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| QGLY > SEC Filings for QGLY > Form 10-Q on 14-Aug-2009 | All Recent SEC Filings |
14-Aug-2009
Quarterly Report
Item 2.
General
The Quigley Corporation (the "Company"), headquartered in Doylestown, Pennsylvania, is a manufacturer, marketer and distributor of a diversified range of homeopathic and health products which comprise the cold remedy and contract manufacturing segments. The Company is also involved in the research and development of potential natural base health products, including, but not limited to, prescription medicines along with supplements and cosmeceuticals for human and veterinary use.
The Company's primary business is the manufacture and distribution of over-the-counter cold remedy products to consumers through national chain, regional, specialty and local retail stores. One of the Company's key products in its cold remedy segment is Cold-EEZE†, a zinc gluconate glycine product proven in clinical studies to reduce the duration and severity of the common cold symptoms by nearly half. Cold-EEZE† is an established product in the health care and cold remedy market.
The Company divides its operations into three reportable segments as follows: (i) cold remedy, whose main product is Cold-EEZE†, (ii) contract manufacturing, which is the manufacturing services provided to third party customers, and (iii) ethical pharmaceutical, currently involved in research and development activity to develop patent applications and innovations for potential pharmaceutical products. The Company manages each segment separately as a consequence of different marketing, service requirement, research and development, and distribution strategies for the respective segments.
See Note 10 to the Condensed Consolidated Financial Statements included in this report for a description of the operating results for each segment.
Recent Developments
Proxy Contest
In April 2009, a group of shareholders in the Company, including Mr. Ted Karkus,
(the "Karkus Group") filed with the Securities and Exchange Commission a
preliminary Proxy Statement proposing an alternative slate of board of directors
for the Company (the "Alternative Ballot") to the slate nominated by the
Company's incumbent Board of Directors (the "Incumbent Ballot") for vote at the
May 20, 2009 annual meeting of stockholders' ("Annual Meeting"). The reason for
the Karkus Group's Alternative Ballot was that the Karkus Group believed it was
time for a change in the Company. The Alternative Ballot indicated, among other
matters, that over the past three fiscal years, the Company's management
delivered declining revenues, declining gross and net profits (increasing net
losses), declining stockholders' equity, declining stock price, with excessive
compensation paid to the Company's management and their family members.
Stockholders of the Company were solicited by both the Company and the Karkus Group (the "Proxy Contest") to support either the Incumbent Ballot or the Alternative Ballot prior to the Company's Annual Meeting. The results were certified by the independent director of elections on June 1, 2009, showing that the Alternative ballot received more votes than the incumbent Ballot. However, due to litigation initiated by the Company, the election was contested by the Company and made subject to a Standstill Order by a District Court Judge in the United States District Court for the Eastern District of Pennsylvania. On Friday, June 12, 2009, the United States District Court for the Eastern District of Pennsylvania issued a decision and order rejecting the last of the Company's challenges to the election results of the Annual Meeting. As a consequence of this decision, the slate of directors nominated pursuant to the Alternative Ballot was elected to the Board of Directors of the Company.
On June 12, 2009, Mr. Guy Quigley, Chairman, President and Chief Executive Officer of the Company, resigned his positions with the Company. Mr. Quigley's resignation had been preceded by the resignation of Mr. Charles Phillips, formerly the Executive Vice President and Chief Operating Officer of the Company, effective May 29, 2009.
The Quigley Corporation and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations
Additionally on June 12, 2009, following the seating of the newly elected board of directors of the Company, Mr. Karkus was elected Chairman of the Board of Directors and the board elected members to its audit committee, compensation committee, and corporate governance and nominating committee. Subsequently, Mr. Karkus was appointed interim Chief Executive Officer of the Company effective June 18, 2009. Effective July 15, 2009, the Company appointed (i) Mr. Karkus as the permanent Chief Executive Officer and (ii) Mr. Robert V. Cuddihy, Jr. as the Executive Vice President and Chief Operating Officer.
As a consequence of the Proxy Contest between the Incumbent Ballot and the Alternative Ballot, for the three months ended June 30, 2009 the Company charged to operations approximately $2.4 million in costs associated with the proxy solicitation and related litigation.
Manufacturing Facility Consolidation
The Company's wholly owned subsidiary, Quigley Manufacturing, Inc. ("QMI"),
produces the Cold-EEZE® lozenge products along with performing such operational
tasks as warehousing and shipping the Company's Cold-EEZE® and other cold remedy
products. Additionally, QMI maintains a United States Food and Drug
Administration ("FDA") approved facility that engages in contract manufacturing
and distribution activities of lozenge-based products for unaffiliated third
parties. QMI also produces and sells therapeutic lozenges to whole sale and
distribution outlets. On February 2, 2009, the Company announced its intention
to close QMI's hard and organic candy production facility in Elizabethtown, PA
and consolidate its manufacturing operations at its Lebanon, PA
facility. Effective in June 2009, the QMI Elizabethtown facility was closed and
as a result QMI will evaluate opportunities to outsource the production of its
organic candy products to third party contract manufacturers. The QMI Lebanon
facility continues its production and distribution of the Cold-EEZE® brand and
other cold remedy products. Total annualized cost savings to the Company as a
result of this consolidation is estimated to be $750,000.
Research and Development
On April 30, 2009, the Company announced preliminary results that the Diabetic
Peripheral Neuropathy Phase IIb clinical study demonstrated a significant
improvement in two key measures of distal sensory nerve function in the group
treated with its investigational new drug, QR-333. The compound was applied
topically to the feet of subjects suffering from painful diabetic neuropathy and
over the course of 12 weeks, significantly improved both maximal conduction
velocity and compound sensory amplitude in the sural nerve. The mean improvement
in nerve conduction velocity exceeded the change considered by thought leaders
to be "clinically meaningful" in clinical studies. The sural nerve carries
sensation from the feet and its pathology is the fundamental cause of foot pain
and ultimately foot ulcers and amputation in some diabetic subjects.
On July 22, 2009, the Company announced the final results from its Phase IIb double-blind, placebo-controlled, study of topical compound QR-333 for the treatment of symptomatic diabetic peripheral neuropathy. The study was completed with fewer than expected evaluable patients with the final and comprehensive conclusions revealing that (i) the compound is safe and well tolerated, and (ii) there were nominal trends, but no statistical differences, between active and placebo groups for the primary and secondary endpoints measuring efficacy by (a) the reduction of pain, (b) symptomatic improvements, (c) improved quality of life and (d) improved sleep.
However, the Company is encouraged by the positive, clinical and statistically significant improvement for efficacy in sural nerve conduction velocity and amplitude unexpectedly found in a sub-set of the patient population. Those data may indicate the potential benefit of this compound as a disease modifying agent which, if validated through additional clinical trials, potentially broadens the therapeutic market opportunity. Additional clinical work would be required and future study considerations might include, a longer duration period to improve patient compliance as well as an assessment of sural nerve function and measures of distal nerve sensory thresholds in the feet to provide more detail to the potential for disease modification. There can be no assurance the Company will undertake additional clinical studies or that the results thereof would lead to a marketable product that can achieve regulatory approvals.
The Quigley Corporation and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations
A preliminary analysis of the lack of adequate primary and secondary end point data indicates that the results may have been attributed to fewer then expected evaluable patients due to a shortage of drug and a high number of patients terminated early due to a lack of compliance with application and usage protocols.
All required end of study regulatory and reporting documentation and procedures will be completed. The Company will continue to consider licensing, partnering or collaborative relationship opportunities to further the development and potential commercialization of the QR-333 candidate and other formulations.
Ethical Pharmaceutical
The current activity of the Company's wholly-owned subsidiary, Quigley Pharma
Inc. ("Pharma"), is the research and development of potential natural base
health products, including, but not limited to, prescription medicines along
with supplements and cosmeceuticals for human and veterinary use. Research and
development activities focus on the identification, isolation and direct use of
active medicinal substances. One aspect of Pharma's research focus is on the
potential synergistic benefits of combining isolated active constituents and
whole plant components. The Company searches 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. 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 its patent applications into
commercial products. The Company has invested significantly in ongoing research
and development activities.
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 operations of the Company support the current research and development expenditures of the ethical pharmaceutical segment. In addition to the funding from operations, the Company may in the short and long term raise capital through the issuance of equity securities or secure other financing resources to support such research. Such funding through equity means would result in the dilution of stockholder ownership in the Company. Should research activity progress on certain formulations, resulting expenditures may require substantial financial support and may necessitate the consideration of alternative approaches such as, licensing, joint venture, or partnership arrangements that meet the Company's long term goals and objectives. Ultimately, should internal working capital be insufficient and external funding methods or other business arrangements become unattainable, such eventualities would likely result in the deferral or abandonment of future growth and development relative to current and prospective Pharma formulations.
The Company recently engaged an independent consultant to conduct a thorough review of the entire research and development portfolio of potential products in the Pharma pipeline. The Company will wait for this review to be completed before determining the next steps in the development of products such as QR-333 and other product formulations still under development and/or testing phases.
The Quigley Corporation and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations
Certain Risk Factors
The Company makes no representation that the FDA or any other regulatory agency will grant an Investigational New Drug ("IND") or take any other action to allow its formulations to be studied or/and for any granted IND to be marketed. Furthermore, no claim is made that potential medicine discussed herein is safe, effective, or approved by the FDA. Additionally, data that demonstrates activity or effectiveness in animals or in vitro tests do not necessarily mean such formula test compound, referenced herein, will be effective in humans. Safety and effectiveness in humans will have to be demonstrated by means of adequate and well controlled clinical studies before the clinical significance of the formula test compound is known. Readers should carefully review the risk factors described in other sections of this filing as well as in other documents the Company files from time to time with the Securities and Exchange Commission.
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® 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.
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 capability and the requirements associated with the development of Pharma's potential prescription drugs and other medicinal products in order to continue to compete on a national and international level. The business development of the Company is dependent on 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.
Critical Accounting Policies
The preparation of financial statements in conformity with generally accepted accounting principles require management to make estimates and assumptions. Those estimates and assumptions affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported revenues and expenses of the Company. The Company's significant accounting policies are described in Note 2 of Notes to Condensed Consolidated Financial Statements included under Item 1 of this Part I. However, certain accounting policies are deemed "critical", as they require management's highest degree of judgment, estimates and assumptions. These accounting estimates and disclosures have been discussed with the Audit Committee of the Company's Board of Directors. A discussion of the Company's critical accounting policies, the judgments and uncertainties affecting their application and the likelihood that materially different amounts would be reported under different conditions or using different assumptions are as follows:
Sales Returns and Allowances
The Company is organized into three different but related business segments,
cold remedy, contract manufacturing and ethical pharmaceutical. When providing
for the appropriate sales returns, allowances, cash discounts and cooperative
incentive promotion costs, each segment applies a uniform and consistent method
for making certain assumptions for estimating these provisions that are
applicable to that specific segment. Traditionally, these provisions are not
material to net income in the contract manufacturing segment. The ethical
pharmaceutical segment does not have any revenues.
The Quigley Corporation and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations
The primary product in the cold remedy segment, Cold-EEZE†, has been clinically
proven 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 (i) a unique product with limited competitors,
(ii) competitively priced, (iii) promoted, (iv) unaffected for remaining
shelf-life as there is no product expiration date, and (v) monitored for
inventory levels at major customers and third-party consumption data. The
Company has recently added new products to the cold remedy segment such as
Kids-EEZE† Chest Relief, ISC-10 immune product and Organix Organic Cough and
Sore Throat Drops. Each of these new products do carry shelf-life expiration
dates for which the Company aggregates such new product market experience data
and updates its sales returns and allowances estimates accordingly.
Currently, the Company does not impose a period of time within which product may
be returned. All requests for product returns must be submitted to the Company
for pre-approval. The main components of the Company's returns policy are: (i)
the Company will accept returns that are due to damaged product that is
un-saleable and such return request activity fall within an acceptable range,
(ii) for products of the Company that have reached or exceeded designated
expiration dates, (iii) in the event that the Company discontinues a product,
the customer will have the right to return only such item that it purchased
directly from the Company. The Company will not accept return requests
pertaining to customer inventory "Overstocking" or "Resets". The Company will
only accept return requests for product in its intended package
configuration. The Company reserves the right to terminate shipment of product
to customers who have made unauthorized deductions contrary to the Company's
Return Policy or pursue other methods of reimbursement. The Company compensates
the customer for authorized returns by means of a credit applied to amounts owed
or to be owed and in the case of discontinued product only, also by way of an
exchange. The Company does not have any significant product exchange history.
At June 30, 2009 and December 31, 2008, the Company included reductions to accounts receivable for sales returns and allowances of $1,793,000 and $1,427,000, respectively, and cash discounts of $73,000 and $150,000, respectively. Additionally, current liabilities at June 30, 2009 and December 31, 2008 include $499,305 and $1,058,962, respectively, for cooperative incentive promotion costs.
Revenue
Provisions to reduce revenues for cold remedy products 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 allowance provisions for the three month periods ended June 30, 2009, and 2008 would affect net sales by approximately $28,000 and $26,000, respectively and the six month periods ended June 30, 2009 and 2008 by approximately $81,000 and $92,000. A one percent deviation for cooperative incentive promotion allowance provisions for the three month periods ended June 30, 2009 and 2008 would affect net sales by approximately $22,000 and $21,000, respectively, and the six month periods ended June 30, 2009 and 2008 by approximately $69,000 and $81,000, respectively
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 largely due to substantial research and development costs in the
Company's Ethical Pharmaceutical segment.
The Quigley Corporation and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations
Financial Condition and Results of Operations Results from Operations for the Three months Ended June 30, 2009 as Compared to the Three Months Ended June 30, 2008
Net sales for the three months ended June 30, 2009 decreased by $320,450 to $1,747,835 as compared to $2,068,285 for the three months ended June 30, 2008. For the three months ended June 30, 2009, the cold remedy segment reported net sales of $1,209,379 representing a decrease of $323,066, or 21.1%, as compared to net sales for three months ended June 30, 2008 period of $1,532,445. The contract manufacturing segment reported net sales to third party customers of $538,456 for the three months ended June 30, 2009 period as compared to $535,840 for the three months ended June 30, 2008.
The decrease in the cold remedy segment net sales reflects a market-wide decrease in consumer purchases of cold remedy products at retail as reported by a third party data provider Information Resources, Inc. ("IRI"). The decrease was also attributed to (i) historic lows in the incidence of colds by consumers and (ii) general economic weakness in the marketplace and (iii) the Company's new products have experienced lower net sales than initial estimates and may require additional advertising and promotional support. In addition to seasonal factors and weaknesses in the general market and consumer demand, the cold remedy segment sales for the three months ended June 30, 2009 period were also adversely impacted by unfavorable inventory management programs implemented by retail customers, and an increase in product return estimates due to pending product expiration dates,. The increase in estimated sales returns is principally due to the most recent new product additions which carry shelf-life expiration dates such as Kids-EEZE† Chest Relief, ISC-10 immune product and Organix Organic Cough and Sore Throat Drops. The aggregate reduction to net sales for the three month period ended June 30, 2009 as compared to the three month period ended June 30, 2008 for these three products was approximately $604,000. The Company continues to strongly promote its cold remedy products through media and in-store marketing along with direct-to-the-consumer promotional programs.
Net sales of the contract manufacturing segment reported a small increase of $2,616 for the three months ended June 30, 2009 as compared to the three months ended June 30, 2008. Contract manufacturing is performed for non-related third party entities to produce lozenge-based products. Fluctuations in net sales from period-to-period are a consequence of the manufacturing schedules required by its customers.
Cost of sales for the three months ended June 30, 2009 were $1,456,763 as compared to $1,170,379 for the three months ended June 30, 2008. Gross margin for the three months ended June 30, 2009 was 16.7% as compared to 43.4% for the three months ended June 30, 2008, a decrease of 26.7%. The cold remedy segment's gross margin for the three months ended June 30, 2009 was 34.1% compared to 59.8% for the three months ended June 30, 2008, a decrease of 25.7%. The decreased cold remedy gross margin of 25.7% for the three months ended June 30, 2009 as compared to the comparable period in 2008, was principally due to the adverse impact to net sales of the unfavorable retail inventory management programs implemented by retail customers and an increase in product return estimates for non-Cold-EEZE† products due to pending product expiration dates along with charges related to obsolete inventory.
The contract manufacturing segment contributed a negative impact to 2009 cost of sales, influenced by lower production volume and fixed production costs which are factors of the seasonality of the Company's sales activities.
Sales and marketing expense for the three months ended June 30, 2009 increased by $225,812 to $792,085, as compared to $566,273 for the three months ended June 30, 2008. The increase in sales and marketing expense was principally due to an increase in expenditures associated with product promotions and advertising.
The Quigley Corporation and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations
General and administration expense for the three months ended June 30, 2009 increased $1,712,623 to $3,742,508 as compared to $2,029,885 for the three months ended June 30, 2008. The increase in general and administration expense for the three months ended June 30, 2009 was principally due to the net effects of (i) an increase in stock promotion cost of approximately $2,400,000, relating to the Proxy Contest, offset by (ii) a decrease in personnel costs of approximately $376,798, principally as a consequence of a decrease in executive salaries and bonuses along with a decrease in legal costs of $173,969.
Research and development costs during the three months ended June 30, 2009 were $385,832 compared to $1,264,824 for the three months ended June 30, 2008. The decrease of $878,992 in research and development costs for the three months ended June 30, 2009 period as compared to the three months ended June 30, 2008 was due to the completion of the Phase IIb study for QR-333 Diabetic Peripheral Neuropathy in November 2008 and a subsequent slowdown in related 2009 spending pending the availability of the final results of the study (see above for the results of the study). Research and development costs are principally related to Pharma's study activities and costs associated with the development of potential ethical pharmaceuticals and other related products.
Interest and other income for the three months ended June 30, 2009 were $4,433 as compared to $84,380 for the three months ended June 30, 2008. The decrease of $79,947 for the three months ended June 30, 2009 as compared to the three months ended June 30, 2008 was due to the decrease in deposit interest rates and reducing bank balances during the three-month period.
As a result of the above, the net loss for the three month period ended June 30, 2009, was $4,624,920, or ($0.36) per share, as compared to a net loss of $2,878,696, or ($0.22) for the three months ended June 30, 2008.
Financial Condition and Results of Operations Results from Operations for the Six months Ended June 30, 2009 as Compared to the Six Months Ended June 30, 2008
Net sales for the six month period ended June 30, 2009 decreased $1,638,938 to $5,734,381 as compared to net sales of $7,373,319 for the six months ended June 30, 2008. The cold remedy segment reported net sales in the six months ended June 30, 2009 of $4,541,437, a decrease of $1,703,142, or 27.3%, as compared to . . .
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