UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2006
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission file number 0-21617
THE QUIGLEY CORPORATION
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(Exact Name of Registrant as Specified in Its Charter)
Nevada 23-2577138
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
(MAILING ADDRESS: PO Box 1349, Doylestown, PA 18901.)
Kells Building, 621 Shady Retreat Road, Doylestown, Pennsylvania 18901
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(Address of Principal Executive Offices) (Zip Code)
(215) 345-0919
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(Registrant's Telephone Number,
Including Area Code)
N/A
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(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of April 25, 2006, there were 12,480,478 shares of common stock, $.0005 par
value per share, outstanding.
TABLE OF CONTENTS
Page No.
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements 3-14
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15-21
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 22
Item 4. Controls and Procedures 22
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 22-23
Item 6. Exhibits 23
Signatures 24
-2-
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THE QUIGLEY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS March 31, 2006 December 31, 2005
(Unaudited)
---------------- ----------------
CURRENT ASSETS:
Cash and cash equivalents $18,190,419 $16,885,170
Accounts receivable (net of doubtful accounts of $354,972 and $354,972) 2,685,493 7,880,140
Inventory 4,227,815 3,900,064
Prepaid expenses and other current assets 1,233,409 1,582,851
---------------- ----------------
TOTAL CURRENT ASSETS 26,337,136 30,248,225
---------------- ----------------
PROPERTY, PLANT AND EQUIPMENT - NET 5,422,760 5,585,793
---------------- ----------------
OTHER ASSETS:
Goodwill 30,763 30,763
Other assets 120,448 110,858
---------------- ----------------
TOTAL OTHER ASSETS 151,211 141,621
---------------- ----------------
TOTAL ASSETS $31,911,107 $35,975,639
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of debt $1,321,428 $428,571
Accounts payable 686,556 771,819
Accrued royalties and commissions 2,906,329 3,301,598
Accrued advertising 761,334 2,860,414
Other current liabilities 2,227,106 2,203,561
---------------- ----------------
TOTAL CURRENT LIABILITIES 7,902,753 9,565,963
---------------- ----------------
LONG-TERM DEBT - 1,035,715
MINORITY INTEREST 57,311 54,314
COMMITMENTS AND CONTINGENCIES (NOTE 7)
STOCKHOLDERS' EQUITY:
Common stock, $.0005 par value; authorized 50,000,000;
Issued: 16,349,531 and 16,360,524 shares 8,175 8,180
Additional paid-in-capital 35,490,499 35,404,803
Retained earnings 13,640,528 15,094,823
Less: Treasury stock, 4,646,053 and 4,646,053 shares, at cost
(25,188,159) (25,188,159)
---------------- ----------------
TOTAL STOCKHOLDERS' EQUITY 23,951,043 25,319,647
---------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $31,911,107 $35,975,639
================ ================
See accompanying notes to condensed consolidated financial statements
-3-
THE QUIGLEY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
March 31, 2006 March 31, 2005
---------------- ----------------
NET SALES $10,266,038 $11,753,270
---------------- ----------------
COST OF SALES 4,953,454 6,050,298
---------------- ----------------
GROSS PROFIT 5,312,584 5,702,972
---------------- ----------------
OPERATING EXPENSES:
Sales and marketing 2,434,925 1,834,831
Administration 3,705,761 2,994,769
Research and development 784,523 1,068,303
---------------- ----------------
TOTAL OPERATING EXPENSES 6,925,209 5,897,903
---------------- ----------------
LOSS FROM OPERATIONS (1,612,625) (194,931)
------------------ ---------------
OTHER INCOME (EXPENSE)
Interest and other income 179,974 69,489
Interest expense (21,644) (29,053)
---------------- ----------------
TOTAL OTHER INCOME (EXPENSE) 158,330 40,436
---------------- ----------------
LOSS FROM OPERATIONS
BEFORE TAXES (1,454,295) (154,495)
INCOME TAXES (BENEFIT) - -
---------------- ----------------
NET LOSS ($1,454,295) ($154,495)
================ ================
EARNINGS (LOSS) PER COMMON SHARE:
Basic ($0.12) ($0.01)
================ ================
Diluted ($0.12) ($0.01)
================ ================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 11,714,140 11,654,796
================ ================
Diluted 11,714,140 11,654,796
================ ================
See accompanying notes to condensed consolidated financial statements
-4-
THE QUIGLEY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
March 31, 2006 March 31, 2005
---------------- ----------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $1,503,382 $2,214,737
---------------- ----------------
NET CASH FLOWS USED IN INVESTING ACTIVITIES (140,966) (33,734)
---------------- ----------------
NET CASH FLOWS USED IN FINANCING ACTIVITIES (57,167) (66,868)
---------------- ----------------
NET INCREASE IN CASH 1,305,249 2,114,135
CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD 16,885,170 14,366,441
---------------- ----------------
CASH & CASH EQUIVALENTS, END OF PERIOD $18,190,419 $16,480,576
================ ================
See accompanying notes to condensed consolidated financial statements
-5-
THE QUIGLEY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - ORGANIZATION AND BUSINESS
The Quigley Corporation (the "Company"), organized under the laws of the state
of Nevada, is engaged in the development, manufacturing, and marketing of
homeopathic and health products that are being offered to the general public and
the research and development of potential prescription products. The Company is
organized into four business segments: Cold Remedy, Health and Wellness,
Contract Manufacturing and Ethical Pharmaceutical. For the fiscal periods
presented, the majority of the Company's revenues have come from the Company's
Cold Remedy and Health and Wellness business segments.
The Company's principal cold-remedy product, Cold-Eeze(R), a zinc gluconate
glycine formulation (ZIGG(TM)) is an over-the-counter consumer product used to
reduce the duration and severity of the common cold. The lozenge form of the
product is manufactured by Quigley Manufacturing Inc. ("QMI"), a wholly owned
subsidiary of the Company, which was formed following the acquisition of certain
assets and assumption of certain liabilities of JoEl, Inc., the contract
manufacturer of the lozenge product prior to October 1, 2004.
Darius International Inc. ("Darius"), a wholly owned subsidiary of the Company,
is a direct selling organization constituting the Health and Wellness segment
that was formed in January 2000 to introduce new products to the marketplace
through a network of independent distributor representatives.
In January 2001, the Company formed an Ethical Pharmaceutical segment which is
now Quigley Pharma Inc. ("Pharma"), a wholly-owned subsidiary of the Company.
The result of that segment's research and development activity may enable the
Company to diversify into the prescription drug market.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The Condensed Consolidated Financial Statements include the accounts of the
Company and its wholly owned subsidiaries. All inter-company transactions and
balances have been eliminated. Effective March 31, 2004, the financial
statements include consolidated variable interest entities ("VIEs") of which the
Company is the primary beneficiary (see discussion in Note 3, "Variable Interest
Entity").
These financial statements have been prepared by management without audit and
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2005. In the opinion of management, all adjustments necessary
for a fair presentation of the consolidated financial position, consolidated
results of operations and consolidated cash flows, for the periods indicated,
have been made. The results of operations for the three months ended March 31,
2006 and 2005 are not necessarily indicative of the results to be expected for
the entire year or any other period.
USE OF ESTIMATES
The Company's consolidated financial statements are prepared in accordance with
generally accepted accounting principles (GAAP) in the United Sates of America.
In connection with the preparation of the consolidated financial statements, it
is required to make assumptions and estimates about future events, and apply
judgments that affect the reported amounts of assets, liabilities, revenue,
expenses and related disclosures. These assumptions, estimates and judgments are
based on historical experience, current trends and other factors that management
believes to be relevant at the time the consolidated financial statements are
prepared. Management reviews the accounting policies, assumptions, estimates and
judgments on a quarterly basis to ensure the financial statements are presented
fairly and in accordance with GAAP. However, because future events and their
effects cannot be determined with certainty, actual results could differ from
these assumptions and estimates, and such differences could be material.
The Company is organized into four different but related business segments,
Cold-Remedy, Health and Wellness, Contract Manufacturing and Ethical
Pharmaceutical. When providing for the appropriate sales returns, allowances,
cash discounts and cooperative advertising costs, each segment applies a uniform
and consistent method for making certain assumptions for estimating these
provisions that are applicable to each specific segment. Traditionally, these
provisions are not material to reported revenues in the Health and Wellness and
Contract Manufacturing segments and the Ethical Pharmaceutical segment does not
have any revenues.
-6-
Provisions to these reserves within the Cold Remedy segment include the use of
such estimates, which are applied or matched to the current sales for the period
presented. These estimates are based on specific customer tracking and an
overall historical experience to obtain an applicable effective rate. Estimates
for sales returns are tracked at the specific customer level and are tested on
an annual historical basis, and reviewed quarterly, as is the estimate for
cooperative advertising costs. Cash discounts follow the terms of sales and are
taken by virtually all customers. Additionally, the monitoring of current
occurrences, developments by customer, market conditions and any other
occurrences that could affect the expected provisions for any future returns or
allowances, cash discounts and cooperative advertising costs relative to net
sales for the period presented are also performed.
CASH EQUIVALENTS
The Company considers all highly liquid investments with an initial maturity of
three months or less at the time of purchase to be cash equivalents. Cash
equivalents include cash on hand and monies invested in money market funds. The
carrying amount approximates the fair market value due to the short-term
maturity of these investments.
INVENTORY VALUATION
Inventory is valued at the lower of cost, determined on a first-in, first-out
basis (FIFO), or market. Inventory items are analyzed to determine cost and the
market value and appropriate valuation reserves are established. The
consolidated financial statements include a specific reserve for excess or
obsolete inventory of $356,220 and $369,508 as of March 31, 2006 and December
31, 2005, respectively. Inventories included raw material, work in progress and
packaging amounts of approximately $1,060,000 and $1,340,000 at March 31, 2006
and December 31, 2005, respectively, with the remainder comprising finished
goods.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. The Company uses a
combination of straight-line and accelerated methods in computing depreciation
for financial reporting purposes. The annual provision for depreciation has been
computed in accordance with the following ranges of estimated asset lives:
building and improvements - twenty to thirty nine years; machinery and equipment
- five to seven years; computer software - three years; and furniture and
fixtures - seven years.
GOODWILL AND INTANGIBLE ASSETS
Goodwill is not amortized but reviewed for impairment on an annual basis or when
events and circumstances indicate the carrying amount may not be recoverable.
CONCENTRATION OF RISKS
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash investments and trade
accounts receivable.
The Company maintains cash and cash equivalents with several major financial
institutions. Since the Company maintains amounts in excess of guarantees
provided by the Federal Depository Insurance Corporation, the Company performs
periodic evaluations of the relative credit standing of these financial
institutions and limits the amount of credit exposure with any one institution.
Trade accounts receivable potentially subject the Company to credit risk. The
Company extends credit to its customers based upon an evaluation of the
customer's financial condition and credit history and generally does not require
collateral. It is not anticipated that any one customer will exceed 10% of
consolidated sales in 2006. 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
22% of sales volume for the three month periods ended March 31, 2006 and 2005,
respectively. Customers comprising the five largest accounts receivable balances
represented 49% and 47% of total trade receivable balances at March 31, 2006 and
December 31, 2005, respectively. During the three month periods ended March 31,
2006 and 2005, approximately 11% and 8%, respectively, of the Company's net
sales were related to international markets.
The Company's revenues are currently generated from the sale of the Cold-Remedy
products which approximated 50% and 49% of total revenues in the three month
periods ended March 31, 2006 and 2005, respectively. The Health and Wellness
-7-
segment approximated 45% and 43%, respectively, for the three-month periods. The
Contract Manufacturing segment approximated 5% and 8%, respectively, for the
respective three-month periods.
Raw materials used in the production of the products are available from numerous
sources. Raw materials for the Cold-Eeze(R) lozenge product is currently
procured from a single vendor in order to secure purchasing economies. In a
situation where this one vendor is not able to supply QMI with the ingredients,
other sources have been identified. Should these product sources terminate or
discontinue for any reason, the Company has formulated a contingency plan in
order to prevent such discontinuance from materially affecting the Company's
operations. Any such termination may, however, result in a temporary delay in
production until the replacement facility is able to meet the Company's
production requirements.
Darius' products for resale can be sourced from several suppliers. In the event
that such sources were no longer in a position to supply Darius with products,
other vendors have been identified as reliable alternatives with minimal adverse
loss of business.
LONG-LIVED ASSETS
The Company reviews its long-lived assets for impairment on an exception basis
whenever events or changes in circumstances indicate that the carrying amount of
the assets may not be recoverable through future cash flows. If it is determined
that an impairment loss has occurred based on the expected cash flows compared
to the related asset value, an impairment loss is recognized in the Statement of
Operations.
REVENUE RECOGNITION
Sales are recognized at the time ownership is transferred to the customer, which
for the Cold Remedy segment is the time the shipment is received by the customer
and for both the Health and Wellness segment and the Contract Manufacturing
segment, when the product is shipped to the customer. Revenue is reduced for
trade promotions, estimated sales returns, cash discounts and other allowances
in the same period as the related sales are recorded. The Company makes
estimates of potential future product returns and other allowances related to
current period revenue. The Company analyzes historical returns, current trends,
and changes in customer and consumer demand when evaluating the adequacy of the
sales returns and other allowances. The consolidated financial statements
include reserves of $525,240 for future sales returns and $422,280 for other
allowances as of March 31, 2006 and $634,580 and $533,250 at December 31, 2005,
respectively. The 2006 and 2005 reserve balances include a remaining returns
provision at March 31, 2006 and December 31, 2005 of approximately $174,000 and
$184,000, respectively, in the event of future product returns following the
discontinuation of the Cold-Eeze(R) Cold Remedy Nasal Spray product in September
2004. The reserves also include an estimate of the uncollectability of accounts
receivable resulting in a reserve of $354,972 at both March 31, 2006 and
December 31, 2005.
COST OF SALES
For the Cold Remedy Segment, in accordance with contract terms, payments
calculated based upon net sales collected to the patent holder of the
Cold-Eeze(R) formulation and payments to the corporation founders and developers
of the final saleable Cold-Eeze(R) product amounting to $242,514 and $535,102,
respectively, for the three month periods ended March 31, 2006 and 2005 are
presented in the financial statements as cost of sales (see also Note 4). Such
payments to the founders terminated in May 2005 in accordance with contractual
agreements.
In the Health and Wellness Segment, agreements with Independent Distributor
Representatives ("IR's") require payments to them to be calculated based upon
net commissionable sales of other IR's in their down-line and not on any of
their individual purchases of products including not taking title to the
products that are sold by other IR's. In accordance with EITF 01-9, such
payments to the IR's do not qualify as a reduction of the selling price as these
payments are not offered as an allowance or as a percentage rebate of direct
purchases made, and the IR's are not offered any cooperative advertising
incentives of any type. Such payments, among other factors, are related to
expand the cycle of additional IR's and for maintaining the distribution channel
for this segment's products.
Accordingly, such distribution payments amounting to $2,052,714 and $2,293,193,
respectively, for the three month periods ended March 31, 2006 and 2005 are
presented in the financial statements as cost of sales.
OPERATING EXPENSES
Agreements relating to the Cold Remedy segment with a major national sales
brokerage firm are for this firm to sell the manufactured Cold-Eeze(R) product
to our customers. Such related costs are presented in the financial statements
as selling expenses.
-8-
In the Health and Wellness Segment, the Company includes payments in accordance
with agreements with the former owner of its acquired proprietary products, to
be calculated based upon net sales collected. These agreements provide for
exclusivity, consulting, marketing presentations, confidentiality and
non-compete arrangements with such payments being classified as administration
expense.
SHIPPING AND HANDLING
Product sales relating to Health and Wellness products carry an additional
identifiable shipping and handling charge to the purchaser, which is classified
as revenue. For the Cold Remedy and Contract Manufacturing segments, such costs
are included as part of the invoiced price. In all cases costs related to this
revenue are recorded in cost of sales.
STOCK COMPENSATION
Stock options and warrants for purchase of the Company's common stock have been
granted to both employees and non-employees since the date the Company became
publicly traded. Options and warrants are exercisable during a period determined
by the Company, but in no event later than ten years from the date granted.
Expense relating to options granted to non-employees has been appropriately
recorded in the periods presented based on fair values as determined by the
Black-Scholes pricing model dependent upon the circumstances relating to the
specific grants.
As of January 1, 2006, the Company adopted SFAS 123R, "SHARED BASED PAYMENT".
The adoption of SFAS 123R did not have an impact on the Company's financial
position or results of operations in the 2006 period reported.
No stock options were granted in the three month periods ended March 31, 2006
and 2005.
ADVERTISING
Advertising costs are expensed within the period in which they are utilized.
Advertising expense is comprised of media advertising, presented as part of
sales and marketing expense; co-operative advertising, which is accounted for as
a deduction from sales; and bonus product, which is accounted for as part of
cost of sales. Advertising costs incurred for the three month periods ended
March 31, 2006 and 2005 were $2,035,284 and $1,694,832, respectively. Included
in prepaid expenses and other current assets was zero and $96,050 at March 31,
2006 and December 31, 2005, respectively, relating to prepaid advertising
expenses.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations in the period incurred.
Expenditures for the three month periods ended March 31, 2006 and 2005 were
$784,523 and $1,068,303, respectively. Principally, research and development
costs are related to Pharma's study activities and costs associated with
Cold-Eeze(R) products.
INCOME TAXES
The Company utilizes the asset and liability approach which requires the
recognition of deferred tax assets and liabilities for the future tax
consequences of events that have been recognized in the Company's financial
statements or tax returns. In estimating future tax consequences, the Company
generally considers all expected future events other than enactments of changes
in the tax law or rates. Until sufficient taxable income to offset the temporary
timing differences attributable to operations and the tax deductions
attributable to option, warrant and stock activities are assured, a valuation
allowance equaling the total deferred tax asset is being provided. See Note 9 -
Income Taxes for further discussion.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash and cash equivalents, accounts receivable and accounts payable are
reflected in the consolidated financial statements at carrying value which
approximates fair value because of the short-term maturity of these instruments.
The fair value of long-term debt was approximately equivalent to its carrying
value due to the fact that the interest rates currently available to the Company
for debt with similar terms are approximately equal to the interest rates for
its existing debt. Determination of the fair value of related party payables is
not practicable due to their related party nature.
-9-
NOTE 3 - VARIABLE INTEREST ENTITY
In December 2003, the Financial Accounting Standards Board (FASB or the "Board")
issued FASB Interpretation No. 46 (revised December 2003), CONSOLIDATION OF
VARIABLE INTEREST ENTITIES (FIN 46R), to address certain implementation issues.
FIN 46R varies significantly from FASB Interpretation No. 46, CONSOLIDATION OF
VARIABLE INTERESTENTITIES("VIE") (FIN 46), which it supersedes. FIN 46R requires
the application of either FIN 46 or FIN 46R by "Public Entities" to all Special
Purpose Entities ("SPEs") at the end of the first interim or annual reporting
period ending after December 15, 2003. FIN 46R is applicable to all non-SPEs
created prior to February 1, 2003 by Public Entities that are not small business
issuers at the end of the first interim or annual reporting period ending after
March 15, 2004. Effective March 31, 2004, the Company adopted FIN 46R for VIE's
formed prior to February 1, 2003. The Company has determined that Scandasystems,
a related party, qualifies as a variable interest entity and the Company has
consolidated Scandasystems beginning with the quarter ended March 31, 2004. Due
to the fact that the Company has no long-term contractual commitments or
guarantees, the maximum exposure to loss is insignificant. As a result of
consolidating the VIE of which the Company is the primary beneficiary, the
Company recognized a minority interest of approximately $57,311 and $54,314 on
the Consolidated Balance Sheets at March 31, 2006 and December 31, 2005,
respectively, which represents the difference between the assets and the
liabilities recorded upon the consolidation of the VIE.
The liabilities recognized as a result of consolidating the VIE do not represent
additional claims on the Company's general assets. Rather, they represent claims
against the specific assets of the consolidated VIE. Conversely, assets
recognized as a result of consolidating this VIE do not represent additional
assets that could be used to satisfy claims against the Company's general
assets. Reflected on the Company's Consolidated Balance Sheets at March 31, 2006
and December 31, 2005, respectively, are $72,372 and $61,844 of VIE assets,
representing all of the assets of the VIE. The VIE assists the Company in
acquiring licenses and with research and development activities in certain
countries.
NOTE 4 - PATENT RIGHTS AND RELATED ROYALTY COMMITMENTS
The Company has maintained a separate representation and distribution agreement
relating to the development of the zinc gluconate glycine product formulation.
In return for exclusive distribution rights, the Company must pay the developer
a 3% royalty and a 2% consulting fee based on sales collected, less certain
deductions, throughout the term of this agreement, which is due to expire in
2007. However, the Company and the developer are in litigation and as such no
potential offset from such litigation for these fees have been recorded. A
founder's commission totaling 5%, on sales collected, less certain deductions,
has been paid to two of the officers, who are also directors and stockholders of
the Company, and whose agreements expired in 2005, (see Note 11).
The expenses for the respective periods relating to such agreements amounted to
$242,514 and $535,102, for the three month periods ended March 31, 2006 and
2005, respectively. Amounts accrued for these expenses at March 31, 2006 and
December 31, 2005 were $2,319,925 and $2,077,411, respectively.
Amounts included in accrued royalties and sales commissions in the balance
sheets at March 31, 2006 and December 31, 2005, apportioned between related
party and other balances, are as follows:
March 31, December 31,
2006 2005
--------------------------------
Related party balances (see Note 11) - -
Other non-related party balances 2,906,329 3,301,598
--------------------------------
Total accrued royalties and sales commissions $2,906,329 $3,301,598
--------------------------------
NOTE 5 - DEBT
In connection with the Company's acquisition of certain assets of JoEl, Inc. in
October 2004, the Company entered into a term loan in the amount of $3 million
payable to PNC Bank, N.A. which was collateralized by mortgages on real property
located in Lebanon and Elizabethtown, Pennsylvania. The Company could elect
interest rate options at either the Prime Rate or LIBOR plus 200 basis points.
The loan was payable in eighty-four equal monthly principal payments of $35,714
that commenced on November 1, 2004. In April 2006, the Company prepaid the total
outstanding balance of approximately $1.3 million. The Company was in compliance
with all related loan covenants for the duration of the loan.
-10-
NOTE 6 - OTHER CURRENT LIABILITIES
Included in other current liabilities are $864,600 and $923,411 related to
accrued compensation at March 31, 2006 and December 31, 2005, respectively.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
Certain operating leases for office and warehouse space maintained by the
Company resulted in rent expense for the three month periods ended March 31,
2006 and 2005 of $64,588, and $55,316, respectively. The Company has approximate
future obligations over the next five years as follows:
Property
Research and and Other
Year Development Leases Advertising Other Total
---------- ------------------ -------------- ----------------- ---------------- -----------------
2006 $2,731,979 $130,841 $15,000 $62,000 $2,939,820
2007 36,174 90,913 - - 127,087
2008 - - - -
2009 - - - -
2010 - - - - -
2011 - - - - -
---------- ------------------ -------------- ----------------- ---------------- -----------------
Total $2,768,153 $221,754 $15,000 $62,000 $3,066,907
---------- ------------------ -------------- ----------------- ---------------- -----------------
Additional advertising and research and development costs are expected to be
incurred during the remainder of 2006.
The Company has an agreement with the former owners of the Utah based direct
marketing and selling company, whereby they receive payments, currently totaling
5% of net sales collected, for product exclusivity, consulting, marketing
presentations, confidentiality and non-compete arrangements. Amounts paid or
payable under such agreement during the three month periods ended March 31, 2006
and 2005, were $190,639 and $199,339, respectively. Amounts payable under such
agreement at March 31, 2006 and December 31, 2005 were $120,032 and $58,597,
respectively.
The Company has several licensing and other contractual agreements, see Note 4.
DARIUS INTERNATIONAL INC., AND INNERLIGHT INC., F/K/A DARIUS
MARKETING INC. VS. ROBERT O. YOUNG AND SHELLEY R. YOUNG
(FEDERAL DISTRICT COURT - EASTERN DISTRICT, PA)
In this action, the Company seeks injunctive relief and monetary damages against
two individuals for violation of a non-competition agreement between a wholly
owned subsidiary of the Company, Innerlight Inc., and the defendants, each of
whom are also under agreement to serve as consulting to the Company.
In late November, 2005, the Company learned that the defendants had launched a
line of nutritional supplement products that competed with Innerlight products.
Defendants promoted their line of products by a website, among other means. The
Company moved for a temporary restraining order against the defendants, which
the court denied; however, the Court ordered expedited discovery and a
preliminary injunction hearing was held before the Court on January 24 and 25,
2006. The parties filed briefs on the significance of the hearing evidence in
relation to the parties' respective claims and argued the matter before the
Federal District Court for the Eastern District of Pennsylvania on February 17,
2006.
On April 21, 2006 a preliminary injunction was issued by the Court and enjoined
the defendants with the respect to Darius' and Innerlight's claims of breach of
contract and unfair competition. It gave further relief to Darius International
and Innerlight Inc. with the respect to claims of trademark infringement.
Defendants were enjoined from endorsing, developing, marketing, and selling any
and all nutritional dietary supplement products that compete with Darius
International's and Innerlight Inc.'s products. Defendants were also enjoined
from using certain marks used in the Innerlight Inc. business in conjunction
with any product. The defendants were ordered to remove from their website all
reference to competing nutritional or dietary supplement products, including
hyperlinks to such products; and were also enjoined from including a reference
to dietary supplement products owned by defendants on any other website.
Defendants have filed an answer and counterclaims and the Company believes these
pleadings are without merit and is vigorously defending those counterclaims and
is prosecuting its action on the complaint.
-11-
On May 5, 2006 defendants filed a motion to dissolve and/or reconsider the
motion for a preliminary injunction. The Company has answered this motion and
believes that its allegations are without merit. Based upon the information the
Company has at this time, it believes the counterclaim actions are without
merit. However, at this time no prediction as to the outcome can be made.
ROBERT O. AND SHELLEY YOUNG VS. DARIUS INTERNATIONAL INC.
AND INNERLIGHT INC., (UTAH THIRD PARTY COMPLAINTS)
On September 14, 2005, a third-party complaint was filed by Shelley R. Young in
Fourth District Court in Provo, Utah against Innerlight Inc. and its parent
company, Darius. Robert O. Young has filed a motion to intervene to join as a
third-party plaintiff with Shelley R. Young. On November 3, 2005, Shelley and
Robert Young filed a parallel suit also in Fourth District Court in Provo, Utah.
The allegations in both complaints include, but are not limited to, an alleged
breach of contract by Innerlight Inc. for alleged failures to make certain
payments under an asset purchase agreement entered into by all parties.
Additional allegations stem from this alleged breach of contract including
unjust enrichment, trademark infringement and alleged violation of rights of
publicity. The plaintiffs are seeking both monetary and injunctive relief.
Innerlight Inc. has objected to the complaint in the third-party action based on
procedural deficiencies and other grounds.
The Fourth District Court of Utah has stayed both the September 14, 2005 and
November 3, 2005 actions pending the adjudication of the Federal District Court
action referenced above and has ordered that all disputes be determined in the
Federal District Court action in the Eastern District of Pennsylvania.
In connection with the Utah actions the Company has sued the Youngs in Equity in
the Court of Common Pleas of Philadelphia County, PA, and in United States
District Court for the Eastern District of Pennsylvania. The Company has alleged
breach of contract, including but not limited to breach of non-competition
provisions in a consulting agreement between the parties and is seeking
unspecified damages and injunctive relief.
INNERLIGHT INC. VS. THE MATRIX GROUP, LLC
On March 13, 2006 Innerlight Inc. filed a declaratory judgment action in the
Fourth Judicial District, Utah County, State of Utah, requesting a declaration
that there is no valid contract between the parties. The Matrix Group, LLC has
alleged there is a contract between the parties obligating Innerlight Inc. to
purchase $750,000 of products for the 12-month period commencing October 18,
2004 and ending October 17, 2005, $1,500,000 for the period commencing October
18, 2005 and ending October 17, 2006, and for each 12-month period thereafter,
through and including October 17, 2013, at least $4,000,000 of products from The
Matrix Group, LLC. The document on which Matrix relies was drafted by Matrix and
states that the acceptance of the appointment by distributor (Innerlight Inc.)
is conditioned upon distributor's written acceptance of the Company's product
price list. No written acceptance of the product price list was ever made by
Innerlight Inc.
The Matrix Group, LLC has filed a Utah Rule of Civil Procedure 12(b)(3) motion
asking that the complaint be dismissed for lack of jurisdiction. Innerlight Inc.
has answered the motion on May 8, 2006.
The Company believes that the defendant's claims are without merit and is
vigorously defending those claims and is prosecuting its action on its
complaint. Based upon the information the Company has at this time, it believes
that the defendant's actions are without merit. However, at this time no
prediction as to the outcome can be made.
NOTE 8 - TRANSACTIONS AFFECTING STOCKHOLDERS' EQUITY
On September 8, 1998, the Company's Board of Directors declared a dividend
distribution of Common Stock Purchase Rights (individually, a "Right" and
collectively, the "Rights"), thereby creating a Stockholder Rights Plan (the
"Plan"). The dividend was payable to the stockholders of record on September 25,
1998. Each Right entitles the stockholder of record to purchase from the Company
that number of common shares having a combined market value equal to two times
the Rights exercise price of $45. The Rights are not exercisable until the
distribution date, which will be the earlier of a public announcement that a
person or group of affiliated or associated persons has acquired 15% or more of
the outstanding common shares, or the announcement of an intention by a
similarly constituted party to make a tender or exchange offer resulting in the
ownership of 15% or more of the outstanding common shares. The dividend has the
effect of giving the stockholder a 50% discount on the share's current market
value for exercising such right. In the event of a cashless exercise of the
Right, and the acquirer has acquired less than 50% beneficial ownership of the
Company, a stockholder may exchange one Right for one common share of the
Company. The final expiration date of the Plan is September 25, 2008.
-12-
Since the inception of the stock buy-back program in January 1998, the Board has
subsequently increased the authorization on five occasions, for a total
authorized buy-back of 5,000,000 shares or approximately 38% of the previous
shares outstanding. Such shares are reflected as treasury stock and will be
available for general corporate purposes. From the initiation of the plan until
March 31, 2006, 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 2005 or
2006 to date.
NOTE 9 - INCOME TAXES
Certain exercises of options and warrants, and restricted stock issued for
services that became unrestricted resulted in reductions to taxes currently
payable and a corresponding increase to additional-paid-in-capital for prior
years. In addition, certain tax benefits for option and warrant exercises
totaling $4,190,063 are deferred and will be credited to
additional-paid-in-capital when the NOL's attributable to these exercises are
utilized. As a result, these NOL's will not be available to offset income tax
expense. The net operating loss carry-forwards currently approximate $11.4
million for federal purposes, of which $3.5 million will expire in 2019, $4.0
million in 2020 and $3.9 million in 2022. Additionally, there are net operating
loss carry-forwards of $16.4 million for state purposes, of which $9.7 million
will expire in 2009, $2.1 million in 2010, $2.8 million in 2012 and $1.8 million
in 2013. Until sufficient taxable income to offset the temporary timing
differences attributable to operations and the tax deductions attributable to
option, warrant and stock activities are assured, a valuation allowance equaling
the total deferred tax asset is being provided.
NOTE 10 - EARNINGS PER SHARE
Basic loss per share ("EPS") excludes dilution and is computed by dividing
income available to common stockholders by the weighted - average number of
common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that shared in the earnings of the entity. Diluted EPS also
utilizes the treasury stock method which prescribes a theoretical buy-back of
shares from the theoretical proceeds of all options and warrants outstanding
during the period. Since there is a large number of options and warrants
outstanding, fluctuations in the actual market price can have a variety of
results for each period presented.
A reconciliation of the applicable numerators and denominators of the income
statement periods presented, as reflects the results of continuing operations,
is as follows (millions, except per share amounts):
Three Months Ended Three Months Ended
March 31, 2005 March 31, 2006
--------------------------------------------------------
Loss Shares EPS Loss Shares EPS
--------------------------------------------------------
Basic EPS ($1.5) 11.7 ($0.12) ($0.2) 11.7 ($0.01)
Dilutives:
Options/Warrants - - - -
--------------------------------------------------------
Diluted EPS ($1.5) 11.7 ($0.12) ($0.2) 11.7 ($0.01)
========================================================
Options and warrants outstanding at March 31, 2006 and 2005 were 4,593,750 and
4,287,250, respectively. They were not included in the computation of diluted
earnings for the periods because the effect would be anti-dilutive.
NOTE 11 - RELATED PARTY TRANSACTIONS
An agreement between the Company and the founders Mr. Guy J. Quigley and Mr.
Charles A. Phillips, both officers and stockholders of the Company, was entered
into on June 1, 1995. The founders, in consideration of the acquisition of the
Cold-Eeze(R) cold therapy product, shared a total commission of five percent
(5%), on sales collected, less certain deductions until this agreement expired
on May 31, 2005. For the three month periods ended March 31, 2006 and 2005,
amounts of zero and $267,551, respectively, were paid or payable under such
founders' commission agreements. Amounts payable under such agreements at March
31, 2006 and December 31, 2005 were zero.
The Company is in the process of acquiring licenses in certain countries through
related party entities whose stockholders include Mr. Gary Quigley, a relative
of the Company's Chief Executive Officer. Fees amounting to $53,250 and $86,298
have been paid to a related entity during the three month periods ended March
31, 2006 and 2005, respectively, to assist with the regulatory aspects of
obtaining such licenses.
-13-
NOTE 12 - SEGMENT INFORMATION
The basis for presenting segment results generally is consistent with overall
Company reporting. The Company reports information about its operating segments
in accordance with Financial Accounting Standard Board Statement No. 131,
"DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION," which
establishes standards for reporting information about a company's operating
segments. All consolidating items are included in Corporate & Other.
The Company divides its operations into four reportable segments as follows: The
Quigley Corporation (Cold-Remedy), whose main product is Cold-Eeze(R), a
proprietary zinc gluconate glycine lozenge for the common cold; Darius (Health
and Wellness), whose business is the sale and direct marketing of a range of
health and wellness products; Quigley Manufacturing (Contract Manufacturing),
which is the production facility for the Cold-Eeze(R) lozenge product and also
performs contract manufacturing services for third party customers, and Pharma,
(Ethical Pharmaceutical), currently involved in research and development
activity to develop patent applications for potential pharmaceutical products.
Financial information relating to 2006 and 2005 operations, by business segment,
follows:
---------------------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED Cold Health and Contract Ethical Corporate &
MARCH 31, 2006 Remedy Wellness Manufacturing Pharmaceutical Other Total
---------------------------------------------------------------------------------------------------------------------------
Revenues
Customers-domestic $5,177,340 $3,416,889 $523,892 - - $9,118,121
Customers-international - 1,147,917 - - - 1,147,917
Inter-segment - - 1,593,128 - (1,593,128) -
Segment operating profit
(loss) ($305,907) ($218,372) ($169,795) ($876,961) ($41,590) ($1,612,625)
---------------------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED Cold Health and Contract Ethical Corporate &
MARCH 31, 2005 Remedy Wellness Manufacturing Pharmaceutical Other Total
---------------------------------------------------------------------------------------------------------------------------
Revenues
Customers-domestic $5,746,641 $4,113,318 $1,010,624 - - $10,870,583
Customers-international - 882,687 - - - 882,687
Inter-segment - - 1,442,297 - (1,442,297) -
Segment operating profit
(loss) $356,243 $393,345 $160,358 ($1,043,482) ($61,395) ($194,931)
-14-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Report contains forward-looking
statements. These forward-looking statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
reflected in these forward-looking statements. Factors that might cause such a
difference include, but are not limited to, management of growth, competition,
pricing pressures on the Company's products, industry growth and general
economic conditions. Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's opinions only as of the
date hereof. The Company undertakes no obligation to revise or publicly release
the results of any revision to these forward-looking statements.
CERTAIN RISK FACTORS
The Quigley Corporation makes no representation that the United States Food and
Drug Administration ("FDA") or any other regulatory agency will grant an
Investigational New Drug ("IND") or take any other action to allow its
formulations to be studied or/and for any IND to be marketed. Furthermore, no
claim is made that potential medicine discussed herein is safe, effective, or
approved by the FDA. Additionally, data that demonstrates activity or
effectiveness in animals or in vitro tests do not necessarily mean such formula
test compound, referenced herein, will be effective in humans. Safety and
effectiveness in humans will have to be demonstrated by means of adequate and
well controlled clinical studies before the clinical significance of the formula
test compound is known. Readers should carefully review the risk factors
described in other sections of the filing as well as in other documents the
Company files from time to time with the Securities and Exchange Commission
("SEC").
OVERVIEW
The Company, headquartered in Doylestown, Pennsylvania, is a leading
manufacturer, marketer and distributor of a diversified range of homeopathic and
health products which comprise the Cold Remedy, Health and Wellness and Contract
Manufacturing segments. The Company is also involved in the research and
development of potential prescription products that comprise the Ethical
Pharmaceutical segment.
The Company's business is the manufacture and distribution of cold remedy
products to the consumer through the over-the-counter marketplace together with
the sale of proprietary health and wellness products through its direct selling
subsidiary. One of the Company's key products in its Cold Remedy segment is
Cold-Eeze(R), a zinc gluconate glycine product proven in two double-blind
clinical studies to reduce the duration and severity of the common cold symptoms
by nearly half. Cold-Eeze(R) is now an established product in the health care
and cold remedy market. Effective October 1, 2004, the Company acquired
substantially all of the assets of JoEl, Inc., the previous manufacturer of the
Cold-Eeze(R) lozenge product. This manufacturing entity, now called Quigley
Manufacturing Inc. ("QMI"), a wholly owned subsidiary of the Company, will
continue to produce lozenge product along with performing such operational tasks
as warehousing and shipping the Company's Cold-Eeze(R) products. In addition,
QMI produces a variety of hard and organic candy for sale to third party
customers in addition to performing contract manufacturing activities for
non-related entities.
The Cold-Remedy segment reported a reduction in net sales in the first quarter
2006 of $569,301 as compared to the same period in 2005, possibly due to the
release in January 2006, by a medical association of controversial effectiveness
data relative to over-the-counter (OTC) products for the cough/cold category
even though Cold-Eeze(R) is proven to be effective in two double-blind placebo
controlled studies in reducing the severity and duration of the common cold.
Sales may also have been negatively affected due to extensive media exposure
gained by vitamin based products despite the lack of both safety and clinical
efficacy data.
The Contract Manufacturing segment reported sales in the first quarter of 2006
of $523,892 a reduction of $486,732 as compared to sales in the 2005 comparative
period of $1,010,624. The main reason for the reduction was due to an OTC
company that utilized manufacturing abilities of this segment having
discontinued their product in the marketplace.
Darius International Inc. ("Darius"), the Health and Wellness segment, a wholly
owned subsidiary of the Company, was formed in January 2000 to introduce new
products to the marketplace through a network of independent distributor
representatives. Darius is a direct selling organization specializing in
proprietary health and wellness products. The formation of Darius has provided
diversification to the Company in both the method of product distribution and
the broader range of products available to the marketplace, serving as a balance
to the seasonal revenue cycles of the Cold-Eeze(R) branded products. In the
first three months of 2006, this segment's net sales were $4,564,806 compared to
-15-
$4,996,005 for the 2005 three month period. However, sales related to
international locations improved by approximately $265,230 or 30% in the 2006
period over the 2005 comparable period offsetting a decrease in domestic sales.
In January 2001, the Company formed an Ethical Pharmaceutical segment, Quigley
Pharma Inc. ("Pharma"), that is under the direction of its Executive Vice
President and Chairman of its Medical Advisory Committee. Pharma was formed for
the purpose of developing naturally derived prescription drugs. Pharma is
currently undergoing research and development activity in compliance with
regulatory requirements. The Company is in the initial stages of what may be a
lengthy process to develop these patent applications into commercial products.
The Company continues to invest significantly in ongoing research and
development activities of this segment. Such investment amounted to $876,961 in
the first quarter 2006 compared to $1,043,482 in the 2005 comparative period.
Future revenues, costs, margins, and profits will continue to be influenced by
the Company's ability to maintain its manufacturing availability and capacity
together with its marketing and distribution capabilities and the requirements
associated with the development of Pharma's potential prescription drugs in
order to continue to compete on a national and international level. The
continued expansion of Darius is dependent on the Company retaining existing
independent distributor representatives and recruiting additional active
representatives both internationally and within the United States, continued
conformity with government regulations, a reliable information technology system
capable of supporting continued growth and continued reliable sources for
product and materials to satisfy consumer demand.
COLD-REMEDY PRODUCTS
In May 1992, the Company entered into an exclusive agreement for the worldwide
representation, manufacturing and marketing of Cold-Eeze(R) products in the
United States. Cold-Eeze(R), a zinc gluconate glycine formulation (ZIGG(TM)), is
an over-the-counter consumer product used to reduce the duration and severity of
the common cold and is available in lozenge, sugar-free tablet and gum form. The
Company has substantiated the effectiveness of Cold-Eeze(R) through a variety of
studies. A randomized double-blind placebo-controlled study, conducted at
Dartmouth College of Health Science, Hanover, New Hampshire, concluded that the
lozenge formulation treatment, initiated within 48 hours of symptom onset,
resulted in a significant reduction in the total duration of the common cold.
On May 22, 1992, "ZINC AND THE COMMON COLD, A CONTROLLED CLINICAL STUDY," was
published in England in the "Journal of International Medical Research," Volume
20, Number 3, Pages 234-246. According to this publication, (a) flavorings used
in other Zinc lozenge products (citrate, tartrate, separate, orotate,
picolinate, mannitol or sorbitol) render the Zinc inactive and unavailable to
the patient's nasal passages, mouth and throat where cold symptoms have to be
treated, (b) this patented formulation delivers approximately 93% of the active
Zinc to the mucosal surfaces and (c) the patient has the same sequence of
symptoms as in the absence of treatment but goes through the phases at an
accelerated rate and with reduced symptom severity.
On July 15, 1996, results of a new randomized double-blind placebo-controlled
study on the common cold, which commenced at the CLEVELAND CLINIC FOUNDATION on
October 3, 1994, were published. The study called "ZINC GLUCONATE LOZENGES FOR
TREATING THE COMMON COLD" was completed and published in the ANNALS OF INTERNAL
MEDICINE - VOL. 125 NO. 2. Using a 13.3mg lozenge (almost half the strength of
the lozenge used in the Dartmouth Study), the result still showed a 42%
reduction in the duration of common cold symptoms.
In April 2002, the Company announced the statistical results of a retrospective
clinical adolescent study at the Heritage School facility in Provo, Utah that
suggests that Cold-Eeze(R) is also an effective means of preventing the common
cold and statistically (a) lessens the number of colds an individual suffers per
year, reducing the median from 1.5 to zero and (b) reduces the use of
antibiotics for respiratory illnesses from 39.3% to 3.0% when Cold-Eeze(R) is
administered as a first line treatment approach to the common cold.
In April 2002, the Company was assigned a Patent Application which was filed
with the Patent Office of the United States Commerce Department for the use of
Cold-Eeze(R) as a prophylactic for cold prevention. The new patent application
follows the results of the adolescent study at the Heritage School facility.
In May 2003, the Company announced the findings of a prospective study,
conducted at the Heritage School facility in Provo, Utah, in which 178 children,
ages 12 to 18 years, were given Cold-Eeze(R) lozenges both symptomatically and
prophylactically from October 5, 2001 to May 30, 2002. The study found a 54%
reduction in the most frequently observed cold duration. Those subjects not
receiving treatment most frequently experienced symptom duration of 11 days
compared with 5 days when Cold-Eeze(R) lozenges were administered, a reduction
of 6 days.
-16-
The business of the Company is subject to federal and state laws and regulations
adopted for the health and safety of users of the Company's products.
Cold-Eeze(R) is a homeopathic remedy that is subject to regulations by various
federal, state and local agencies, including the United States Food and Drug
Administration ("FDA") and the Homeopathic Pharmacopoeia of the United States.
HEALTH AND WELLNESS
Darius, through Innerlight Inc., its wholly owned subsidiary, is a direct
selling company specializing in the development and distribution of proprietary
health and wellness products, including herbal vitamins and dietary supplements
for the human condition, primarily within the United States and since the second
quarter of 2003, internationally.
The continued success of this segment is dependent, among other things, on the
Company's ability:
o To maintain existing independent distributor representatives and
recruit additional successful independent distributor representatives.
Additionally, the loss of key high-level distributors or business
contributors as a result of business disagreements, litigation or
otherwise could negatively impact future growth and revenues;
o To continue to develop and make available new and desirable products
at an acceptable cost;
o To maintain safe and reliable multiple-location sources for product
and materials;
o To maintain a reliable information technology system and internet
capability. The Company has expended significant resources on systems
enhancements in the past and will continue to do so to ensure prompt
customer response times, business continuity and reliable reporting
capabilities. Any interruption to computer systems for an extended
period of time could be harmful to the business;
o To execute conformity with various federal, state and local regulatory
agencies both within the United States and abroad. With the growth of
international business, difficulties with foreign regulatory
requirements could have a significant negative impact on future
growth. Any inquiries from government authorities relating to the
Company's business and compliance with laws and regulations could be
harmful to the Company;
o To compete with larger more mature organizations operating within the
same market and to remain competitive in terms of product relevance
and business opportunity;
o To successfully implement methods for progressing the direct selling
philosophy internationally; and
o To plan strategically for general economic conditions.
Any or all of the above risks could result in significant reductions in revenues
and profitability of the Health and Wellness segment.
CONTRACT MANUFACTURING
From October 1, 2004, this manufacturing entity, now called QMI, a wholly owned
subsidiary of the Company, has continued to produce lozenge product along with
performing such operational tasks as warehousing and shipping the Company's
Cold-Eeze(R) products. In addition to that function, QMI produces a variety of
hard and organic candy for sale to third party customers in addition to
performing contract manufacturing activities for non-related entities. QMI is an
FDA-approved facility.
ETHICAL PHARMACEUTICAL
Pharma's current activity is the research and development of naturally-derived
prescription drugs with the goal of improving the quality of life and health of
those in need. Research and development will focus on the identification,
isolation and direct use of active medicinal substances. One aspect of Pharma's
research will focus on the potential synergistic benefits of combining isolated
active constituents and whole plant components. The Company will search for new
natural sources of medicinal substances from plants and fungi from around the
world while also investigating the use of traditional and historic medicinals
and therapeutics.
-17-
The pre-clinical development, clinical trials, product manufacturing and
marketing of Pharma's potential new products are subject to federal and state
regulation in the United States and other countries. Obtaining FDA regulatory
approval for these pharmaceutical products can require substantial resources and
take several years. The length of this process depends on the type, complexity
and novelty of the product and the nature of the disease or other indications to
be treated. If the Company cannot obtain regulatory approval of these new
products in a timely manner or if the patents are not granted or if the patents
are subsequently challenged, these possible events could have a material effect
on the business and financial condition of the Company. The strength of the
Company's patent position may be important to its long-term success. There can
be no assurance that these patents and patent applications will effectively
protect the Company's products from duplication by others.
The areas of focus are:
o A Patent (No. 6,555,573 B2) entitled "Method and Composition for the
Topical Treatment of Diabetic Neuropathy." The patent extends through
March 27, 2021.
o A Patent (No. 6,592,896 B2) entitled "Medicinal Composition and Method
of Using It" (for Treatment of Sialorrhea and other Disorders) for a
product to relieve sialorrhea (drooling) in patients suffering from
Amyotrophic Lateral Sclerosis (ALS), otherwise known as Lou Gehrig's
Disease. The patent extends through August 6, 2021.
o A Patent (No. 6,596,313 B2) entitled "Nutritional Supplement and
Method of Using It" for a product to relieve sialorrhea (drooling) in
patients suffering from Amyotrophic Lateral Sclerosis (ALS), otherwise
known as Lou Gehrig's Disease. The patent extends through April 15,
2022.
o A Patent (No. 6,753,325 B2) entitled "Composition and Method for
Prevention, Reduction and Treatment of Radiation Dermatitis," a
composition for preventing, reducing or treating radiation dermatitis.
The patent extends through November 5, 2021.
o A Patent (No. 6,827,945 B2) entitled "Nutritional Supplement and
Method of Using It" for a method for treating at least one symptom of
arthritis. The patent extends through April 22, 2023.
o In September 2002, the Company filed a foreign patent application
entitled "Method and Composition for the Topical Treatment of Diabetic
Neuropathy" in Europe and other foreign markets.
QR-333 - In April 2002, the Company initiated a Phase II Proof of Concept Study
in France for treatment of diabetic neuropathy, which was concluded in 2003. In
April 2003, the Company announced that an independently monitored analysis of
the Phase II Proof of Concept Study concluded that subjects using this
formulation had 67% of their symptoms improve, suggesting efficacy. In March
2004, the Company announced that it had completed its first meeting at the FDA
prior to submitting the Company's IND application for the relief of symptoms of
diabetic symmetrical peripheral neuropathy. The FDA's pre-IND meeting programs
are designed to provide sponsors with advance guidance and input on drug
development programs. In September 2005, the Company announced that a
preliminary report of its topical compound for the treatment of diabetic
neuropathy was recently featured in the JOURNAL OF DIABETES AND ITS
COMPLICATION. Authored by Dr. C. LeFante and Dr. P. Valensi, the article
appeared in the June 1, 2005 issue, and included findings that showed the
compound reduced the severity of numbness, and irritation from baseline values.
In October 2005, the Company announced the results of pre-clinical toxicology
studies that showed no irritation, photo toxicity, contact hypersensitivity or
photo allergy when applied topically to hairless guinea pigs and another study
that showed no difference in the dermal response of the compound or placebo when
applied to Gottingen Minipigs. (Both animal models are suggested for the
evaluation of topical drugs, by the FDA). In March 2006, the Company announced
the filing of an IND application with the FDA for its topical compound for the
treatment of Diabetic Peripheral Neuropathy. This filing allows the Company to
begin human clinical trials following a 30-day review period. If the FDA has no
further comments, studies with human subjects will commence as soon as possible
pending the availability of study drug. This application includes a compilation
of all of the supporting development data and regulatory documentation required
to file an IND application with the FDA. In April 2006, upon FDA approval for
its IND, the Company announced that it will be commencing human studies on its
formulation. Patient screening and enrollment will begin immediately for the
first of two human trials designed to determine the safety pharmacokinetics of
the Company's IND. A Phase 2(b) dose ranging study will commence after the
completion of the pharmacokinetic study.
The Company also announced that in anticipation of receiving this IND, it has
previously held its investigators meeting to organize its multi-center phase
2(b) trials. This will allow the Company to begin these trials as soon as study
drug is available.
-18-
QR-336 - In April 2004, the Company announced the results of a preliminary,
pre-clinical animal study which measured the effect of its proprietary patent
applied for formulation against ionizing (nuclear) radiation. This study
determined that parenteral (injection) administration of the study compound was
protective against the effects of a lethal, whole body ionizing radiation dose
in a mouse model. This compound is being investigated to potentially reduce the
effects of radiation exposure on humans.
QR-337 - In September 2003, the Company announced its intention to file for
permission to study its patent pending potential treatment for psoriasis and
other skin disorders. Continued testing will therefore have to be conducted
under an IND application following positive preliminary results.
QR-435 - In May 2004, the Company announced that an intranasal spray application
of the anti-viral test compound demonstrated efficacy by significantly reducing
the severity of illness in ferrets that had been infected with the Influenza A
virus. In pre-clinical studies, the antiviral formulation demonstrates antiviral
activity against Ocular and Genital Herpes, indicating a new research and
development path for the versatile compound. The Company is pleased with the
progress and indicated that continued research is required to confirm the
compound's safety and efficacy profiles.
QR-437 - In January 2004, the Company reported that its compound, which was
demonstrating antiviral activity, had shown virucidal and virustatic activity
against the strain 3B of the Human Immunodeficiency Virus Type 1 (HIV-1) in an
in-vitro study. Additionally, the Company decided that the derivative compound
of the anti-viral formulation previously found to be effective for treating
Sialorrhea would probably postpone further development on the Sialorrhea
indication and concentrate on further qualification and development of the
anti-viral capabilities of the compound in humans.
QR-439 - In December 2003, the Company announced positive test results of a
preliminary independent in vitro study indicating that a test compound of the
Company previously tested on the Influenza virus showed "significant virucidal
activity against a strain of the Severe Acute Respiratory Syndrome (SARS)
virus."
In January 2004, the Company announced that it would conduct two further studies
evaluating the compound which had shown activity against Influenza and SARS. The
first study was intended to repeat the previously announced results, which
demonstrated the compound to be 100 percent effective in preventing non-infected
ferrets in close proximity to an infected ferret from becoming infected with the
Influenza A virus. The second study was a dose ranging study on the test
compound. Upon dosage determination and confirmation results from these
forthcoming animal model studies, a human proof of concept study using a virus
challenge with Influenza A virus in a quarantine unit would be a viable next
step.
QR-440 (A) - The Company received an additional Investigational New Animal Drug
(INAD) number from the Center for Veterinary Medicine of the FDA. In previous
studies, QR-440 has been shown to reduce inflammation and also suggests possible
disease-modifying potential.
QR-441(A) - In November 2005, the Company was assigned nine INADs for a broad
anti-viral agent by the Center for Veterinary Medicine of the FDA. Eight of the
INADs are for investigating the compound use against avain flu H5N1virus in
chickens, turkeys, ducks, pigs, horses, dogs, cats and non-food birds. In
January 2006, a ninth INAD was assigned for investigating its compound for
treating arthritis in dogs. In March 2006, the Company announced that it is
planning a series of controlled experiments designed to test its all natural
broad spectrum anti-viral compound in poultry stocks. The Company also announced
that Dr. Timothy S. Cummings, MS, DVM, ACPV Clinical Poultry Professor at the
College of Veterinary Medicine at Mississippi State University and Thomas G.
Voss, Ph.D. Assistant Professor Tulane University School of Medicine will be
assisting the Company in the development of the INAD bird challenge studies.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the dates of the financial statements
and the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
The Company is organized into four different but related business segments, Cold
Remedy, Health and Wellness, Contract Manufacturing and Ethical Pharmaceutical.
When providing for the appropriate sales returns, allowances, cash discounts and
cooperative advertising costs, each segment applies a uniform and consistent
method for making certain assumptions for estimating these provisions that are
applicable to that specific segment. Traditionally, these provisions are not
material to net income in the Health and Wellness and Contract Manufacturing
segments. The Ethical Pharmaceutical segment does not have any revenues.
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The product in the Cold Remedy segment, Cold-Eeze(R), has been clinically proven
in two double-blind studies to reduce the severity and duration of common cold
symptoms. Accordingly, factors considered in estimating the appropriate sales
returns and allowances for this product include it being: a unique product with
limited competitors; competitively priced; promoted; unaffected for remaining
shelf life as there is no expiration date; and monitored for inventory levels at
major customers and third-party consumption data, such as Information Resources,
Inc. ("IRI").
At March 31, 2006 and December 31, 2005, the Company included reductions to
accounts receivable for sales returns and allowances of $525,000 and $635,000,
respectively, and cash discounts of $67,000 and $178,000, respectively.
Additionally, current liabilities at March 31, 2006 and December 31, 2005
include $643,000 and $1,067,000, respectively, for cooperative advertising
costs.
Management believes there are no material charges to net income in the current
period related to sales from a prior period.
REVENUE
Provisions to reserves to reduce revenues for cold remedy products that do not
have an expiration date, include the use of estimates, which are applied or
matched to the current sales for the period presented. These estimates are based
on specific customer tracking and an overall historical experience to obtain an
effective applicable rate, which is tested on an annual basis and reviewed
quarterly to ascertain the most applicable effective rate. Additionally, the
monitoring of current occurrences, developments by customer, market conditions
and any other occurrences that could affect the expected provisions relative to
net sales for the period presented are also performed.
A one percent deviation for these consolidated reserve provisions for the three
month periods ended March 31, 2006, and 2005 would affect net sales by
approximately $117,000 and $133,000, respectively. A one percent deviation for
cooperative advertising reserve provisions for the three month periods ended
March 31, 2006 and 2005 would affect net sales by approximately $62,000 and
$69,000, respectively.
The reported results include a remaining returns provision of approximately
$174,000 and $184,000 at March 31, 2006 and December 31, 2005, respectively, in
the event of future product returns following the discontinuation of the
Cold-Eeze(R) Cold Remedy Nasal Spray product in September 2004.
INCOME TAXES
The Company has recorded a valuation allowance against its net deferred tax
assets. Management believes that this allowance is required due to the
uncertainty of realizing these tax benefits in the future. The uncertainty
arises because the Company may incur substantial research and development costs
in its Ethical Pharmaceutical segment.
THREE MONTHS ENDED MARCH 31, 2006 COMPARED WITH THREE MONTHS ENDED MARCH 31,
2005
Net sales for the three month period ended March 31, 2006 were $10,266,038,
reflecting a decrease of $1,487,232 over the net sales of $11,753,270 for the
comparable three month period ended March 31, 2005. The Cold Remedy segment
reported net sales in the 2006 period of $5,177,340, a decrease of $569,301, or
9.9%, over the comparable 2005 period of $5,746,641. The Health and Wellness
segment reported net sales in the 2006 period of $4,564,806, a decrease of
$431,199, or 8.6%, over the net sales of $4,996,005 for the comparable 2005
period. The Contract Manufacturing segment reported net sales of $523,892 in the
2006 period compared to $1,010,624 in the comparable 2005 period, a decrease of
$486,732 or 48.2%.
The Cold-Remedy segment sales decrease may possibly be due in part to the
release in January 2006, by a medical association, of controversial
effectiveness data relative to over-the-counter (OTC) products for the
cough/cold category even though Cold-Eeze(R) is proven to be effective in two
double-blind placebo controlled studies in reducing the severity and duration of
the common cold. Sales may also have been negatively affected due to extensive
media exposure gained by vitamin based products despite the lack of both safety
and clinical efficacy data.
The Health and Wellness segment's net sales decreased in the 2006 period as a
result of reduced activity of domestic independent distributor representatives,
however, sales related to international markets increased by 30% from $882,687
in the 2005 period to $1,147,917 in the comparable 2006 period.
Cost of sales as a percentage of net sales for the three months ended March 31,
2006 was 48.3% compared to 51.4% for the comparable 2005 period, a decrease of
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3.1%. This decrease was primarily due to the expiration of a founders'
commission in May 2005, related to the Cold-Remedy segment, amounting to an
approximately 4.2% decrease in the cost of goods of this segment. The cost of
goods for the Health and Wellness segment remained relatively unchanged between
periods. The cost of goods of the Contract Manufacturing segment was negatively
impacted in the 2006 period due to an OTC company that utilized manufacturing
abilities of this segment having discontinued their product in the marketplace.
Sales and marketing expense for the three month period ended March 31, 2006 were
$2,434,925, an increase of $600,094 over the comparable 2005 period amount of
$1,834,831. The increase was primarily due to increased advertising and product
promotion expense of $519,331, primarily related to the Cold-Remedy segment.
General and administration costs for the three month period ended March 31, 2006
was $3,705,761 compared to $2,994,769 for the 2005 period, an increase of
$710,992 between the periods. The increase in 2006 was primarily due to
increased legal and insurance costs of $351,324 and $198,527, respectively.
Research and development costs during the three months ended March 31, 2006 were
$784,523 compared to $1,068,303 during the 2005 comparable period, reflecting a
decrease in 2006 of $283,780, primarily as a result of decreased Pharma segment
costs and reduced study activity related to the Cold-Eeze(R) products.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $18,434,383 and $20,682,262 at March 31, 2006
and December 31, 2005, respectively. Changes in working capital overall have
been primarily due to the following items: cash balances increased by
$1,305,249; account receivable balances decreased by $5,194,647 due to seasonal
factors and effective collection practices; inventory increased by $327,751 due
to a slow down in sales activity with some offset due to increased international
sales activity; accrued advertising decreased by $2,099,080 due to the seasonal
nature of the Cold-Remedy segment, accrued royalties and sales commissions
decreased by $395,269 largely due to the effects of certain litigation in
progress and the payment in 2006 of sales related incentives provided for at
December 31, 2005. Total debt decreased by $142,858 as a result of the repayment
of recurring monthly principal amounts in the period. The total remaining
balance on this loan, approximating $1,300,000 was repaid in April 2006. This
item related to the loan liability following the acquisition of JoEl, Inc.
effective October 1, 2004 while the assets acquired are presented in property,
plant and equipment. Total cash balances at March 31, 2006 were $18,190,419
compared to $16,885,170 at December 31, 2005.
Management believes that its strategy to establish Cold-Eeze(R) as a recognized
brand name, its broader range of products, its diversified distribution methods
as it relates to the Health and Wellness business segment, adequate
manufacturing capacity, and growth in international sales, together with its
current working capital, should provide an internal source of capital to fund
the Company's business operations. The Cold Remedy and Health and Wellness
segments contribute current expenditure support in relation to the Ethical
Pharmaceutical segment. In addition to anticipated funding from operations, the
Company and its subsidiaries may in the short and long term raise capital
through the issuance of equity securities to finance anticipated growth.
Management is not aware of any trends, events or uncertainties that have or are
reasonably likely to have a material negative impact upon the Company's (a)
short-term or long-term liquidity, or (b) net sales or income from continuing
operations. Any challenge to the Company's patent rights could have a material
adverse effect on future liquidity of the Company; however, the Company is not
aware of any condition that would make such an event probable.
Management believes that cash generated from operations, along with its current
cash balances, will be sufficient to finance working capital and capital
expenditure requirements for at least the next twelve months.
Management believes that cash generated from operations along with its current
cash balances will be sufficient to finance working capital and capital
expenditure requirements for at least the next twelve months.
CAPITAL EXPENDITURES
Capital expenditures during the remainder of 2006 are not expected to be
material.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's operations are not subject to risks of material foreign currency
fluctuations, nor does it use derivative financial instruments in its investment
practices. The Company places its marketable investments in instruments that
meet high credit quality standards. The Company does not expect material losses
with respect to its investment portfolio or exposure to market risks associated
with interest rates. The impact on the Company's results of a one percentage
point change in short-term interest rates would not have a material impact on
the Company's future earnings, fair value, or cash flows related to investments
in cash equivalents or interest-earning marketable securities.
ITEM 4. CONTROLS AND PROCEDURES
Based on their evaluation as of the end of the period covered by this report,
the Company's Chief Executive Officer and Chief Financial Officer have concluded
that the Company's disclosure controls and procedures (as defined in Rules
13a-15 and 15d-15 under the Securities Exchange Act of 1934, as amended) are
effective. There have been no significant changes in internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses. The Company is currently
undergoing a comprehensive effort in preparation for compliance with Section 404
of the Sarbanes-Oxley Act of 2002. This will involve the documentation, testing
and review of our internal controls under the direction of senior management.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
DARIUS INTERNATIONAL INC., AND INNERLIGHT INC., F/K/A DARIUS
MARKETING INC. VS. ROBERT O. YOUNG AND SHELLEY R. YOUNG
(FEDERAL DISTRICT COURT - EASTERN DISTRICT, PA)
In this action, the Company seeks injunctive relief and monetary damages against
two individuals for violation of a non-competition agreement between a wholly
owned subsidiary of the Company, Innerlight Inc., and the defendants, each of
whom are also under agreement to serve as consulting to the Company.
In late November, 2005, the Company learned that the defendants had launched a
line of nutritional supplement products that competed with Innerlight products.
Defendants promoted their line of products by a website, among other means. The
Company moved for a temporary restraining order against the defendants, which
the court denied; however, the Court ordered expedited discovery and a
preliminary injunction hearing was held before the Court on January 24 and 25,
2006. The parties filed briefs on the significance of the hearing evidence in
relation to the parties' respective claims and argued the matter before the
Federal District Court for the Eastern District of Pennsylvania on February 17,
2006.
On April 21, 2006 a preliminary injunction was issued by the Court and enjoined
the defendants with the respect to Darius' and Innerlight's claims of breach of
contract and unfair competition. It gave further relief to Darius International
and Innerlight Inc. with the respect to claims of trademark infringement.
Defendants were enjoined from endorsing, developing, marketing, and selling any
and all nutritional dietary supplement products that compete with Darius
International's and Innerlight Inc.'s products. Defendants were also enjoined
from using certain marks used in the Innerlight Inc. business in conjunction
with any product. The defendants were ordered to remove from their website all
reference to competing nutritional or dietary supplement products, including
hyperlinks to such products; and were also enjoined from including a reference
to dietary supplement products owned by defendants on any other website.
Defendants have filed an answer and counterclaims and the Company believes these
pleadings are without merit and is vigorously defending those counterclaims and
is prosecuting its action on the complaint.
On May 5, 2006 defendants filed a motion to dissolve and/or reconsider the
motion for a preliminary injunction. The Company has answered this motion and
believes that its allegations are without merit. Based upon the information the
Company has at this time, it believes the counterclaim actions are without
merit. However, at this time no prediction as to the outcome can be made.
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ROBERT O. AND SHELLEY YOUNG VS. DARIUS INTERNATIONAL INC.
AND INNERLIGHT INC., (UTAH THIRD PARTY COMPLAINTS)
On September 14, 2005, a third-party complaint was filed by Shelley R. Young in
Fourth District Court in Provo, Utah against Innerlight Inc. and its parent
company, Darius. Robert O. Young has filed a motion to intervene to join as a
third-party plaintiff with Shelley R. Young. On November 3, 2005, Shelley and
Robert Young filed a parallel suit also in Fourth District Court in Provo, Utah.
The allegations in both complaints include, but are not limited to, an alleged
breach of contract by Innerlight Inc. for alleged failures to make certain
payments under an asset purchase agreement entered into by all parties.
Additional allegations stem from this alleged breach of contract including
unjust enrichment, trademark infringement and alleged violation of rights of
publicity. The plaintiffs are seeking both monetary and injunctive relief.
Innerlight Inc. has objected to the complaint in the third-party action based on
procedural deficiencies and other grounds.
The Fourth District Court of Utah has stayed both the September 14, 2005 and
November 3, 2005 actions pending the adjudication of the Federal District Court
action referenced above and has ordered that all disputes be determined in the
Federal District Court action in the Eastern District of Pennsylvania.
In connection with the Utah actions the Company has sued the Youngs in Equity in
the Court of Common Pleas of Philadelphia County, PA, and in United States
District Court for the Eastern District of Pennsylvania. The Company has alleged
breach of contract, including but not limited to breach of non-competition
provisions in a consulting agreement between the parties and is seeking
unspecified damages and injunctive relief.
INNERLIGHT INC. VS. THE MATRIX GROUP, LLC
On March 13, 2006 Innerlight Inc. filed a declaratory judgment action in the
Fourth Judicial District, Utah County, State of Utah, requesting a declaration
that there is no valid contract between the parties. The Matrix Group, LLC has
alleged there is a contract between the parties obligating Innerlight Inc. to
purchase $750,000 of products for the 12-month period commencing October 18,
2004 and ending October 17, 2005, $1,500,000 for the period commencing October
18, 2005 and ending October 17, 2006, and for each 12-month period thereafter,
through and including October 17, 2013, at least $4,000,000 of products from The
Matrix Group, LLC. The document on which Matrix relies was drafted by Matrix and
states that the acceptance of the appointment by distributor (Innerlight Inc.)
is conditioned upon distributor's written acceptance of the Company's product
price list. No written acceptance of the product price list was ever made by
Innerlight Inc.
The Matrix Group, LLC has filed a Utah Rule of Civil Procedure 12(b)(3) motion
asking that the complaint be dismissed for lack of jurisdiction. Innerlight Inc.
has answered the motion on May 8, 2006.
The Company believes that the defendant's claims are without merit and is
vigorously defending those claims and is prosecuting its action on its
complaint. Based upon the information the Company has at this time, it believes
that the defendant's actions are without merit. However, at this time no
prediction as to the outcome can be made.
ITEM 6. EXHIBITS
(1) Exhibit 31.1 Certification by the Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
(2) Exhibit 31.2 Certification by the Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
(3) Exhibit 32.1 Certification by the Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(4) Exhibit 32.2 Certification by the Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE QUIGLEY CORPORATION
By: /s/ George J. Longo
-------------------------------------------
George J. Longo
Vice President, Chief Financial Officer
Date: May 15, 2006
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