mjm2005
18 years ago
Press Release Source: The Quigley Corporation
Quigley Enlists Leading Radiation Oncology Researcher to Assist in the Development Plan for Radiological Testing of QR-336 Compound
Monday April 3, 7:30 am ET
Company Plans to Develop Successful Animal Model to Comply with FDA Animal Efficacy Rules for Radio-Protective Agents
DOYLESTOWN, Pa., April 3 /PRNewswire-FirstCall/ -- Quigley Pharma, a wholly owned subsidiary of The Quigley Corporation (Nasdaq: QGLY - News), announced today that it has signed an agreement with Dr. William H. McBride, the Vice Chair of Research, Department of Oncology at UCLA to help develop an appropriate animal model radio protective research program for QR-336 to comply with New Food and Drug Administration animal efficacy rules for radio- protective pharmacological compounds.
"We are very happy to have a distinguished expert in Dr. McBride involved with the protocol development process," said Dr. Richard Rosenbloom, COO and Executive Vice President. "His experience developing radiological clinical trials makes him uniquely qualified to design the proper studies to test the effectiveness of this compound."
The QR-336 compound has demonstrated encouraging results in a preliminary non-GLP animal study against ionizing radiation. A further in-vivo study involving pre-treating mice with QR-336, followed by lethally irradiating the treated and untreated groups has shown a four-fold increase (80% survival rate) in mice surviving the otherwise lethal dose of radiation as compared to the non-treated group. Results also show that bone marrow extracted from animals that were previously treated with QR-336 and irradiated, could protect another set of irradiated animals whereas bone marrow also extracted from untreated, irradiated mice could not protect lethally irradiated animals.
QR-336 is being investigated to potentially reduce the effects of ionizing radiation, which could affect cancer patients undergoing radiation therapy, nuclear-terrorism (i.e. dirty bomb), the nuclear industry, healthcare professionals as well as commercial airline flight crews. Ionizing radiation has been linked to Leukemia and other pathology. The development of a naturally derived non-toxic drug could potentially offer some protection against these effects
About William McBride, Ph.D.
Dr. McBride is the Vice Chair of Research, at the Department of Radiation Oncology as well as the principal investigator of the UCLA Center for Biological Radioprotectors, which serves as an NIAID - biodefense: Center for Medical Counter Measures Against Radiation. Dr. McBride's far-reaching industry expertise includes participation in a series of meetings under NIH, DHHS, FDA and other government offices designed to determine what animal models make sense for radiation. He was one of the co-authors of the meeting report "Animal Models for Radiation Injury, Protection and Therapy."
Editorial Boards
Cancer Immunology Immunotherapy, 1982-1992
Immunology, 1982-1993
Radiation Research, 1992-1996
Cancer Gene Therapy, 1995-Present
International Journal Radiation Oncology Biology Physics, 1995-197, 1998-
2000, 2001, 2003, 2005
Occasional referee for papers to: Biotechniques, Blood, Cancer, Cancer
Gene Therapy, Cancer Research, Clinical Cancer Research, Clinical
Experimental Immunology, European Journal of Cancer, International
Journal of Cancer, International Journal Radiation, Oncology Biology
Physics, Journal of Cell Biology, Journal of Cellular Immunology, Journal
of Clinical Oncology Radiotherapy, Journal of Immunology, Journal of
Immunotherapy, Journal of Laboratory Immunology, Metastasis Journal,
Molecular Carcinogenesis, Nature, Radiation Oncology Investigations,
Radiation Research, Radiotherapy and Oncology.
Committee Work
International Congress of Radiation Research
Program committee, 13th International Congress of Radiation Research,
2005-2007
Radiation Research Society
President-Elect, 2005
American Society for Therapeutic Radiology and Oncology
Research Council (Vice-Chair), 2003-2005
Grant Assessor and Reviewer (National/International)
National Institutes for Health/National Cancer Institute
Pathology Study Group, 1980
Cancer Research Manpower Review Committee, 1988-1993, 1995, 1996, 2002
T32 and RO3 Grants Study Section, ad hoc, Washington D.C., 1997
Radiation Study Section
Ad hoc, Washington D.C., 1992, 1996
Permanent member 1997-2001
Chair, 2000-2001
Bioshield NIAID Grant Review Committee (Chair), 2004
NCI Program Project Parent Committee D,7 2005-2006, 2008
Department of Energy
Department of Defense
American Board of Radiology
American Society for Therapeutic Radiology and Oncology
American Institute of Biological Sciences/US Army Medical Research and
Material Command - Panel D Two: Anti-Radiation Drug
Development/Tungsten Grant Review Committee, 2005
The Quigley Corporation makes no representation that the U.S. Food and Drug Administration or any other regulatory agency will grant an IND for human study or take any other action to allow the aforementioned compound to be marketed. Furthermore, no claim is made that the potential medicine discussed here is safe, effective, or approved by the Food and Drug Administration.
About The Quigley Corporation
(Nasdaq: QGLY, http://www.Quigleyco.com) is a diversified natural health medical science company. Its Cold Remedy segment is a leading marketer and manufacturer of the COLD-EEZE® family of lozenges, gums and sugar free tablets clinically proven to cut the common cold nearly in half. COLD-EEZE customers include leading national wholesalers and distributors, as well as independent and chain food, drug and mass merchandise stores and pharmacies. The Quigley Corporation has several wholly owned subsidiaries. Darius International markets health and wellness products through its wholly owned subsidiary, InnerLight Inc. Quigley Manufacturing Inc. consists of two FDA approved facilities to manufacture COLD- EEZE® lozenges as well as fulfill other contract manufacturing opportunities. Quigley Pharma Inc. (http://www.QuigleyPharma.com) conducts research in order to develop and commercialize a pipeline of patented botanical and naturally derived prescription drugs.
Certain statements in this press release are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and involve known and unknown risk, uncertainties and other factors that may cause the company's actual performance or achievements to be materially different from the results, performance or achievements expressed or implied by the forward-looking statement. Factors that impact such forward-looking statements include, among others, changes in worldwide general economic conditions, changes in interest rates, government regulations, and worldwide competition.
All media inquiries for Quigley Pharma and Dr. McBride should be directed to:
CONTACT: Media Investor Relations
Karen Pineman Carl Hymans
G.S. Schwartz & Co. G.S. Schwartz & Co.
212.725.4500 212.725.4500
kpineman@schwartz.com carlh@schwartz.com
Source: The Quigley Corporation
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mjm2005
18 years ago
Form 10-K for QUIGLEY CORP
23-Mar-2006
Annual Report
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
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, which is an FDA approved facility, produces a variety of hard and organic candy for sale to third party customers in addition to performing contract manufacturing activities for non-related entities. The Cold-Eeze(R) products reported an improved sales performance in 2005 due to effective product support by means of media and in-store advertising; the introduction of new Cold-Eeze(R) flavors; and increased consumer demand for Cold-Eeze(R) as indicated by Information Resources Incorporated (IRI) data. During 2005, the margin of the Cold Remedy segment was improved as a result of the impact of the Cold-Eeze(R) now being produced by the manufacturing subsidiary and forming part of the consolidated results of the Company. However, these gains were offset by substantially lower gross profit margins on the Contract Manufacturing segment's non cold remedy sales and non-manufacturing operating costs of the manufacturing subsidiary being included in current operations rather than being carried as inventory and cost of sales as was the case prior to October 1, 2004.
Our Health and Wellness segment is operated through Darius International Inc. ("Darius"), a wholly owned subsidiary of the Company which was formed in January 2000 to introduce new products to the marketplace through a network of independent distributor representatives. Darius is a direct selling organization specializing in proprietary health and wellness products. The formation of Darius has provided diversification to the Company in both the method of product distribution and the broader range of products available to the marketplace, serving as a balance to the seasonal revenue cycles of the Cold-Eeze(R) branded products. This segment's 2005 net sales remained relatively unchanged compared to 2004 due to a decline in the number of active domestic independent distributor representatives, which was offset by this segment's gain in international sales of 54.3%.
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 with ongoing research and development activities of this segment.
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.
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EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
In November 2004, the FASB issued SFAS NO. 151, "INVENTORY COSTS" ("SFAS 151"). SFAS 151 amends the guidance in Chapter 4 of Accounting Research Bulletin No. 43, "Inventory Pricing" to clarify the accounting for amounts of idle facility expense, freight, handling costs and wasted material. SFAS 151 requires that these types of items be recognized as current period charges as they occur. The provisions of SFAS 151 are effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The adoption of this standard is not expected to have an impact on the Company's consolidated financial position, results of operations or cash flows.
In December 2004, the FASB issued Statement 123 (revised 2004),"SHARE-BASED PAYMENT." The standard eliminates the disclosure-only election under the prior SFAS 123 and requires the recognition of compensation expense for stock options and other forms of equity compensation based on the fair value of the instruments on the date of grant. The standard is effective for fiscal years beginning after June 15, 2005. In March 2005, the Securities & Exchange Commission (the "SEC") issued Staff Accounting Bulletin No. 107, "Share-Based Payment" ("SAB 107"). SAB 107 summarizes the views of the SEC staff regarding the interaction between SFAS No. 123 (Revised 2004), "Share-Based Payment" ("SFAS 123R") and certain SEC rules and regulations, and is intended to assist in the initial implementation of SFAS 123R, which for the Company is required by the beginning of its fiscal year 2006. The Company had no unvested options as of December 31, 2005 and therefore the adoption of this standard will not have an impact on the Company's consolidated balance sheets and statements of operations, shareholders' equity and cash flows.
In December 2004, the FASB issued Statement 153,"EXCHANGES OF NONMONETARY ASSETS, AN AMENDMENT OF APB OPINION NO.29." The standard is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged and eliminates the exception under APB Opinion No. 29 for an exchange of similar productive assets and replaces it with an exception for exchanges of nonmonetary assets that do not have commercial substance. The standard is effective for nonmonetary exchanges occurring in fiscal periods beginning after June 15, 2005. The adoption of SFAS No. 153 did not have a material impact on the Company's financial position or results of operations.
In May 2005, the Financial Accounting Standards Board ("FASB") issued Statement 154, "ACCOUNTING CHANGES AND ERROR CORRECTIONS, A REPLACEMENT OF APB OPINION NO. 20 AND FASB STATEMENT NO. 3." The standard requires retrospective application to prior periods' financial statements of a voluntary change in accounting principle unless it is deemed impracticable. The standard states that a change in method of depreciation, amortization or depletion for long-lived, non-financial assets be accounted for as a change in accounting estimate that is affected by a change in accounting principle. The standard is effective for accounting changes and corrections of errors made occurring in fiscal years beginning after December 15, 2005. The impact on the Company's financial position or results of operations as a result of the adoption of Statement of Financial Accounting Standards ("SFAS") No. 154 cannot be determined.
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.
The product in the Cold Remedy segment, Cold-Eeze(R), has been clinically proven in two double-blind studies to reduce the severity and duration of common cold symptoms. Accordingly, factors considered in estimating the appropriate sales returns and allowances for this product include it being: a unique product with limited competitors; competitively priced; promoted; unaffected for remaining shelf life as there is no expiration date; monitored for inventory levels at major customers and third-party consumption data, such as Information Resources, Inc. ("IRI").
-24-
At December 31, 2005 and 2004 the Company included reductions to accounts receivable for sales returns and allowances of $635,000 and $1,109,000, respectively, and cash discounts of $178,000 and $92,000, respectively. Additionally, current liabilities at December 31, 2005 and 2004 include $1,067,072 and $743,000, respectively for cooperative advertising costs.
The roll-forward of the sales returns and allowance reserve ending at December 31 is as follows:
Account - Sales Returns & Allowances 2005 2004
--------------------------------------------------------------------------------------------------------------
Beginning balance $1,109,171 $403,850
Provision made for future charges relative to sales for each period 678,127 1,414,796
presented
Current provision related to discontinuation of Cold-Eeze(R) nasal spray 183,716 625,756
Actual returns & allowances recorded in the current period presented (1,336,434) (1,335,231)
-------------- -------------
Ending balance $634,580 $1,109,171
============== =============
The reduction in the 2005 provision as compared to 2004 was principally due to the initiation of specific limits on product returns from customers, greater product acceptance and further enhanced evaluation of return requests from customers relative to the Cold Remedy segment.
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 years ended December 31, 2005, 2004 and 2003 would affect net sales by approximately $599,000, $481,000 and $455,000, respectively. A one percent deviation for cooperative advertising reserve provisions for the years ended December 31, 2005, 2004 and 2003 could affect net sales by approximately $352,000, $275,000 and $241,000, respectively.
The reported results include a remaining returns provision of approximately $184,000 and $626,000 at December 31, 2005 and December 31, 2004, respectively in the event of future product returns following the discontinuation of the Cold-Eeze(R) Cold Remedy Nasal Spray product in September 2004.
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.
RESULTS OF OPERATIONS
TWELVE MONTHS ENDED DECEMBER 31, 2005 COMPARED WITH SAME PERIOD 2004
Net sales for 2005 were $53,658,043 compared to $43,947,995 for 2004, reflecting an increase of 22.1% in 2005. Revenues, by segment, for 2005 were Cold Remedy, $29,284,651; Health and Wellness, $20,473,050; and Contract Manufacturing, $3,900,342, as compared to 2004 when the revenues for each respective segment were $22,834,249, $20,361,391 and $752,355.
The Cold Remedy segment reported a sales increase in 2005 of $6,450,402 or 28.2%. During 2005 the Company continued to strongly support the Cold-Eeze(R) product line through media and in-store advertising and the introduction of new Cold-Eeze(R) flavors thereby increasing the profile of the product through line extension. Cold-Eeze(R) product unit consumption increased by 27% in 2005 as measured by Information Resources Incorporated (IRI) data.
-25-
The Health and Wellness segment's net sales increased in 2005 by $111,659 or 0.5%. International sales for this segment increased by 54.3% due to an increase in the number of independent international distributor representatives in 2005 with offset due to a decline in the number of active domestic independent distributor representatives.
The Contract Manufacturing segment refers to the third party sales generated by QMI. In addition to the manufacture of the Cold-Eeze(R) product, QMI also manufactures a variety of hard and organic candies under its own brand names along with other products on a contract manufacturing basis for other customers. Sales for this segment in 2005 increased by $3,147,887 as the 2004 period consisted of three months activity.
Cost of sales from continuing operations for 2005 as a percentage of net sales was 48.1%, compared to 53.6% for 2004. The cost of sales percentage for the Cold Remedy segment decreased in 2005 by 6.2% primarily due to the impact of the discontinuation of the nasal spray product in 2004 and the conclusion of the Company's royalty obligations to the founders in May 2005. The 2004 nasal product discontinuation negatively impacted net sales by approximately $680,000 and resulted in an additional expense to cost of sales of approximately $672,000 due to obsolete product and materials. Remaining variations between the years is largely the result of product mix. The cost of sales percentage for the Health and Wellness segment increased in 2005 by 1.6% largely attributable to costs associated with increased international sales activity, product mix and variations in the independent distributor representative commission cost. The 2005 consolidated cost of sales was favorably impacted as a result of the consolidation effects of the manufacturing facility as it relates to Cold-Eeze(R). These gross profit gains of the Cold Remedy segment were offset by substantially lower gross profit margins for the Contract Manufacturing segment, which is significantly lower than the other operating segments.
Selling, marketing and administrative expenses for 2005 were $21,070,307 compared to $16,960,313 in 2004. The increase in 2005 was primarily due to increased sales brokerage commission costs of $816,000 due to significantly improved sales performance; the addition of Quigley Manufacturing Inc., for the whole of 2005 resulted in increased selling and administration costs of $1,276,459; insurance costs increased by $435,920, with the remaining increase largely due to increased payroll costs. Selling, marketing and administrative expenses, by segment, in 2005 were Cold Remedy $13,519,967, Health and Wellness $5,249,296, Pharma $724,394 and Contract Manufacturing $1,576,650, as compared to 2004 of $11,068,726, $5,098,834, $492,562 and $300,191, respectively.
Research and development costs for 2005 and 2004 were $3,784,221 and $3,232,569, respectively. Principally, the increase in research and development expenditure was the result of decreased cold-remedy related product testing costs in 2005 compared to the prior year, offset by increased Pharma study costs of approximately $756,000 in 2005.
During 2005, the Company's major operating expenses of salaries, brokerage commissions, promotion, advertising, and legal costs accounted for approximately $16,922,587 (68.1%) of the total operating expenses of $24,854,528, an increase of 31.2% over the 2004 amount of $12,900,314 (63.9%) of total operating expenses of $20,192,882, largely the result of increased sales brokerage commission costs and increased payroll costs in 2005. The 2005 amounts reflect the inclusion of QMI for the twelve months of 2005 compared to three months in 2004.
Total assets of the Company at December 31, 2005 and 2004 were $35,975,639 and $31,529,756, respectively. Working capital increased by $2,829,352 to $20,682,262 at December 31, 2005. The primary influences on working capital during 2005 were: the increase in cash balances, increased account receivable balances due to increased sales, increased inventory on hand as a result of increased sales including international activity; increased accrued royalties and sales commissions as a result of litigation between the Company and the developer of Cold-Eeze(R) and increased advertising payable balances due to increased advertising activity in the latter part of 2005 and related seasonal factors.
TWELVE MONTHS ENDED DECEMBER 31, 2004 COMPARED WITH SAME PERIOD 2003 Revenues from continuing operations for 2004 were $43,947,995 compared to $41,499,163 for 2003, reflecting an increase of 5.9% in 2004. Revenues, by segment, for 2004 were Cold Remedy, $22,834,249; Health and Wellness, $20,361,391; and Contract Manufacturing, $752,355, as compared to 2003 when the revenues for each respective segment were $20,474,969, $21,024,194 and zero. The Contract Manufacturing segment refers to the third party sales generated by QMI. In addition to the manufacture of the Cold-Eeze(R) product, QMI also manufactures a variety of hard and organic candies under its own brand names along with other products on a contract manufacturing basis for other customers. The 2004 revenues for the Cold Remedy segment were negatively affected by the discontinuation of the nasal spray product, reducing the 2004 revenues by approximately $680,000 as a result of actual and anticipated product returns. Notwithstanding the discontinuation of the nasal spray product, the Cold Remedy segment reported increased revenues which may be attributable to strategic media advertising during the early part of the cold season, strong trade and consumer product promotions, and media attention during the fourth quarter of 2004
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following the reported scarcity of flu vaccine products. The Health and Wellness segment reported reduced revenues in 2004 of $662,803 over the prior year. This segment experienced a reduction in domestic sales which were offset by increased sales to international markets of 135%.
Cost of sales from continuing operations for 2004 as a percentage of net sales was 53.6%, compared to 51.8% for 2003. The cost of sales percentage for the Cold Remedy segment increased in 2004 by 4.7% primarily due to the impact of the discontinuation of the nasal spray product. The discontinuation negatively impacted net sales by approximately $680,000 and resulted in an additional expense to cost of sales of approximately $672,000 due to obsolete product and materials. Remaining variations between the years is largely the result of product mix. The cost of sales percentage for the Health and Wellness segment increased in 2004 by 1.2% largely attributable to a charge of approximately $200,000 related to a reserve for expected obsolete inventory.
Selling, marketing and administrative expenses from continuing operations for 2004 were $16,960,313 compared to $16,010,164 in 2003. The increase in 2004 was primarily due to increased media advertising of $892,771, largely related to the commencement of Cold-Eeze(R) advertising activity earlier in the 2004/2005 cold season compared to prior year. Selling, marketing and administrative expenses, by segment, in 2004 were Cold Remedy $11,068,726, Health and Wellness $5,098,834, Pharma $492,562 and Contract Manufacturing $300,191, as compared to 2003 when these expenses for each respective segment were $10,061,349, $5,396,696, $552,119 and zero.
Research and development costs from continuing operations in 2004 and 2003 were $3,232,569 and $3,365,698, respectively. Principally, the decrease in research and development expenditure was the result of decreased Cold Remedy related product testing costs in 2004 compared to the prior year, which were offset by increased Pharma study costs of approximately $261,000.
During 2004, the Company's major operating expenses of salaries, brokerage commissions, promotion, advertising, and legal costs accounted for approximately $12,900,314 (64%) of the total operating expenses of $20,192,882, an increase of 13.9% over the 2003 amount of $11,328,608, largely the result of increased media advertising and payroll costs in 2004.
Revenues of CPNP (discontinued operations) for the twelve months periods ended December 31, 2004 and 2003 were zero and $59,824, respectively, and net losses for the same periods were zero and $54,349. The results of CPNP are presented as discontinued operations in the Statements of Operations.
Total assets of the Company at December 31, 2004 and 2003 were $31,529,756 and $26,269,759, respectively. Working capital decreased by $404,444 to $17,852,910 at December 31, 2004. The primary influences on working capital during 2004 were: the increase in cash balances, decreased account receivable balances due to attentive collections, reductions in inventory on hand as a result of increased revenues; increased liabilities due to current portion of long term debt of $428,571 related to the acquisition of certain assets, (primarily property, plant and equipment), and assumption of certain liabilities of the former contract manufacturer, JoEl, Inc., now QMI, along with the inclusion of assets and liabilities relating to QMI at December 31, 2004, and the increase in advertising payable balances due to increased advertising activity in the latter part of 2004.
MATERIAL COMMITMENTS AND SIGNIFICANT AGREEMENTS
Effective October 1, 2004, the Company acquired certain assets and assumed certain liabilities of JoEl, Inc., the sole manufacturer of the Cold-Eeze(R) lozenge product. As part of the acquisition, the Company entered into a loan obligation in the amount of $3.0 million payable to PNC Bank, N.A. The loan is collateralized by mortgages on real property located in each of Lebanon, Pennsylvania and Elizabethtown, Pennsylvania and was used to finance the majority of the cash portion of the purchase price. The Company can elect interest rate options of either the Prime Rate or LIBOR plus 200 basis points. The loan is payable in eighty-four equal monthly principal payments of $35,714 commencing November 1, 2004, and such amounts payable are reflected in the consolidated balance sheet as current portion of long-term debt amounting to $428,571 and long term debt amounting to $1,035,715. The Company is in compliance with all related loan covenants.
With the exception of the Company's Cold-Eeze(R) lozenge product, the Company's products are manufactured by outside sources. The Company has agreements in place with these manufacturers, which ensure a reliable source of product for the future.
The Company has agreements in place with independent brokers whose function is to represent the Company's Cold-Eeze(R) products, in a product sales and promotion capacity, throughout the United States and internationally. The brokers are remunerated through a commission structure, based on a percentage of sales collected, less certain deductions.
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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 of the Company, who are also directors and stockholders of the Company, and whose agreements expired in May 2005. The expenses for the respective periods relating to such agreements amounted to $1,745,748, $2,058,965 and $1,805,294 for the twelve months periods ended December 31, 2005, 2004 and 2003, respectively. Amounts accrued for these expenses at December 31, 2005 and 2004 were $2,077,411 and $1,129,654, 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 exclusivity, consulting, marketing presentations, confidentiality and non-compete arrangements. Amounts paid or payable under such agreement during 2005, 2004 and 2003 were $838,607, $800,881 and $880,091, respectively. Amounts payable under such agreement at December 31, 2005 and 2004 were $58,597 and $60,876, respectively.
Certain operating leases for office and warehouse space maintained by the Company resulted in rent expense for the years ended December 31, 2005, 2004 and 2003, of $227,701, $335,226, and $255,078, respectively. The future minimum lease obligations under these operating leases are approximately $240,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $20,682,262 and $17,852,910 at December 31, . . .
http://biz.yahoo.com/e/060323/qgly10-k.html
mjm2005
18 years ago
http://biz.yahoo.com/e/050803/qgly10-q.html
Form 10-Q for QUIGLEY CORP
3-Aug-2005
Quarterly Report
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Report contains forward-looking statements. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in these forward-looking statements. Factors that might cause such a difference include, but are not limited to, management of growth, competition, pricing pressures on the Company's products, industry growth and general economic conditions. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's opinions only as of the date hereof. The Company undertakes no obligation to revise or publicly release the results of any revision to these forward-looking statements.
CERTAIN RISK FACTORS
The Quigley Corporation makes no representation that the United States Food and Drug Administration ("FDA") or any other regulatory agency will grant an Investigational New Drug or take any other action to allow its formulations to be studied or marketed. Furthermore, no claim is made that potential medicine discussed herein is safe, effective, or approved by the Food and Drug Administration. Additionally, data that demonstrates activity or effectiveness in animals or in vitro tests do not necessarily mean such formula test compound, referenced herein, will be effective in humans. Safety and effectiveness in humans will have to be demonstrated by means of adequate and well controlled clinical studies before the clinical significance of the formula test compound is known. Readers should carefully review the risk factors described in other sections of the filing as well as in other documents the Company files from time to time with the Securities and Exchange Commission ("SEC").
OVERVIEW
The Company, headquartered in Doylestown, Pennsylvania, is a leading manufacturer, marketer and distributor of a diversified range of homeopathic and health products which comprise the Cold Remedy, Health and Wellness and Contract Manufacturing segments. The Company is also involved in the research and development of potential prescription products that comprise the Ethical Pharmaceutical segment.
The Company's business is the manufacture and distribution of cold remedy products to the consumer through the over-the-counter marketplace together with the sale of proprietary health and wellness products through its direct selling subsidiary. One of the Company's key products in its Cold Remedy segment is Cold-Eeze(R), a zinc gluconate glycine product proven in two double-blind clinical studies to reduce the duration and severity of the common cold symptoms by nearly half. Cold-Eeze(R) is now an established product in the health care and cold remedy market. Effective October 1, 2004, the Company acquired substantially all of the assets of JoEl, Inc., the previous manufacturer of the Cold-Eeze(R) lozenge product. This manufacturing entity, now called Quigley Manufacturing Inc. ("QMI"), a wholly owned subsidiary of the Company, will continue to produce lozenge product along with performing such operational tasks as warehousing and shipping the Company's Cold-Eeze(R) products. In addition, QMI produces a variety of hard and organic candy for sale to third party customers in addition to performing contract manufacturing activities for non-related entities. The Cold-Eeze(R) products reported a strong sales performance in the first six months of 2005 as a result of a prolonged cough/cold season, increased consumer demand and increased household penetration. The presence of QMI in 2005 contributed net sales of $2,376,319 in the six month period.
Darius International Inc. ("Darius"), the Health and Wellness segment, a wholly owned subsidiary of the Company, was formed in January 2000 to introduce new products to the marketplace through a network of independent distributors. Darius is a direct selling organization specializing in proprietary health and wellness products. The formation of Darius has provided diversification to the Company in both the method of product distribution and the broader range of products available to the marketplace, serving as a balance to the seasonal revenue cycles of the Cold-Eeze(R) branded products. This segment's 2005 net sales decreased over the comparable 2004 six month period due to a decline in the number of active domestic independent representatives; however, international sales activity improved in the 2005 period.
In January 2001, the Company formed an Ethical Pharmaceutical segment, Quigley Pharma Inc. ("Pharma"), that is under the direction of its Executive Vice President and Chairman of its Medical Advisory Committee. Pharma was formed for the purpose of developing naturally derived prescription drugs, cosmeceuticals, and dietary supplements. Pharma is currently undergoing research and development activity in compliance with regulatory requirements. The Company is in the initial stages of what may be a lengthy process to develop these patent applications into commercial products.
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Future revenues, costs, margins, and profits will continue to be influenced by the Company's ability to maintain its manufacturing availability and capacity together with its marketing and distribution capabilities and the requirements associated with the development of Pharma's potential prescription drugs in order to continue to compete on a national and international level. The continued expansion of Darius is dependent on the Company retaining existing independent representatives and recruiting additional active representatives both internationally and within the United States, continued conformity with government regulations, a reliable information technology system capable of supporting continued growth and continued reliable sources for product and materials to satisfy consumer demand.
COLD REMEDY
Cold-Eeze(R), a zinc gluconate glycine formulation (ZIGG(TM)), is an over-the-counter consumer product used to reduce the duration and severity of the common cold and is currently sold in lozenge, sugar-free tablet and gum form. During 2003, the Company launched a Kidz-EEZE(TM) Sore Throat Pops product.
In May 1992, the Company entered into an exclusive agreement for worldwide representation, manufacturing and marketing of Cold-Eeze(R) products in the United States. A randomized double-blind placebo-controlled study, conducted at Dartmouth College of Health Science, Hanover, New Hampshire, concluded that the lozenge formulation treatment, initiated within 48 hours of symptom onset, resulted in a significant reduction in the total duration of the common cold.
On May 22, 1992, "ZINC AND THE COMMON COLD, A CONTROLLED CLINICAL STUDY," was published in England in the "Journal of International Medical Research," Volume 20, Number 3, Pages 234-246. According to this publication, (a) flavorings used in other Zinc lozenge products (citrate, tartrate, separate, orotate, picolinate, mannitol or sorbitol) render the Zinc inactive and unavailable to the patient's nasal passages, mouth and throat where cold symptoms have to be treated, (b) this patented formulation delivers approximately 93% of the active Zinc to the mucosal surfaces and (c) the patient has the same sequence of symptoms as in the absence of treatment but goes through the phases at an accelerated rate and with reduced symptom severity.
On July 15, 1996, results of a new randomized double-blind placebo-controlled study on the common cold, which commenced at the CLEVELAND CLINIC FOUNDATION on October 3, 1994 were published. The study called "ZINC GLUCONATE LOZENGES FOR TREATING THE COMMON COLD" was completed and published in THE ANNALS OF INTERNAL MEDICINE - VOL. 125 NO. 2. Using a 13.3mg lozenge (almost half the strength of the lozenge used in the Dartmouth Study), the result still showed a 42% reduction in the duration of common cold symptoms.
In April 2002, the Company announced the statistical results of a retrospective clinical adolescent study at the Heritage School facility in Provo, Utah that suggests that Cold-Eeze(R) is also an effective means of preventing the common cold and statistically (a) lessens the number of colds an individual suffers per year, reducing the median from 1.5 to zero and (b) reduces the use of antibiotics for respiratory illnesses from 39.3% to 3.0% when Cold-Eeze(R) is administered as a first-line treatment approach to the common cold.
In April 2002, the Company was assigned a Patent Application which was filed with the Patent Office of the United States Commerce Department for the use of Cold-Eeze(R) as a prophylactic for cold prevention. The new patent application follows the results of the adolescent study at the Heritage School facility.
In May 2003, the Company announced the findings of a prospective study, conducted at the Heritage School facility in Provo, Utah, in which 178 children, ages 12 to 18 years, were given Cold-Eeze(R) lozenges both symptomatically and prophylactically from October 5, 2001 to May 30, 2002. The study found a 54% reduction in the most frequently observed cold duration. Those subjects not receiving treatment most frequently experienced symptom duration of 11 days compared with 5 days when Cold-Eeze(R) lozenges were administered, a reduction of 6 days.
The business of the Company is subject to federal and state laws and regulations adopted for the health and safety of users of the Company's products. Cold-Eeze(R) is a homeopathic remedy that is subject to regulations by various federal, state and local agencies, including the FDA and the Homeopathic Pharmacopoeia of the United States.
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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 representatives and recruit additional successful independent representatives. Additionally, the loss of key high-level distributors could negatively impact future growth and revenues;
o To continue to develop and make available new and desirable products at an acceptable cost;
o To maintain safe and reliable multiple-location sources for product and materials;
o To maintain a reliable information technology system and internet capability. The Company has expended significant resources on systems enhancements in the past and will continue to do so to ensure prompt customer response times, business continuity and reliable reporting capabilities. Any interruption to computer systems for an extended period of time could be harmful to the business;
o To execute conformity with various federal, state and local regulatory agencies both within the United States and abroad. With the growth of international business, difficulties with foreign regulatory requirements could have a significant negative impact on future growth. Any inquiries from government authorities relating to the Company's business and compliance with laws and regulations could be harmful to the Company;
o To compete with larger more mature organizations operating within the same market and to remain competitive in terms of product relevance and business opportunity;
o To successfully implement methods for progressing the direct selling philosophy internationally; and
o To plan strategically for general economic conditions.
Any or all of the above risks could result in significant reductions in revenues and profitability of the Health and Wellness segment.
CONTRACT MANUFACTURING
From October 1, 2004, this manufacturing entity, QMI, a wholly owned subsidiary of the Company, has continued to produce lozenge product along with performing such operational tasks as warehousing and shipping the Company's Cold-Eeze(R) products. In addition to that function, QMI produces a variety of hard and organic candy for sale to third party customers in addition to performing contract manufacturing activities for non-related entities. QMI is an FDA-approved facility.
ETHICAL PHARMACEUTICAL
Pharma's current activity is the development of naturally-derived prescription drugs with the goal to improve the quality of life and health of those in need through scientific research and development. Research and development will focus on the identification, isolation and direct use of active medicinal substances. One aspect of Pharma's research will focus on the combination of isolated active constituents and whole plant components. The search for new natural sources of medicinal substances will focus not only on world plants, fungi, and other natural substances, but also on an intense investigation into traditional medicinals and historic therapeutics.
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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 of treating at least one symptom of arthritis. The patent extends through April 22, 2023.
o In September 2002, the Company filed a foreign patent application entitled "Method and Composition for the Topical Treatment of Diabetic Neuropathy" in Europe and other foreign markets.
In April 2002, the Company initiated a Phase II Proof of Concept Study in France for treatment of diabetic neuropathy, which was concluded in 2003. In April 2003, the Company announced that an independently monitored analysis of the Phase II Proof of Concept Study concluded that subjects using this formulation had 67% of their symptoms improve, suggesting efficacy. In March 2004, the Company announced that it had completed its first meeting at the FDA prior to submitting the Company's Investigational New Drug ("IND") application for the relief of symptoms of diabetic symmetrical peripheral neuropathy. The FDA's pre-IND meeting programs are designed to provide sponsors with advance guidance and input on drug development programs.
In September 2003, the Company announced its intention to file for permission to study its patent pending potential treatment for psoriasis and other skin disorders. Continued testing will therefore have to be conducted under an IND application following positive preliminary results.
In December 2003, the Company announced positive test results of a preliminary independent in vitro study indicating that a test compound of the Company previously tested on the Influenza virus showed "significant virucidal activity against a strain of the Severe Acute Respiratory Syndrome (SARS) virus." In January 2004 the Company announced that it intends to conduct two further studies. The first study is intended to repeat the previously announced results, which demonstrated the compound to be 100 percent effective in preventing non-infected ferrets in close proximity to an infected ferret from becoming infected with the Influenza A virus. The second study is a dose ranging study on the test compound. Upon dosage determination and confirmation results from this forthcoming animal model study, a human proof of concept study using a virus challenge with Influenza A virus in a quarantine unit can be the next step. In January 2004, the Company also reported that its compound has shown virucidal and virustatic activity against the strain 3B of the Human Immunodeficiency Virus Type 1 (HIV-1) in an in-vitro study.
In January 2004, a broad anti-viral compound was determined to be effective in in-vitro and in-vivo studies for applications such as Influenza A&B, SARS, and Herpes Simplex 1, and since this Sialorrhea formulation is a derivative compound of the anti-viral formulation, ongoing testing for this Sialorrhea compound is being reconsidered and probably will be discontinued.
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In April 2004, the Company announced the results of a preliminary, pre-clinical animal study which measured the effect of its proprietary patent applied for formulation against ionizing (nuclear) radiation. This study determined that parenteral (injection) administration of the study compound was protective against the effects of a lethal, whole body ionizing radiation dose in a mouse model. This compound is being investigated to potentially reduce the effects of radiation exposure on humans.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
In May 2005, the Financial Accounting Standards Board ("FASB") issued Statement 154, "ACCOUNTING CHANGES AND ERROR CORRECTIONS, A REPLACEMENT OF APB OPINION NO. 20 AND FASB STATEMENT NO. 3." The standard requires retrospective application to prior periods' financial statements of a voluntary change in accounting principle unless it is deemed impracticable. The standard states that a change in method of depreciation, amortization or depletion for long-lived, non-financial assets be accounted for as a change in accounting estimate that is affected by a change in accounting principle. The standard is effective for accounting changes and corrections of errors made occurring in fiscal years beginning after December 15, 2005. The adoption of Statement of Financial Accounting Standards ("SFAS") No. 154 is not expected to have a material impact on the Company's financial position or results of operations.
In December 2004, the FASB issued Statement 153,"EXCHANGES OF NONMONETARY ASSETS, AN AMENDMENT OF APB OPINION NO.29." The standard is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged and eliminates the exception under APB Opinion No. 29 for an exchange of similar productive assets and replaces it with an exception for exchanges of nonmonetary assets that do not have commercial substance. The standard is effective for nonmonetary exchanges occurring in fiscal periods beginning after June 15, 2005. The adoption of SFAS No. 153 is not expected to have a material impact on the Company's financial position or results of operations.
In December 2004, the FASB issued Statement 123 (revised 2004),"SHARE-BASED PAYMENT." The standard eliminates the disclosure-only election under the prior SFAS 123 and requires the recognition of compensation expense for stock options and other forms of equity compensation based on the fair value of the instruments on the date of grant. The standard is effective for fiscal years beginning after June 15, 2005.
CRITICAL ACCOUNTING POLICIES
As previously described, the Company is engaged in the development, manufacturing, and marketing of health and homeopathic products that are being offered to the general public and is also involved in the research and development of potential prescription products. Certain key accounting policies that may affect the results of the Company are the timing of revenue recognition and sales incentives, particularly co-operative advertising; the classification of royalties and commissions; the classification of advertising expenses; and the fact that all research and development costs are expensed as incurred. Note 1, Organization and Business, describes the Company's other significant accounting policies.
REVENUE RECOGNITION
Sales are recognized at the time ownership is transferred to the customer, which for the Cold Remedy segment is the time the shipment is received by the customer and for both the Health and Wellness segment and the Contract Manufacturing segment, when the product is shipped to the customer. Sales returns and allowances are provided for in the period that the related sales are recorded. Provisions for these reserves are based on historical experience. The 2005 and 2004 reserve balances include a returns provision at June 30, 2005 and December 31, 2004 of approximately $344,000 and $626,000, respectively, in the event of future product returns following the discontinuation of the Cold-Eeze(R) Cold Remedy Nasal Spray product in September 2004.
ADVERTISING
Advertising costs are expensed within the period in which they are utilized. Advertising expense is comprised of media advertising, presented as part of sales and marketing expense; co-operative advertising, which is accounted for as a deduction from sales; and bonus product, which is accounted for as part of cost of sales. Advertising costs incurred for the three month periods ended June 30, 2005 and 2004 were $812,497 and $289,638, respectively; the six month costs for the periods ended June 30, 2005 and 2004 were $2,507,330 and $1,589,755, respectively. Included in prepaid expenses and other current assets was $59,016 and $41,375 at June 30, 2005 and December 31, 2004, respectively, relating to prepaid advertising expenses.
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RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations in the period incurred. Expenditures for the three month periods ended June 30, 2005 and 2004 were $840,659 and $820,847, respectively; the six month costs for the periods ended June 30, 2005 and 2004 were $1,908,962 and $1,767,849, respectively. Principally, research and development costs are related to Pharma's study activities and costs associated with Cold-Eeze(R) products.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2005 COMPARED WITH THREE MONTHS ENDED JUNE 30, 2004
Net sales for the three month period ended June 30, 2005 were $8,844,173, reflecting an increase of $1,942,991 over the net sales of $6,901,182 for the comparable three month period ended June 30, 2004. The Cold Remedy segment reported net sales in the 2005 period of $2,140,905, an increase of $570,824, or 36.4%, over the comparable 2004 period of $1,570,081. The Health and Wellness segment reported net sales in the 2005 period of $5,337,573, an increase of $6,472, or 0.1%, over the net sales of $5,331,101 for the comparable 2004 period. The Contract Manufacturing segment reported net sales of $1,365,695 in the 2005 period with no comparable amount in the 2004 period as this segment commenced business as a part of The Quigley Corporation on October 1, 2004.
Net sales of the Cold Remedy segment were favorably affected by the prolonged nature of the recent cold season, increased consumer demand and increased household penetration. In addition, the Company continued to generate increased sales and greater market penetration for the Cold-Eeze(R) products due to continued product support and promotion.
The Health and Wellness segment's net sales decreased in the 2005 period as a result of a decline in the number of active domestic independent representatives. This decline was partially offset by an increase in European sales of 39.7% over the 2004 comparable period.
Cost of sales as a percentage of net sales for the three months ended June 30, 2005 was 65.7% compared to 59.8% for the comparable 2004 period, an increase of 5.9%. This increase was primarily due to the provision for obsolete product and the lower gross profit margin attributable to the contract manufacturing segment.
Sales and marketing expense for the three month period ended June 30, 2005 were $1,066,759, an increase of $232,285 over the comparable 2004 period amount of $834,474. The increase was primarily due to increased media advertising in the 2005 period in support of the Cold-Eeze(R) products and increased costs associated with sales growth.
General and administration costs for the three month period ended June 30, 2005 was $2,986,507 compared to $2,054,741 during the 2004 period, an increase of $931,766 between the periods. The increase in 2005 was primarily due to increased payroll costs for the period and 2005 costs associated with the contract manufacturing segment for which there are no comparable 2004 costs as this segment commenced business as a part of the Company on October 1, 2004.
Research and development costs during the three months ended June 30, 2005 were $840,659 compared to $820,847 during the 2004 comparable period, reflecting an increase in 2005 of $19,812, primarily as a result of increased Pharma segment costs and reduced study activity related to the Cold-Eeze(R) products.
SIX MONTHS ENDED JUNE 30, 2005 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2004
Net sales for the six month period ended June 30, 2005 were $20,597,443, reflecting an increase of $4,090,644 over the net sales of $16,506,799 for the comparable six month period ended June 30, 2004. The Cold Remedy segment reported net sales in 2005 of $7,887,546, an increase of $2,203,873, or 38.8%, over the comparable 2004 period of $5,683,673. The Health and Wellness segment reported net sales in 2005 of $10,333,578, a reduction of $489,548, or 4.5%, over the net sales of $10,823,126 for the comparable 2004 period. The Contract Manufacturing segment reported net sales of $2,376,319 in the 2005 period with no comparable amount in the 2004 period as this segment commenced business as a part of The Quigley Corporation on October 1, 2004.
Net sales of the Cold Remedy segment were favorably affected by the prolonged nature of the recent cold season, increased consumer demand and increased . .
mjm2005
18 years ago
Form 10-Q for QUIGLEY CORP
6-May-2005
Quarterly Report
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Report contains forward-looking statements. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in these forward-looking statements. Factors that might cause such a difference include, but are not limited to, management of growth, competition, pricing pressures on the Company's products, industry growth and general economic conditions. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's opinions only as of the date hereof. The Company undertakes no obligation to revise or publicly release the results of any revision to these forward-looking statements.
CERTAIN RISK FACTORS
The Quigley Corporation makes no representation that the United States Food and Drug Administration or any other regulatory agency will grant an Investigational New Drug or take any other action to allow its formulations to be studied or marketed. Furthermore, no claim is made that potential medicine discussed herein is safe, effective, or approved by the Food and Drug Administration. Additionally, data that demonstrates activity or effectiveness in animals or in vitro tests do not necessarily mean such formula test compound, referenced herein, will be effective in humans. Safety and effectiveness in humans will have to be demonstrated by means of adequate and well controlled clinical studies before the clinical significance of the formula test compound is known. Readers should carefully review the risk factors described in other sections of the filing as well as in other documents the Company files from time to time with the Securities and Exchange Commission.
OVERVIEW
The Company, headquartered in Doylestown, Pennsylvania, is a leading manufacturer, marketer and distributor of a diversified range of homeopathic and health products which comprise the Cold Remedy, Health and Wellness and Contract Manufacturing segments. The Company is also involved in the research and development of potential prescription products that comprise the Ethical Pharmaceutical segment.
The Company's business is the manufacture and distribution of cold remedy products to the consumer through the over-the-counter marketplace together with the sale of proprietary health and wellness products through its direct selling subsidiary. One of the Company's key products in its Cold Remedy segment is Cold-Eeze(R), a zinc gluconate glycine product proven in two double-blind clinical studies to reduce the duration and severity of the common cold symptoms by nearly half. Cold-Eeze(R) is now an established product in the health care and cold remedy market. Effective October 1, 2004, the Company acquired substantially all of the assets of JoEl, Inc., the previous manufacturer of the Cold-Eeze(R) lozenge product. This manufacturing entity, now called Quigley Manufacturing Inc. ("QMI"), a wholly owned subsidiary of the Company, will continue to produce lozenge product along with performing such operational tasks as warehousing and shipping the Company's Cold-Eeze(R) products. In addition, QMI produces a variety of hard and organic candy for sale to third party customers in addition to performing contract manufacturing activities for non-related entities. The Cold-Eeze(R) products reported a strong sales performance in the first quarter of 2005 as a result of a prolonged cough/cold season, increased consumer demand and increased household penetration. The presence of QMI in 2005 contributed net sales of approximately one million dollars to first quarter net sales.
Darius International Inc. ("Darius"), the Health and Wellness segment, a wholly owned subsidiary of the Company, was formed in January 2000 to introduce new products to the marketplace through a network of independent distributors. Darius is a direct selling organization specializing in proprietary health and wellness products. The formation of Darius has provided diversification to the Company in both the method of product distribution and the broader range of products available to the marketplace, serving as a balance to the seasonal revenue cycles of the Cold-Eeze(R) branded products. This segment's 2005 net sales decreased over the comparable 2004 period due to a decline in the number of active domestic independent representatives; however, international sales activity improved in the 2005 period.
In January 2001, the Company formed an Ethical Pharmaceutical segment, Quigley Pharma Inc. ("Pharma"), that is under the direction of its Executive Vice President and Chairman of its Medical Advisory Committee. Pharma was formed for the purpose of developing naturally derived prescription drugs, cosmeceuticals, and dietary supplements. Pharma is currently undergoing research and development activity in compliance with regulatory requirements. The Company is in the
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initial stages of what may be a lengthy process to develop these patent applications into commercial products.
Future revenues, costs, margins, and profits will continue to be influenced by the Company's ability to maintain its manufacturing availability and capacity together with its marketing and distribution capabilities and the requirements associated with the development of Pharma's potential prescription drugs in order to continue to compete on a national and international level. The continued expansion of Darius is dependent on the Company retaining existing independent representatives and recruiting additional active representatives both internationally and within the United States, continued conformity with government regulations, a reliable information technology system capable of supporting continued growth and continued reliable sources for product and materials to satisfy consumer demand.
COLD REMEDY
Cold-Eeze(R), a zinc gluconate glycine formulation (ZIGG(TM)), is an over-the-counter consumer product used to reduce tHE duration and severity of the common cold and is currently sold in lozenge, sugar-free tablet and gum form. During 2003, the Company launched a Kidz-EEZE(TM) Sore Throat Pops product.
In May 1992, the Company entered into an exclusive agreement for worldwide representation, manufacturing and marketing of Cold-Eeze(R) products in the United States. A randomized double-blind placebo-controlled study, conducted at Dartmouth College of Health Science, Hanover, New Hampshire, concluded that the lozenge formulation treatment, initiated within 48 hours of symptom onset, resulted in a significant reduction in the total duration of the common cold.
On May 22, 1992, "ZINC AND THE COMMON COLD, A CONTROLLED CLINICAL STUDY," was published in England in the "Journal of International Medical Research," Volume 20, Number 3, Pages 234-246. According to this publication, (a) flavorings used in other Zinc lozenge products (citrate, tartrate, separate, orotate, picolinate, mannitol or sorbitol) render the Zinc inactive and unavailable to the patient's nasal passages, mouth and throat where cold symptoms have to be treated, (b) this patented formulation delivers approximately 93% of the active Zinc to the mucosal surfaces and (c) the patient has the same sequence of symptoms as in the absence of treatment but goes through the phases at an accelerated rate and with reduced symptom severity.
On July 15, 1996, results of a new randomized double-blind placebo-controlled study on the common cold, which commenced at the CLEVELAND CLINIC FOUNDATION on October 3, 1994 were published. The study called "ZINC GLUCONATE LOZENGES FOR TREATING THE COMMON COLD" was completed and published in THE ANNALS OF INTERNAL MEDICINE - VOL. 125 NO. 2. Using a 13.3mg lozenge (almost half the strength of the lozenge used in the Dartmouth Study), the result still showed a 42% reduction in the duration of common cold symptoms.
In April 2002, the Company announced the statistical results of a retrospective clinical adolescent study at the Heritage School facility in Provo, Utah that suggests that Cold-Eeze(R) is also an effective means of preventing the common cold and statistically (a) lessens the number of colds an individual suffers per year, reducing the median from 1.5 to zero and (b) reduces the use of antibiotics for respiratory illnesses from 39.3% to 3.0% when Cold-Eeze(R) is administered as a first-line treatment approach to the common cold.
In April 2002, the Company was assigned a Patent Application which was filed with the Patent Office of the United States Commerce Department for the use of Cold-Eeze(R) as a prophylactic for cold prevention. The new patent application follows the results of the adolescent study at the Heritage School facility.
In May 2003, the Company announced the findings of a prospective study, conducted at the Heritage School facility in Provo, Utah, in which 178 children, ages 12 to 18 years, were given Cold-Eeze(R) lozenges both symptomatically and prophylactically from October 5, 2001 to May 30, 2002. The study found a 54% reduction in the most frequently observed cold duration. Those subjects not receiving treatment most frequently experienced symptom duration of 11 days compared with 5 days when Cold-Eeze(R) lozenges were administered, a reduction of 6 days.
The business of the Company is subject to federal and state laws and regulations adopted for the health and safety of users of the Company's products. Cold-Eeze(R) is a homeopathic remedy that is subject to regulations by various federal, state and local agencies, including the United States Food and Drug Administration ("FDA") and the Homeopathic Pharmacopoeia of the United States.
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HEALTH AND WELLNESS
Darius, through Innerlight Inc., its wholly owned subsidiary, is a direct selling company specializing in the development and distribution of proprietary health and wellness products, including herbal vitamins and dietary supplements for the human condition, primarily within the United States and since the second quarter of 2003, internationally. During the fourth quarter of 2004, Darius launched an exclusive skin care line under the Beverly Sassoon brand name to diversify this segment's product range.
The continued success of this segment is dependent, among other things, on the Company's ability:
o To maintain existing independent representatives and recruit additional successful independent representatives. Additionally, the loss of key high-level distributors could negatively impact future growth and revenues;
o To continue to develop and make available new and desirable products at an acceptable cost;
o To maintain safe and reliable multiple-location sources for product and materials;
o To maintain a reliable information technology system and internet capability. The Company has expended significant resources on systems enhancements in the past and will continue to do so to ensure prompt customer response times, business continuity and reliable reporting capabilities. Any interruption to computer systems for an extended period of time could be harmful to the business;
o To execute conformity with various federal, state and local regulatory agencies both within the United States and abroad. With the growth of international business, difficulties with foreign regulatory requirements could have a significant negative impact on future growth. Any inquiries from government authorities relating to the Company's business and compliance with laws and regulations could be harmful to the Company;
o To compete with larger more mature organizations operating within the same market and to remain competitive in terms of product relevance and business opportunity;
o To successfully implement methods for progressing the direct selling philosophy internationally; and
o To plan strategically for general economic conditions.
Any or all of the above risks could result in significant reductions in revenues and profitability of the Health and Wellness segment.
CONTRACT MANUFACTURING
From October 1, 2004, this manufacturing entity, now called Quigley Manufacturing Inc. ("QMI"), a wholly owned subsidiary of the Company, has continued to produce lozenge product along with performing such operational tasks as warehousing and shipping the Company's Cold-Eeze(R) products. In addition to that function, QMI produces a variety of hard and organic candy for sale to third party customers in addition to performing contract manufacturing activities for non-related entities. QMI is an FDA-approved facility.
ETHICAL PHARMACEUTICAL
Pharma's current activity is the development of naturally-derived prescription drugs with the goal to improve the quality of life and health of those in need through scientific research and development. Research and development will focus on the identification, isolation and direct use of active medicinal substances. One aspect of Pharma's research will focus on the combination of isolated active constituents and whole plant components. The search for new natural sources of medicinal substances will focus not only on world plants, fungi, and other natural substances, but also on an intense investigation into traditional medicinals and historic therapeutics.
The pre-clinical development, clinical trials, product manufacturing and marketing of Pharma's potential new products are subject to federal and state regulation in the United States and other countries. Obtaining FDA regulatory approval for these pharmaceutical products can require substantial resources and
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take several years. The length of this process depends on the type, complexity and novelty of the product and the nature of the disease or other indications to be treated. If the Company cannot obtain regulatory approval of these new products in a timely manner or if the patents are not granted or if the patents are subsequently challenged, these possible events could have a material effect on the business and financial condition of the Company. The strength of the Company's patent position may be important to its long-term success. There can be no assurance that these patents and patent applications will effectively protect the Company's products from duplication by others.
The areas of focus are:
o A Patent (No. 6,555,573 B2) entitled "Method and Composition for the Topical Treatment of Diabetic Neuropathy." The patent extends through March 27, 2021.
o A Patent (No. 6,592,896 B2) entitled "Medicinal Composition and Method of Using It" (for Treatment of Sialorrhea and other Disorders) for a product to relieve sialorrhea (drooling) in patients suffering from Amyotrophic Lateral Sclerosis (ALS), otherwise known as Lou Gehrig's Disease. The patent extends through August 6, 2021.
o A Patent (No. 6,596,313 B2) entitled "Nutritional Supplement and Method of Using It" for a product to relieve sialorrhea (drooling) in patients suffering from Amyotrophic Lateral Sclerosis (ALS), otherwise known as Lou Gehrig's Disease. The patent extends through April 15, 2022.
o A Patent (No. 6,753,325 B2) entitled "Composition and Method for Prevention, Reduction and Treatment of Radiation Dermatitis," a composition for preventing, reducing or treating radiation dermatitis. The patent extends through November 5, 2021.
o A Patent (No. 6,827,945 B2) entitled "Nutritional Supplement and Method of Using It" for a method of treating at least one symptom of arthritis. The patent extends through April 22, 2023.
o In September 2002, the Company filed a foreign patent application entitled "Method and Composition for the Topical Treatment of Diabetic Neuropathy" in Europe and other foreign markets.
In April 2002, the Company initiated a Phase II Proof of Concept Study in France for treatment of diabetic neuropathy, which was concluded in 2003. In April 2003, the Company announced that an independently monitored analysis of the Phase II Proof of Concept Study concluded that subjects using this formulation had 67% of their symptoms improve, suggesting efficacy. In March 2004, the Company announced that it had completed its first meeting at the FDA prior to submitting the Company's Investigational New Drug ("IND") application for the relief of symptoms of diabetic symmetrical peripheral neuropathy. The FDA's pre-IND meeting programs are designed to provide sponsors with advance guidance and input on drug development programs.
In September 2003, the Company announced its intention to file for permission to study its patent pending potential treatment for psoriasis and other skin disorders. Continued testing will therefore have to be conducted under an IND application following positive preliminary results.
In December 2003, the Company announced positive test results of a preliminary independent in vitro study indicating that a test compound of the Company previously tested on the Influenza virus showed "significant virucidal activity against a strain of the Severe Acute Respiratory Syndrome (SARS) virus." In January 2004 the Company announced that it intends to conduct two further studies. The first study is intended to repeat the previously announced results, which demonstrated the compound to be 100 percent effective in preventing non-infected ferrets in close proximity to an infected ferret from becoming infected with the Influenza A virus. The second study is a dose ranging study on the test compound. Upon dosage determination and confirmation results from this forthcoming animal model study, a human proof of concept study using a virus challenge with Influenza A virus in a quarantine unit can be the next step. In January 2004, the Company also reported that its compound has shown virucidal and virustatic activity against the strain 3B of the Human Immunodeficiency Virus Type 1 (HIV-1) in an in-vitro study.
In January 2004, a broad anti-viral compound was determined to be effective in in-vitro and in-vivo studies for applications such as Influenza A&B, SARS, and Herpes Simplex 1, and since this Sialorrhea formulation is a derivative compound of the anti-viral formulation, ongoing testing for this Sialorrhea compound is being reconsidered and probably will be discontinued.
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In April 2004, the Company announced the results of a preliminary, pre-clinical animal study which measured the effect of its proprietary patent applied for formulation against ionizing (nuclear) radiation. This study determined that parenteral (injection) administration of the study compound was protective against the effects of a lethal, whole body ionizing radiation dose in a mouse model. This compound is being investigated to potentially reduce the effects of radiation exposure on humans.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB") issued Statement No. 123 (revised 2004), Share-Based Payment (Statement 123(R)), which replaces Statement No. 123, "Accounting for Stock-Based Compensation," and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees." Statement 123 (R) requires all companies to measure compensation cost for all share-based payments (including employee stock options) at fair value and recognize the cost in the financial statements. The pro forma disclosures previously permitted under Statement 123 will no longer be an alternative to financial statement recognition. This statement applies to all awards granted after the date of adoption and to awards modified, repurchased, or cancelled after that date. The cumulative effect of initially applying Statement 123(R), if any, will be recognized as of the date of adoption.
In April 2005, the SEC delayed the effective date of SFAS 123(R) to fiscal years beginning after June 15, 2005. As a result SFAS 123(R) will be effective for the Company beginning in the first quarter of 2006. The Company has not completed its evaluation of the impact that adopting SFAS 123(R) will have on its financial statements.
CRITICAL ACCOUNTING POLICIES
As previously described, the Company is engaged in the development, manufacturing, and marketing of health and homeopathic products that are being offered to the general public and is also involved in the research and development of potential prescription products. Certain key accounting policies that may affect the results of the Company are the timing of revenue recognition and sales incentives, particularly co-operative advertising; the classification of royalties and commissions; the classification of advertising expenses; and the fact that all research and development costs are expensed as incurred. Note 1, Organization and Business, describes the Company's other significant accounting policies.
REVENUE RECOGNITION
Sales are recognized at the time ownership is transferred to the customer, which for the Cold Remedy segment is the time the shipment is received by the customer and for both the Health and Wellness segment and the Contract Manufacturing segment, when the product is shipped to the customer. Sales returns and allowances are provided for in the period that the related sales are recorded. Provisions for these reserves are based on historical experience. The 2005 and 2004 reserve balances include a returns provision at March 31, 2005 and December 31, 2004 of approximately $542,000 and $626,000, respectively, in the event of future product returns following the discontinuation of the Cold-Eeze(R) Cold Remedy Nasal Spray product in September 2004.
ADVERTISING
Advertising costs are expensed within the period in which they are utilized. Advertising expense is comprised of media advertising, presented as part of sales and marketing expense; co-operative advertising, which is accounted for as a deduction from sales; and bonus product, which is accounted for as part of cost of sales. Advertising costs incurred for the three month periods ended March 31, 2005 and 2004 were $1,694,832 and $1,209,572, respectively. Included in prepaid expenses and other current assets was $73,775 and $41,375 at March 31, 2005 and December 31, 2004, respectively, relating to prepaid advertising expenses.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations in the period incurred. Expenditures for the three month periods ended March 31, 2005 and 2004 were $1,068,303 and $947,002, respectively. Principally, research and development costs are related to Pharma's study activities and costs associated with Cold-Eeze(R) products.
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RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2005 COMPARED WITH THREE MONTHS ENDED MARCH 31,
2004
Net sales for the three month period ended March 31, 2005 were $11,753,270, reflecting an increase of $2,147,653 over the net sales of $9,605,617 for the comparable three month period ended March 31, 2004. The Cold Remedy segment reported net sales in 2005 of $5,746,641, an increase of $1,633,049, or 40%, over the comparable 2004 period of $4,113,592. The Health and Wellness segment reported net sales in 2005 of $4,996,005, a reduction of $496,020, or 9%, over the net sales of $5,492,025 for the comparable 2004 period. The Contract Manufacturing segment reported net sales of $1,010,624 in the 2005 period with no comparable amount in the 2004 period as this segment commenced business as a part of The Quigley Corporation on October 1, 2004.
Net sales of the Cold Remedy segment were favorably affected by the prolonged nature of the recent cold season, increased consumer demand and increased household penetration. In addition, the Company continued to generate increased sales and greater market penetration for the Cold-Eeze(R) products due to continued product support and promotion.
The Health and Wellness segment's net sales decreased in the 2005 period as a result of a decline in the number of active domestic independent representatives. This decline was partially offset by an increase in European sales of 15.8% over the 2004 comparable period.
Cost of sales as a percentage of net sales for the three months ended March 31, 2005 was 51.4% compared to 52.9% for the comparable 2004 period, a decrease of 1.5%. This decrease was primarily due to the influence of the lower cost Cold Remedy segment on the consolidated results in 2005, particularly as a result of this segment's significant net sales increase in the 2005 period. Cost of sales of the remaining segments were largely consistent between periods.
Sales and marketing expense for the three month period ended March 31, 2005 were $1,834,831, an increase of $211,765 over the comparable 2004 period amount of $1,623,066. The increase was primarily due to increased media advertising in the 2005 period in support of the Cold-Eeze(R) products.
General and administration costs for the three month period ended March 31, 2005 was $2,994,769 compared to $2,750,499 during the 2004 period, an increase of $244,270 between the periods. The increase in 2005 was primarily due to increased payroll costs for the period and 2005 costs associated with the contract manufacturing segment for which there are no comparable 2004 costs as this segment commenced business as a part of the Company on October 1, 2004.
Research and development costs during the three months ended March 31, 2005 were $1,068,303 compared to $947,002 during the 2004 comparable period, reflecting an increase in 2005 of $121,301, primarily as a result of increased Pharma segment costs and study activity related to the Cold-Eeze(R) products.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $17,902,677 and $17,852,910 at March 31, 2005 and December 31, 2004, respectively, resulting in an increase of $49,767. Changes in working capital overall have been primarily due to the following items: cash balances increased by $2,114,135; accounts receivable decreased by $3,105,618 due to seasonal fluctuations and effective cash collections; advertising liabilities decreased by $1,606,398 as a result of the seasonality of the cold remedy products and related co-operative and media advertising activity; and other current liabilities increased by $790,082 principally due to increased payroll liabilities at March 31, 2005. Total cash balances at March 31, 2005 were $16,480,576 compared to $14,366,441 at December 31, 2004. The increase in cash was due to the movements in working capital as reported. In April 2005, the Company prepaid an amount of $1.0 million against the outstanding balance on the long-term loan.
Management believes that its revised strategy to establish Cold-Eeze(R) as a recognized brand name, its broader range of products, its diversified distribution methods as it relates to the Health and Wellness business segment, adequate manufacturing capacity and growth in international sales, together with its current working capital, should provide an internal source of capital to fund the Company's business operations. In addition to anticipated funding from operations, the Company and its subsidiaries may, in the short and long term, raise capital through the issuance of equity securities to finance anticipated growth.
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