
warrants of the Company's stock available for exercise.
NOTE 7 - INCOME TAXES
Certain exercises of options and warrants, and restricted stock issued for
services that became unrestricted resulted in reductions to taxes currently
payable and a corresponding increase to additional-paid-in-capital for prior
years. Certain tax benefits for option and warrant exercises totaling $1,889,397
are deferred because of a net operating loss carry-forward for tax purposes
("NOLs") that occurred during the fourth quarter of 1999, resulting from a
cumulative effect of deducting $42,800,364 attributed to options, warrants and
unrestricted stock deductions from taxable income. The net operating loss
carry-forwards arising from the option, warrant and stock activities approximate
$16.2 million for federal purposes, of which $3.5 million will expire in 2019,
$4.0 million in 2020, $8.7 million in 2022 and $16.2 million for state purposes,
of which $9.7 million will expire in 2009, $3.0 million in 2010, and $3.5
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 8 - 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.
-15-
A reconciliation of the applicable numerators and denominators of the income
statement periods presented is as follows (millions, except earnings per share
amounts):
Three Months Ended Nine Months Ended Three Months Ended Nine Months Ended
September 30, 2003 September 30, 2003 September 30, 2002 September 30, 2002
Income Shares EPS Loss Shares EPS Loss Shares EPS Loss Shares EPS
-------------------------------------------------------------------------------------------------------
Basic EPS $ 0.1 11.5 $ 0.01 ($ 1.8) 11.5 ($0.16) ($ 0.3) 11.0 ($0.03) ($3.4) 10.9 ($0.31)
Dilutives:
Options/Warrants -- 2.9 -- -- -- -- -- -- -- -- -- --
-------------------------------------------------------------------------------------------------------
Diluted EPS $ 0.1 14.4 $ 0.01 ($ 1.8) 11.5 ($0.16) ($ 0.3) 11.0 ($0.03) ($3.4) 10.9 ($0.31)
=======================================================================================================
Options and warrants outstanding at September 30, 2003 and 2002 were 4,462,500
and 4,160,500, respectively. They were not included in the computation of
diluted earnings for periods reporting losses because the effect would be
anti-dilutive.
NOTE 9 - RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Company has sales brokerage and other
arrangements with entities whose major stockholders are also stockholders of The
Quigley Corporation, or are related to a major stockholder, officer and director
of the Company. Commissions and other items expensed under such arrangements for
the three months ended September 30, 2003 and 2002 were zero and $4,454,
respectively, the amounts for the nine months ended September 30, 2003 and 2002
were zero and $37,979, respectively, and are included in sales and marketing,
and administration expense classifications in the Consolidated Statements of
Operations. Amounts payable under such agreements at September 30, 2003 and
December 31, 2002 were zero.
An agreement between the Company and the founders Mr. Guy J. Quigley and Mr.
Charles A. Phillips, both officers, directors and stockholders of the Company,
was entered into on June 1, 1995. The founders, in consideration of the
acquisition of the Cold-Eeze(R) cold therapy product, are to share a total
commission of five percent (5%), on sales collected, less certain deductions,
until the termination of this agreement on May 31, 2005. The amounts paid or
payable for the three months periods ended September 30, 2003 and 2002 under
such founder's commission agreements were $269,272 and $165,107, respectively,
the amounts for the nine months periods ended September 30, 2003 and 2002 were
$495,297 and $351,110, respectively, such expense is included in the cost of
sales classification in the Consolidated Statements of Operations. Amounts
payable under such agreements at September 30, 2003 and December 31, 2002 were
$199,017 and $301,695 respectively, and are represented in the accrued royalties
and sales commission classification in the Consolidated Balance Sheets.
The Company is in the process of acquiring licenses in certain countries through
related party entities whose stockholders include Mr. Gary Quigley, a relative
of the Company's Chief Executive Officer. Fees amounting to $92,250 and $76,007,
respectively, have been paid to a related entity during the three months periods
ended September 30, 2003 and 2002, respectively, to assist with the regulatory
aspects of obtaining such licenses and are included in the research and
development expense classification in the Consolidated Statements of Operations.
Corresponding amounts paid during the nine months periods ended September 30,
2003 and 2002, were $276,750 and $217,000, respectively.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
Certain operating leases for office and warehouse space maintained by the
Company resulted in rent expense for the three months periods ended September
30, 2003 and 2002 of $55,570 and $76,706, respectively, with such expenses for
the nine months periods ended September 30, 2003 and 2002 of $163,950 and
$169,263, respectively. The future minimum lease obligations under these
operating leases are approximately $436,000. The Company is a guarantor of a
lease for a former subsidiary. The lease extends for a period of approximately
three years, the maximum amount of future payments the Company could be required
to make under the guarantee is approximately $250,000.
The Company has committed to advertising and research and development costs
approximating $3,600,000 relating to 2003 and 2004. Additional advertising and
research and development costs are expected to be incurred for the remainder of
2003 and during 2004.
-16-
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 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 also maintains a separate representation and distribution agreement
relating to the development of the zinc gluconate glycine product formulation.
In return for exclusive distribution rights, the Company must pay the developer
a 3% royalty and a 2% consulting fee based on sales collected, less certain
deductions, throughout the term of this agreement, expiring in 2007.
Additionally, a founder's commission totaling 5%, on sales collected, less
certain deductions, is paid to two of the officers, who are also directors and
stockholders of the Company, and whose agreements expire in 2005.
The expenses for the respective periods relating to such agreements amounted to
$361,071 and $330,214 for the three months periods ended September 30, 2003 and
2002, respectively, the corresponding expenses for the nine months periods ended
September 30, 2003 and 2002 were $813,130 and $738,220, respectively. Amounts
accrued for these expenses at September 30, 2003 and December 31, 2002 were
$338,898 and $553,698, respectively.
The Company has an agreement with the former owners of the Utah based direct
marketing and selling company, whereby they receive payments, currently totaling
5% of net sales collected, for use of product formulations, consulting,
confidentiality and non-compete agreements. Amounts paid or payable under such
agreement during the three months periods ended September 30, 2003 and 2002 were
$222,097 and $181,491, respectively, the amounts relating to the nine months
periods ended September 30, 2003 and 2002 were $662,266 and $478,817,
respectively. Amounts payable under such agreement at September 30, 2003 and
December 31, 2002 were $74,519 and $63,866, respectively.
In August 2003, the Company entered into a licensing agreement with a patent
holder relating to utilizing a nasal spray product in the treatment of symptoms
of the common cold. The Company agreed to pay the patent holder a two percent
royalty on net sales of nasal spray products, less certain deductions,
throughout the term of this agreement, expiring no later than April 2014.
Amounts paid or payable under such agreement during the nine month period ended
September 30, 2003 were $13,537, with zero in the 2002 comparable period. No
amounts relating to this agreement were accrued or payable at September 30,
2003.
On August 1, 2003, an action was filed with the American Arbitration Association
by Mike Foran against Innerlight, Inc., a wholly owned subsidiary of Darius
International, Inc. which is a wholly owned subsidiary of the Corporation. Foran
was terminated as an independent representative by Innerlight, Inc. in December,
2002. Foran claims that he is entitled to commissions and payments for an
unspecified time from his termination in the amount of $10 million. On November
3rd Mike Foran submitted an Amended Claim to the American Arbitration
Association adding Darius International, Inc. and the Corporation as additional
party defendants to the action commenced on August 1, 2003 before the American
Arbitration Association.
On November 6th an action was commenced by The Quigley Corporation, Innerlight,
Inc., and Darius International, Inc. against Mike Foran in the United States
District Court for the District of Utah, Central Division, seeking a declaratory
judgment that The Quigley Corporation and Darius International are not parties
to any arbitration agreement with Mike Foran and may not be compelled to
arbitrate defendant's claims against them in arbitration. The action also
requests an injunction against Mike Foran enjoining the arbitration, and a
declaratory judgment that Innerlight properly terminated the agreement with Mike
Foran and does not owe any further commissions or other compensation to him
under its agreement with him.
The Corporation believes Foran's claims are without merit and is vigorously
defending the claims. No assessment can be made as to the outcome of this action
at this time.
An action was filed by Intervention, Inc. on July 2, 2002 in Contra Costa County
Superior Court under the California Unfair Competition Law, Business and
Professions Code, Section 17200. The Complaint claims that COLD-EEZE(R) does not
contain ionic zinc and therefore does not have the unique quality the Company
asserts for it. The Complaint purports to attack The Cleveland Clinic Study
titled Zinc Gluconate Lozenges for Treating the Common Cold and the Dartmouth
Study, Zinc Gluconate and The Common Cold, A Controlled Clinical Study. The
plaintiff claims that the Dartmouth Study is not double-blind and is not
randomized. The plaintiff also claims that The Cleveland Clinic Study is untrue
-17-
and deceptive because it did not conclude that patients "starting treatments"
with zinc had a 42% reduction in duration of the common cold and, also, because
the 42% reduction in common cold duration is not a reference to average of cold
duration but rather is a reference to the reduction in median duration. There is
also a claim by the plaintiff that there is an implied claim that the results in
the studies have been confirmed by repetition which plaintiff contests.
On the 3rd day of July, 2003, the Contra Costa County Superior Court upon Motion
of The Quigley Corporation issued a Summary Judgment in favor of The Quigley
Corporation. On October 24, 2003, Intervention Inc. filed an appeal to the
California Court of Appeals from the Summary Judgment issued in favor of The
Quigley Corporation. The Corporation believes that Intervention Inc.'s claims
are without merit and is vigorously defending the claims. No assessment can be
made to the outcome of this action at this time.
NOTE 11 - RECENT ACCOUNTING PRONOUNCEMENTS
SFAS NO. 148, "ACCOUNTING FOR STOCK-BASED COMPENSATION - TRANSITION AND
DISCLOSURE AN AMENDMENT OF FASB STATEMENT NO. 123" (SFAS 148)
In December 2002, the FASB issued SFAS 148 which amends SFAS 123 to provide
alternative methods of transition for an entity that voluntarily changes to the
fair value based method of accounting for stock-based employee compensation. It
also amends the disclosure provisions of SFAS 123 to require prominent
disclosure about the effects on reported net income of an entity's accounting
policy decisions with respect to stock-based employee compensation. It also
amends APB Opinion No. 28, "Interim Financial Reporting", to require disclosure
about those effects in interim financial information. The Company has adopted
the disclosure requirements of SFAS 148. The required disclosures are included
in Note 2, Summary of Significant Accounting Policies, to the Consolidated
Financial Statements.
FASB INTERPRETATION NO. 45, "GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS
FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS" (FIN
45)
In November 2002, the FASB issued FIN 45 which elaborates on the disclosures to
be made by a guarantor about its obligations under certain guarantees that it
has issued. It also clarifies that a guarantor is required to recognize, at the
inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The disclosure requirements of FIN 45 are
effective for financial statements for periods ending after December 15, 2002.
The initial recognition and initial measurement provisions of FIN 45 are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The Company has adopted the disclosure requirements of FIN 45
for the Form 10-K issued for the fiscal year ended December 31, 2002 and has
adopted the initial recognition and measurement provisions for any guarantees
issued or modified starting January 1, 2003.
FIN 46 WHICH CLARIFIES THE APPLICATION OF ACCOUNTING RESEARCH BULLETIN NO. 51,
"CONSOLIDATED FINANCIAL STATEMENTS,"
In January 2003, the FASB issued FIN 46 which clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to
certain entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. The disclosure requirements of FIN 46 are effective
for financial statements issued after January 31, 2003. The initial recognition
provisions of FIN 46 are applicable immediately to new variable interests in
variable interest entities created after January 31, 2003. For a variable
interest in a variable interest entity created before February 1, 2003, the
initial recognition provisions of FIN 46 are to be implemented no later than the
beginning of the first interim or annual reporting period beginning after June
15, 2003. The Company has determined that it does not have any variable
interests in any variable interest entities. Therefore, the adoption of FIN 46
did not have a material impact on the Company's financial position or results of
operations.
SFAS NO. 150, "ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS
OF BOTH LIABILITIES AND EQUITY." (SFAS NO. 150)
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). The provisions of SFAS No.
-18-
150 are effective for financial instruments entered into or modified after May
31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. The Company believes that the adoption of
SFAS No. 150 did not have an impact on its financial position or results of
operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS
-------------
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Report contains forward-looking
statements. These forward-looking statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
reflected in these forward-looking statements. Factors that might cause such a
difference include, but are not limited to, management of growth, competition,
pricing pressures on the Company's product, industry growth and general economic
conditions. Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's opinions only as of the
date hereof. The Company undertakes no obligation to revise or publicly release
the results of any revision to these forward-looking statements. Readers should
carefully review the risk factors described in other documents the Company files
from time to time with the Securities and Exchange Commission. The Quigley
Corporation makes no representation that the US Food and Drug Administration or
any other regulatory agency will grant an Investigational New Drug ("IND") or
take any other action to allow its formulations to be studied or marketed.
Furthermore, no claim is made that potential medicine discussed herein is safe,
effective, or approved by the Food and Drug Administration.
OVERVIEW
The Quigley Corporation, (the "Company"), headquartered in Doylestown,
Pennsylvania, is a leading marketer and distributor of a diversified range of
health and homeopathic products and is also involved in the research and
development of potential prescription products. The Company is organized into
three business segments of Cold Remedy, Health and Wellness, and Ethical
Pharmaceutical.
The Company's primary Cold Remedy product continues to be Cold-Eeze(R), which is
marketed in lozenge, nasal spray and sugar-free tablet form. Cold-Eeze(R) is the
only zinc gluconate glycine lozenge product clinically proven in two double
blind studies to reduce the severity and duration of common cold symptoms. The
efficacy of the lozenge was established following the publication of the second
double blind study in July 1996. A 2002 retrospective study also found that the
use of the Cold-Eeze(R) lozenge to treat a cold statistically reduced the use of
antibiotics for respiratory illnesses by 92% when Cold-Eeze(R) is administered
as a first line treatment approach to the common cold. This study also
reinforces the original clinical trials, concluding that Cold-Eeze(R) reduces
the median duration of a cold by four days along with suggesting that
Cold-Eeze(R) is an effective means of preventing the common cold.
In May 2003, the Company announced the study findings of a prospective study,
conducted at the Heritage School facility in Provo, Utah, 178 children ages 12
to 18 years were given Cold-Eeze(R) lozenges both symptomatically and
prophylactically from October 5, 2001 to May 30, 2002. The study found a 54%
reduction in the most frequently observed cold duration. Those subjects not
receiving treatment most frequently experienced symptom duration at 11 days
compared with 5 days when lozenges were administered, a reduction of 6 days.
Cold-Eeze(R) is distributed through numerous independent, chain drug and
discount stores throughout the United States. The Company reports increased cold
remedy revenues during 2003 compared to 2002 of 27.2%. This increase in revenues
is attributable to successful product bonus programs during the current and past
cold season that have been well received by the trade, increased strategic media
advertising, continued support of the product at retail level through
co-operative advertising activities with the trade and attention to the market
place through the outsourced nationwide brokerage network under the direction of
the Company's internal sales and marketing team. In addition the Company
launched the Cold-EEZE(R) Cold Remedy Nasal Spray and Kidz-EEZE(TM) Sore Throat
Pop during the third quarter 2003.
Revenues relating to Darius International Inc. ("Darius"), the Health and
Wellness segment, increased in 2003 compared to 2002 by 47.8%. This increase was
due to ongoing increases in the number of independent representatives.
Additionally, the Company commenced international sales activity during the
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latter part of the first quarter of 2003 with year to date revenues
approximating $700,000. The Company is planning to pursue this marketing
opportunity. This business segment has been effective in balancing the
seasonality of the Cold Remedy segment and producing a more consistent revenue
source throughout the fiscal year.
The establishment of a pharmaceutical subsidiary, Quigley Pharma Inc.,
("Pharma"), Ethical Pharmaceutical, may enable the Company to diversify into the
prescription drug market and ensure safe and effective distribution of important
potential new products currently under development. During 2003, Pharma
continued clinical trials and study activities in various areas of interest.
Resulting from this research and study activity, the Company has received a
patent for compound QR333 entitled "Method and Composition for the Topical
Treatment of Diabetic Neuropathy" and two patents related to compound QR334
entitled "Medicinal Composition and Method of Using It" (for Treatment of
Sialorrhea and other Disorders) and "Nutritional Supplement and Methods of Using
It".
The Company continues to use the resources of independent national and
international brokers complementing its own personnel to represent the Company's
over-the-counter products, thereby saving capital and other ongoing expenditures
that would otherwise be incurred. The distribution of product relating to the
direct selling segment is by means of independent representatives who are not
employees of the Company.
Manufacturing for all the Company's products is accomplished by outside sources.
The lozenge form is manufactured by a third party manufacturer, a significant
part of this manufacturer's revenues are from the Company, with the sugar-free,
nasal spray, sore throat and health and wellness products being produced by
different manufacturers.
During the first nine months of 2003, the Company continued the process of the
registration of the Cold-Eeze(R) products in the United Kingdom as a pharmacy
drug and incurred approximately $286,949 in related expenses and is included in
the research and development expense classification.
Future revenues, costs, margins, and profits will continue to be influenced by
the Company's ability to maintain its manufacturing availability and capacity
together with its marketing and distribution capabilities and requirements
associated with the development of Pharma's potential prescription drugs in
order to continue to compete on a national and international level. The
continued expansion of Darius International, Inc., is dependent on the Company
retaining existing independent representatives and recruiting additional
representatives both internationally and within the United States; continued
conformity with government regulations; a reliable information technology system
capable of supporting continued growth and continued reliable sources for
product and materials to satisfy consumer demand.
During 2000, the Company acquired a 60% ownership position in CPNP. In December
2002, the Board of Directors of the Company approved a plan to sell CPNP. On
January 22, 2003, the Company completed the sale of the Company's 60% equity
interest in CPNP to Suncoast. Results of CPNP prior to January 22, 2003 are
presented as discontinued operations in the Consolidated Statements of
Operations and in the Consolidated Balance Sheets.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
------------------------------------------
SFAS NO. 148, "ACCOUNTING FOR STOCK-BASED COMPENSATION - TRANSITION AND
DISCLOSURE AN AMENDMENT OF FASB STATEMENT NO. 123" (SFAS 148)
In December 2002, the FASB issued SFAS 148 which amends SFAS 123 to provide
alternative methods of transition for an entity that voluntarily changes to the
fair value based method of accounting for stock-based employee compensation. It
also amends the disclosure provisions of SFAS 123 to require prominent
disclosure about the effects on reported net income of an entity's accounting
policy decisions with respect to stock-based employee compensation. It also
amends APB Opinion No. 28, "Interim Financial Reporting", to require disclosure
about those effects in interim financial information. The Company has adopted
the disclosure requirements of SFAS 148. The required disclosures are included
in Note 2, Summary of Significant Accounting Policies, to the Consolidated
Financial Statements.
FASB INTERPRETATION NO. 45, "GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS
FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS" (FIN
45)
In November 2002, the FASB issued FIN 45 which elaborates on the disclosures to
be made by a guarantor about its obligations under certain guarantees that it
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has issued. It also clarifies that a guarantor is required to recognize, at the
inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The disclosure requirements of FIN 45 are
effective for financial statements for periods ending after December 15, 2002.
The initial recognition and initial measurement provisions of FIN 45 are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The Company has adopted the disclosure requirements of FIN 45
for this Form 10-K issued for the fiscal year ended December 31, 2002 and has
adopted the initial recognition and measurement provisions for any guarantees
issued or modified starting January 1, 2003.
FIN 46 WHICH CLARIFIES THE APPLICATION OF ACCOUNTING RESEARCH BULLETIN NO. 51,
"CONSOLIDATED FINANCIAL STATEMENTS,"
In January 2003, the FASB issued FIN 46 which clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to
certain entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. The disclosure requirements of FIN 46 are effective
for financial statements issued after January 31, 2003. The initial recognition
provisions of FIN 46 are applicable immediately to new variable interests in
variable interest entities created after January 31, 2003. For a variable
interest in a variable interest entity created before February 1, 2003, the
initial recognition provisions of FIN 46 are to be implemented no later than the
beginning of the first interim or annual reporting period beginning after June
15, 2003. The Company has determined that it does not have any variable
interests in any variable interest entities. Therefore, the adoption of FIN 46
did not have a material impact on the Company's financial position or results of
operations.
SFAS NO. 150, "ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS
OF BOTH LIABILITIES AND EQUITY." (SFAS NO. 150)
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). The provisions of SFAS No.
150 are effective for financial instruments entered into or modified after May
31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. The Company believes that the adoption of
SFAS No. 150 did not have an impact on its financial position or results of
operations.
CRITICAL ACCOUNTING POLICIES
----------------------------
As previously described, the Company is engaged in the development,
manufacturing, and marketing of health and homeopathic products that are being
offered to the general public and is also involved in the research and
development of potential prescription products. Certain key accounting policies
that may affect the results of the Company are the timing of revenue recognition
and sales incentives (including coupons, rebates and discounts); the
classification of advertising expenses; and the fact that all research and
development costs are expensed as incurred. Notes to Financial Statements, Note
1, Organization and Business, describes the Company's other significant
accounting policies.
REVENUE RECOGNITION
Sales are recognized at the time ownership and risk of loss is transferred to
the customer, which is primarily the time the shipment is received by the
customer. Sales returns and allowances are provided for in the period that the
related sales are recorded. Provisions for these reserves are based on
historical experience.
ADVERTISING
Advertising costs are expensed within the period to which they relate.
Advertising expense is made up of media advertising, presented as part of sales
and marketing expense; co-operative advertising, which is accounted for as a
deduction from sales; and bonus product, which is accounted for as part of cost
of sales. The level of advertising expense to be incurred is determined each
period to coincide with management's sales and marketing strategies. Advertising
costs incurred for the three months periods ended September 30, 2003 and 2002
were $1,120,256 and $1,324,624, the expense for the nine months periods ended
September 30, 2003 and 2002 were $2,514,575 and $2,255,989, respectively. This
expense item increased in the 2003 nine month reporting period due to strategic
media advertising in addition to other trade related methods of advertising,
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necessary to promote and support the Cold-Eeze(R) product. Included in prepaid
expenses and other current assets was $65,000 and $236,875 at September 30, 2003
and December 31, 2002, respectively, relating to prepaid advertising expenses.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations in the year incurred.
Expenditures for the three months periods ended September 30, 2003 and 2002 were
$1,230,245 and $666,002, respectively, expense for the nine months periods ended
September 30, 2003 and 2002 were $2,599,250 and $1,897,403, respectively.
Principally, research and development is part of the product research costs
related to Pharma and study costs associated with Cold-Eeze(R). Expenditure for
2003 also includes study costs relating to Cold-EEZE(R) Cold Remedy Nasal Spray.
Pharma is currently involved in research activity that is expected to increase
significantly over time as product research and testing progresses. The Company
is at the initial stages of what may be a lengthy process to develop potential
commercial prescription products.
RESULTS OF OPERATIONS
---------------------
THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED WITH SAME PERIOD 2002
Revenues for the three months ended September 30, 2003 were $9,912,227 compared
to $7,834,325 for 2002, reflecting an increase of 26.5% in 2003. Revenues in
2003 comprised $4,614,554 relating to the Cold Remedy segment and $5,297,673
from the Health and Wellness segment, compared to 2002 revenues of $3,524,663
and $4,309,662, by respective segment. Cold Remedy segment revenues have
increased in 2003 resulting from successful product bonus promotion campaigns
during the current and past cold season, increased strategic media advertising,
continued support of the products at retail level through co-operative
advertising activities with the customer and revised packaging making the
product more prominent in the marketplace, along with the launch of Cold-EEZE(R)
Cold Remedy Nasal Spray and Kidz-EEZE(TM) Sore Throat Pops during the third
quarter 2003. Independent data indicates increasing consumer awareness and
consumption of the Cold-Eeze(R) products. The Health and Wellness segment
reported increased sales in 2003 of 22.9%. This segment has grown significantly
due to increasing numbers of active independent representatives and the ability
of the Company to make available to consumers products suitable for direct
selling distribution methods. During the quarter the Health and Wellness segment
recorded $478,378 in international sales due to the commencement of direct
selling activity outside North America during the latter part of the first
quarter of 2003. The performance of the Health and Wellness segment has resulted
in relative equalization of revenues during the fiscal year rather than being
influenced by the seasonal nature of the Cold Remedy segment.
Cost of sales for 2003 as a percentage of sales was 51.3%, compared to 55.3% for
2002. The decrease in the cost of sales percentage in 2003 was primarily due to
the reduced cost of the 2003 product bonus program compared to the previous
year's Buy One Get One free promotion, a significantly reduced royalty charge
associated with Cold-EEZE(R) Cold Remedy Nasal Spray and the Kidz-EEZE(TM) Sore
Throat Pop, both of which commenced shipping to the trade in the third quarter
2003. Additional costs savings were achieved in 2003 resulting from reduced
procurement costs of product associated with the Health and Wellness segment
together with fluctuations in the payout rates of commissions to independent
representatives consistent with dynamics of a direct selling organization.
Selling, general and administrative expenses for 2003 were $3,142,401 compared
to $2,775,777 in 2002. The increase in 2003 was primarily due to increased media
advertising related to the Cold Remedy segment together with increases in
variable costs associated with increased revenues achieved by the Health and
Wellness segment in 2003.
Research and development costs in 2003 and 2002 were $1,230,245 and $666,002,
respectively. Research and development study costs related to Quigley Pharma in
the 2003 period were $635,911 compared to $403,411 in the comparable 2002
reporting period reflecting continued research and study costs associated with
the Ethical Pharmaceutical segment and the remainder for each respective period
relating to a new product of the Cold Remedy segment.
During 2003, the Company's major operating expenses of salaries, brokerage
commissions, promotion, advertising, and legal costs accounted for approximately
$2,069,689 (47.3%) of the total operating expenses of $4,372,646, an increase of
16.4% over the 2002 amount of $1,778,053 (51.7%) of total operating expenses of
$3,441,779. The selling, general and administrative expenses related to health
and wellness for 2003 and 2002 were $1,331,248 and $797,515, respectively,
reflecting increased expenditure in 2003 necessary to support the significant
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revenue growth of this segment. Operating expenses overall have increased
between the periods for reasons stated earlier.
Revenues of CPNP (discontinued operations) for the three months periods ended
September 30, 2003 and 2002 were zero and $443,574, respectively, net losses for
the same periods were zero and $211,542. The results of CPNP are represented as
discontinued operations in the Statements of Operations and Balance Sheets.
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED WITH SAME PERIOD 2002
Revenues for 2003 were $25,107,899 compared to $18,021,344 for 2002, reflecting
an increase of 39.3% in 2003. Revenues in 2003 comprised $9,434,316 relating to
the Cold Remedy segment and $15,673,583 from the Health and Wellness segment,
compared to 2002 revenues of $7,417,168 and $10,604,176, by respective segment.
The Cold Remedy and Health and Wellness segments report an increase in revenues
of 27.2% and 47.8%, respectively, between the years. The 2002 Cold Remedy
segment revenues included an amount for licensing fees of $148,866 as a result
of the settlement of the infringement suit against Gel Tech, LLC, the developer
of Zicam(TM), and Gum Tech International, Inc., its distributor as compared to
zero in 2003. The reported increase in the Cold Remedy segment revenues reflects
increased strategic media advertising, successful product bonus programs,
continued co-operative advertising programs with the trade along with the launch
of Cold-EEZE(R) Cold Remedy Nasal Spray and Kidz-EEZE(TM) Sore Throat Pops
during the third quarter 2003. The direct sales Health and Wellness segment
continues to recruit active independent representatives with the Company's
strategy to provide the independent representatives with products appropriate to
a direct selling organization that the consumer will find beneficial.
Cost of sales for 2003 as a percentage of sales was 53.7%, compared to 57.1% for
2002. The 2003 decrease is primarily due reduced royalty costs resulting from
the launch of Cold-EEZE(R) Cold Remedy Nasal Spray and Kidz-EEZE(TM) Sore Throat
Pop on which a lesser royalty percentage is payable compared to the zinc
gluconate glycine products, also 2003 royalty costs have been further reduced on
the zinc gloconate glycine products due to the expiration of the royalty payable
to the patent holder of 3% of sales collected which expired in 2002. The 2002
costs also included inventory obsolescence charges approximating $350,000 or
1.8% of sales. The cost of sales of the Health and Wellness segment has also
decreased in 2003 as a result of reductions in product procurement costs.
Selling, general and administrative expenses for 2003 were $10,239,362 compared
to $8,756,047 in 2002. Expenditures were higher in 2003 due to increased media
advertising related to the Cold-Eeze(R) product of $519,542, costs related to
the Health and Wellness segment increased by $1,482,819 between the periods
necessary to support a revenue increase of 47.8% largely due to variable costs
directly correlated to revenue activity. Stock promotion costs were lower in
2003 due to a $700,000 non-cash charge in 2002 resulting from the granting of
warrants in consideration for consulting services.
Research and development costs in 2003 and 2002 were $2,599,250 and $1,897,403,
respectively. Research and Development study costs related to the activities of
Quigley Pharma increased by $592,007 between the years, with spending in 2003 on
Cold-Eeze(R) clinical assignments involving the lozenge and nasal spray forms of
the product remaining relatively constant compared to 2002.
During 2003, the Company's major operating expenses of salaries, brokerage
commissions, promotion, advertising, and legal costs accounted for approximately
$6,752,633 (52.6%) of the total operating expenses of $12,838,612, an increase
of 13.5% over the 2002 amount of $5,947,481 (55.8%) of total operating expenses
of $10,653,450. The selling, general and administrative expenses related to
health and wellness for 2003 and 2002 were $3,591,914 and $2,109,095,
respectively. The increase in the health and wellness costs reflects the
variable nature of the underlying costs of this segment relative to revenue.
Operating expenses overall have increased between the periods for reasons stated
earlier.
Revenues of CPNP (discontinued operations) for the nine months periods ended
September 30, 2003 and 2002 were $59,824, and $1,643,898, respectively, net
losses for the same periods were $54,349 and $292,790. The results of CPNP are
represented as discontinued operations in the Statements of Operations and
Balance Sheets.
Total assets of the Company at September 30, 2003 and December 31, 2002 were
$22,999,426 and $24,934,956, respectively. Working capital decreased by
$1,901,687 to $14,062,262 at September 30, 2003. The primary influences on
working capital during the first nine months of 2003 were: the decrease in cash
balances $2,249,910, the increase in accounts receivable of $412,153 and the
decrease in current liabilities of $84,207. The movements in the balance sheet
are largely the result of the seasonal nature of the Cold Remedy segment
together with the cash characteristics of the Health and Wellness segment.
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LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $14,062,262 and $15,963,949 at September 30,
2003 and December 31,2002, respectively. Changes in working capital overall have
been primarily due to the following items: cash balances decreased by
$2,249,910; accounts receivable increased by $412,153 due to seasonal
fluctuations; accrued advertising has decreased by $661,924 as a result of the
seasonality of the cold remedy products and related media advertising; royalties
and sales commissions liabilities decreased by $154,776 related to the
cold-season cycle; and other current liabilities increased by $1,090,619. Total
cash balances at September 30, 2003 were $10,647,170 compared to $12,897,080 at
December 31, 2002, the reduction in cash was due to the movements in working
capital and the 2003 net loss of $1,867,573.
Management believes that its revised strategy to establish Cold-Eeze(R) as a
recognized brand name, its broader range of products, its diversified
distribution methods as it relates to the Health and Wellness business segment,
adequate manufacturing capacity, growth in international sales together with its
current working capital should provide an internal source of capital to fund the
Company's business operations. In addition to anticipated funding from
operations, the Company and its subsidiaries may in the short and long term
raise capital through the issuance of equity securities to finance anticipated
growth.
Management is not aware of any trends, events or uncertainties that have or are
reasonably likely to have a material negative impact upon the Company's (a)
short-term or long-term liquidity, or (b) net sales, revenues or income from
operations. Any challenge to the Company's patent rights could have a material
adverse effect on future liquidity of the Company; however, the Company is not
aware of any condition that would make such an event probable.
Management believes that cash generated from operations along with its current
cash balances will be sufficient to finance working capital and capital
expenditure requirements for at least the next twelve months.
CAPITAL EXPENDITURES
Since the Company's products are manufactured by outside sources, capital
expenditures during the remainder of 2003 are not anticipated to be material.
IMPACT OF INFLATION
The Company is subject to normal inflationary trends and anticipates that any
increased costs should be passed on to its customers.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
ITEM 4. CONTROLS AND PROCEDURES
Based on their evaluation, as of the end of the period covered by this Quarterly
Report on Form 10-Q, the Company's Chief Executive Officer and Chief Financial
Officer have concluded that the Company's disclosure controls and procedures (as
defined in Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934)
are adequately designed to ensure that the information required to be disclosed
by the Company in reports that it files or submits under the Securities and
Exchange Act of 1934, as amended, have been recorded processed and summarized in
a timely basis. 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.
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PART II. OTHER INFORMATION
--------------------------
ITEM 1. LEGAL PROCEEDINGS
MIKE FORAN VS. INNERLIGHT, INC.,
DARIUS INTERNATIONAL, INC., AND
THE QUIGLEY CORPORATION
On August 1, 2003, an action was filed with the American Arbitration Association
by Mike Foran against Innerlight, Inc., a wholly owned subsidiary of Darius
International, Inc. which is a wholly owned subsidiary of the Corporation. Foran
was terminated as an independent representative by Innerlight, Inc. in December,
2002. Foran claims that he is entitled to commissions and payments for an
unspecified time from his termination in the amount of $10 million. On November
3rd Mike Foran submitted an Amended Claim to the American Arbitration
Association adding Darius International, Inc. and the Corporation as additional
party defendants to the action commenced on August 1, 2003 before the American
Arbitration Association.
On November 6, 2003, an action was commenced by The Quigley Corporation,
Innerlight, Inc., and Darius International, Inc. against Mike Foran in the
United States District Court for the District of Utah, Central Division, seeking
a declaratory judgment that The Quigley Corporation and Darius International are
not parties to any arbitration agreement with Mike Foran and may not be
compelled to arbitrate defendant's claims against them in arbitration. The
action also requests an injunction against Mike Foran enjoining the arbitration,
and a declaratory judgment that Innerlight properly terminated the agreement
with Mike Foran and does not owe any further commissions or other compensation
to him under its agreement with him.
The Corporation believes Foran's claims are without merit and is vigorously
defending the claims. No assessment can be made as to the outcome of this action
at this time.
INTERVENTION, INC.
An action was filed by Intervention, Inc. on July 2, 2002 in Contra Costa County
Superior Court under the California Unfair Competition Law, Business and
Professions Code, Section 17200. The Complaint claims that COLD-EEZE(R) does not
contain ionic zinc and therefore does not have the unique quality the Company
asserts for it. The Complaint purports to attack The Cleveland Clinic Study
titled Zinc Gluconate Lozenges for Treating the Common Cold and the Dartmouth
Study, Zinc Gluconate and The Common Cold, A Controlled Clinical Study. The
plaintiff claims that the Dartmouth Study is not double-blind and is not
randomized. The plaintiff also claims that The Cleveland Clinic Study is untrue
and deceptive because it did not conclude that patients "starting treatments"
with zinc had a 42% reduction in duration of the common cold and, also, because
the 42% reduction in common cold duration is not a reference to average of cold
duration but rather is a reference to the reduction in median duration. There is
also a claim by the plaintiff that there is an implied claim that the results in
the studies have been confirmed by repetition which plaintiff contests.
On the 3rd day of July, 2003, the Contra Costa County Superior Court upon Motion
of The Quigley Corporation issued a Summary Judgment in favor of The Quigley
Corporation. On October 24, 2003, Intervention Inc. filed an appeal to the
California Court of Appeals from the Summary Judgment issued in favor of The
Quigley Corporation. The Corporation believes that Intervention Inc.'s claims
are without merit and is vigorously defending the claims. No assessment can be
made to the outcome of this action at this time.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(1) 31.1 Certification by the Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
(2) 31.2 Certification by the Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
(3) 32.1 Certification by the Chief Executive Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(4) 32.2 Certification by the Chief Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(b) The Company reported under:
Item 9. Regulation FD Disclosure
On July 24, 2003, The Quigley Corporation announced its
results for the quarter ended June 30, 2003. The information
on Form 8-K was furnished pursuant to Item 12 of Form 8-K as
directed by the U.S. Securities and Exchange Commission in
Release No. 34-47583.
There were no other Current Reports on Form 8-K filed during the
quarter ended September 30, 2003.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE QUIGLEY CORPORATION
By: /s/ George J. Longo
-------------------------------------
George J. Longo
Vice President, Chief Financial Officer
Date: November 10, 2003
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