UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-QSB
(Mark One)
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarter ended June 30, 1996
or
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______ to _______
Commission File number 0-27646
Gum Tech International, Inc.
---------------------------------------------------------------
(Exact name of small business issuer as specified in it charter)
Utah 87-0482806
---------------------------- ---------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
4205 North Seventh Avenue
Suite 300
Phoenix, AZ 85013-3080
(Address of principal executive offices)
(602) 277-0606
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No __
There are 4,876,740 shares of the registrant's common stock, no par value
outstanding as of June 30, 1996.
<PAGE>
GUM TECH INTERNATIONAL, INC.
FORM 10-QSB
INDEX
Part I Financial Information Page
Item 1. Condensed Balance Sheet as of
June 30, 1996 1
Condensed Statements of Operations
for the three months ended June 30, 1996
and 1995 3
Condensed Statements of Operations
for the six months ended June 30, 1996
and 1995 4
Condensed Statements of Cash Flows
for the six months ended June 30, 1996
and 1995 5
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
Part II Other Information and Signatures 11
<PAGE>
GUM TECH INTERNATIONAL, INC.
CONDENSED BALANCE SHEET
June 30, 1996
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $3,317,729
Accounts receivable, net of allowance
for doubtful accounts of $10,555 1,222,794
Inventories 1,459,880
Deferred income taxes 215,412
Prepaid expenses and other 141,213
----------
Total Current Assets 6,357,028
----------
Property and Equipment, at cost:
Machinery and production equipment 3,228,515
Office furniture and equipment 79,097
Leasehold improvements 185,778
----------
Total Property and Equipment 3,493,390
Less accumulated depreciation (203,786)
----------
Net Property and Equipment 3,289,604
----------
Other Assets:
Deposits 172,530
Notes receivable 264,931
Restricted Cash 102,758
Other 142,203
----------
Total Other Assets 682,422
----------
Total Assets $10,329,054
===========
The accompanying notes are an integral part of
these condensed financial statements.
1
<PAGE>
GUM TECH INTERNATIONAL, INC.
CONDENSED BALANCE SHEET
June 30, 1996
(Continued)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable $ 535,036
Current portion of long-term debt 221,749
-----------
Total Current Liabilities 756,785
-----------
Long Term Debt, net of current portion above:
Equipment Lease Obligations 1,594,160
-----------
Total Long Term Debt 1,594,160
-----------
Commitments and Contingencies -
Stockholders' Equity:
Preferred stock: no par value, 1,000,000
authorized, none issued or outstanding -
Common stock: no par value, 10,000,000
shares authorized, 4,876,740 shares
issued and outstanding 7,851,060
Retained Earnings 127,049
-----------
Total Stockholders' Equity 7,978,109
-----------
Total Liabilities and Stockholders' Equity $10,329,054
===========
The accompanying notes are an integral part of
these condensed financial statements.
2
<PAGE>
GUM TECH INTERNATIONAL, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended June 30,
-----------------------------------
1996 1995
-----------------------------------
Net Sales $1,153,894 $1,041,256
Cost of Sales 543,879 635,048
---------- ----------
Gross Profit 610,015 406,208
Operating Expenses 994,072 151,962
Research and Development 18,978 12,392
---------- ----------
Income (Loss) From Operations (403,035) 241,854
---------- ----------
Other Income (Expense):
Interest and Other Income 32,462 23,920
Interest Expense (58,968) (20,191)
---------- ----------
Total Other Income (Expense) (26,506) 3,729
---------- ----------
Income (Loss) Before Provision For
Income Taxes (429,541) 245,583
Provision for income taxes (90,729) 93,906
----------- ----------
Net Income (Loss) $(338,812) $151,677
=========== ==========
Net Income (Loss) Per Share of Common Stock:
Primary:
Weighted Average Number of
Common Shares Outstanding 4,466,630 4,392,658
=========== ==========
Net Income (Loss) Per Share of
Common Stock $(0.08) $0.03
=========== ==========
Diluted:
Weighted Average Number of
Common Shares Outstanding 4,466,630 4,392,658
=========== ==========
Net Income (Loss) Per Share of
Common Stock $(0.08) $0.03
=========== ==========
The accompanying notes are an integral part of
these condensed financial statements.
3
<PAGE>
GUM TECH INTERNATIONAL, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Six months ended June 30,
--------------------------------------
1996 1995
--------------------------------------
Net Sales $2,044,531 $1,732,825
Cost of Sales 1,069,832 967,760
----------- ----------
Gross Profit 974,699 765,065
Operating Expenses 1,624,415 352,198
Research and Development 50,773 12,392
----------- ----------
Income (Loss) From Operations (700,489) 400,475
----------- ----------
Other Income (Expense):
Interest and Other Income 45,733 26,460
Income Interest (137,611) (25,416)
----------- ----------
Total Other Income (Expense) (91,878) 1,044
----------- ----------
Income (Loss)Before Provision
For Income Taxes (792,367) 401,519
Provision for income taxes (213,343) 143,006
----------- ----------
Net Income (Loss) $(579,024) $258,513
========== ==========
Net Income (Loss) Per Share of Common Stock:
Primary:
Weighted Average Number of
Common Shares Outstanding 3,974,103 4,392,658
=========== ==========
Net Income (Loss) Per
Share ofCommon Stock $(0.15) $0.06
=========== ==========
Diluted:
Weighted Average Number of
Common Shares Outstanding 3,974,103 4,392,658
============ ==========
Net Income (Loss) Per
Share of Common Stock $(0.15) $0.06
============ ==========
The accompanying notes are an integral part of
these condensed financial statements.
4
<PAGE>
GUM TECH INTERNATIONAL, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended June 30,
---------------------------------
1996 1995
---------------------------------
Cash Flows From Operating Activities:
Net income (loss) $(579,024) $258,513
Adjustments to reconcile net income
(loss) to cash (used) by operating
activities:
Depreciation 183,512 4,067
Deferred income taxes (215,412) -
Changes in assets and liabilities:
(Increase) in accounts receivable (287,463) (600,861)
(Increase) in inventories (561,215) (827,067)
(Increase) in prepaid expenses
and other (96,725) (6,206)
(Increase) in deposits
and other (175,245) (57,046)
Increase in accounts payable and
accrued expenses 3,441 246,992
Increase (Decrease) in
customer deposits (36,959) 130,200
----------- ----------
Net Cash (Used) By Operating Activities (1,765,090) (851,408)
----------- ----------
Cash Flows From Investing Activities:
Capital expenditures (614,056) (27,582)
Deposits on purchases of equipment - (781,055)
Increase in notes receivable (150,000) (100,000)
Receipt principal on notes receivable - 100,000
----------- ----------
Net Cash (Used) By Investing Activities (764,056) (808,637)
----------- ----------
Cash Flows From Financing Activities:
Proceeds from borrowing 706,397 1,400,000
Principal payments on notes payable (2,485,042) (41,742)
Issuance of common stock 8,400,000 756,000
Cash dividends - (37,449)
Offering costs incurred (1,277,807) (184,311)
----------- ----------
Net Cash Provided By
Financing Activities 5,343,548 1,892,498
----------- ----------
Net Increase in Cash and
Cash Equivalents 2,814,402 232,453
Cash and Cash Equivalents at
Beginning of Period 503,327 25,231
----------- ----------
Cash and Cash Equivalents at
End of Period $3,317,729 $257,684
=========== ==========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the perid for:
Interest $ 244,973 $ 3,191
Income taxes 23,165 106,052
Supplemental Disclosure of Non Cash Investing
and Financing Activities:
Capital lease obligation incurred
for new equipment $1,194,554 $ -
The accompanying notes are an integral part of
these condensed financial statements.
5
<PAGE>
GUM TECH INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
The accompanying financial information of the Company is prepared in
accordance with the rules prescribed for filing condensed interim financial
statements and, accordingly, does not include all disclosures that may be
necessary for complete financial statements prepared in accordance with
generally accepted accounting principles. The disclosures presented are
sufficient, in management's opinion, to make the interim information presented
not misleading. All adjustments, consisting of normal recurring adjustments,
which are necessary so as to make the interim information not misleading, have
been made. Results of operations for the six months ended June 30, 1996 are not
necessarily indicative of results of operations that may be expected for the
year ending December 31, 1996. It is recommended that this financial information
be read with the complete financial statements included in the Company's
Prospectus dated April 24, 1996 previously filed with the Securities and
Exchange Commission.
Net income (loss) per share of common stock is computed using the weighted
average number of common shares and common share equivalents outstanding during
the periods presented. Common share equivalents result from outstanding options
and warrants to purchase common stock. Pursuant to the requirements of the
Securities and Exchange Commission, common shares issued by the Company during
the twelve months immediately preceding the initial public offering, plus the
number of shares usable upon exercise of stock options granted during this
period, have been included in the calculation of the shares used in computing
net income (loss) per share as if they were outstanding for all periods
presented (using the treasury stock method and the estimated public offering
price in calculating equivalent shares).
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The Company was organized in 1991 to develop, market and distribute
specialty chewing gum products. The Company's first chewing gum product included
a natural caffeine substance marketed to runners and other exercise enthusiasts
as a source of energy and carbohydrates. In 1994 and 1995, the Company raised
funds through debt and equity financings which were used to establish a new
management team, develop additional chewing gum products, build inventories and
purchase chewing gum manufacturing equipment for the Company's 28,000 square
foot manufacturing facility which commenced operations in late March, 1996. The
facility has 49 employees and is expected by the end of 1996 to produce most of
the Company's chewing gum products.
Results of Operations for the Three Months Ended June 30, 1996 Compared to the
Three Months Ended June 30, 1995
Net Sales. Net sales increased by $112,638 or 11%, to $1,153,894 for the
three months ended June 30, 1996 compared to $1,041,256 for the three months
ended June 30, 1995. The increase in sales was a result of new products being
introduced into the market place and an increased distribution network to the
mass market, drug and food store markets.
Cost of Sales. Cost of sales decreased 14% to $543,879 or 47% of net sales
for the three months ended June 30, 1996, compared to $635,048 or 61% of net
sales for the same period in 1995. The primary reasons are the Company is now
selling directly to mass market, food and drug stores instead of through our
largest distributor. Cost of sales are expected to continue to decline as the
manufacturing plant becomes more efficient.
Gross Profit. Gross profit increased by 14% to $610,015 or 53% of net sales
for the three months ended June 30, 1996, compared to $406,208 or 39% of net
sales for the same period in 1995.
Operating Expenses. Operating expenses were $994,072 an increase of
$842,110 for the three months ended June 30, 1996 compared to the same period in
1995. Approximately $431,000 of these operating expenses were directly
attributable to the operations of the manufacturing plant (See table below).
Moreover, because the manufacturing facility continues to operate at only a
small percentage of its capacity, revenues were not sufficient to offset the
manufacturing operating expenses. Factors contributing to an increase in
non-manufacturing operating expenses were related to advertising ($230,985),
labor ($127,797), professional fees for legal, accounting, art/production, and
general consulting ($126,827), insurance ($62,906), and trade shows ($31,911).
7
<PAGE>
The following table sets forth certain expenses related only to the
operations of the Company's manufacturing facility:
Depreciation Expense $115,084
Rent 32,664
Utilities 20,961
Insurance 25,977
Maintenance & Repairs 11,675
Labor 141,968
Interest Expense on Equipment 42,805
Other Expenses 39,910
--------
Total $431,044
Research and Development. Research and development expenditures were
$18,978 for the three months ended June 30, 1996, compared to $12,392 for the
same period in 1995. The majority of these costs were related to the development
of three "over the counter" products and various private label endeavors.
Interest and Other Income and Interest Expense. Interest and other income
was $32,462, an increase of $8,542 primarily as a result of an increase in
working capital from equity financings that were invested in short-term
investments. Interest expense was $58,968, an increase of $38,777 for the three
months ended June 30, 1996 compared to the same period in 1995. This increase
was a result of the Company issuing $2.4 million of debt securities. Proceeds
from the loans were used to pay deposits on chewing gum manufacturing equipment,
to build inventories of new products, for marketing expenses and working
capital. Proceeds from the Offering were used to retire the debt in early May,
1996. In addition, the Company entered into a $1.85 million equipment financing
agreement with Textron Financial Corporation in December, 1995.
Net Income. Net income decreased to ($338,812) for the three months ended
June 30, 1996 compared to $151,677 for the same period in 1995. The loss
incurred in this period was primarily due to increased operating expenses.
Results of Operations for the Six Months Ended June 30, 1996 Compared to the
Six Months Ended June 30, 1995
Net Sales. Net sales increased by $311,706, or 18%, to $2,044,531 for the
six months ended June 30, 1996 compared to $1,732,825 for the six months ended
June 30, 1996. The increase in sales was a result of an expanded distribution
network, the introduction of several new products and increased shipments of
existing products to the Company's main distributor.
Cost of Sales. Cost of sales decreased 4% to $1,069,832 or 52% of net sales
for the six months ended June 30, 1996, compared to $967,760 or 56% of net sales
for the same period in 1995. The primary reasons for this decrease is the
Company is now selling directly to mass market, drug, food and export customers
at higher gross margins. Cost of sales are expected to continue to decline as
the manufacturing plant becomes more efficient.
8
<PAGE>
Gross Profit. Gross profit increased by 4% to $974,699 or 48% of net sales
for the six months ended June 30, 1996, compared to $765,065 or 44% of net sales
for the same period in 1995.
Operating Expenses. Operating expenses were $1,624,416, an increase of
$1,272,218 for the six months ended June 30, 1996, compared to the same period
in 1995. Approximately $721,000 of these operating expenses were directly
attributable to the operations of the manufacturing plant. No manufacturing
expenses were incurred for the six months ended June 30, 1995 as the Company had
not yet commenced manufacturing operations. Moreover, because the manufacturing
facility continues to operate at only a small percentage of its capacity,
revenues were not sufficient to offset the manufacturing operating expenses.
Factors contributing to an increase in non-manufacturing operating expenses were
related to advertising ($319,925), labor ($300,866), professional fees for
legal, accounting, art/production, and general consulting ($167,724), insurance
($86,488), and trade shows ($51,766).
Research and Development. Research and development expenditures were
$50,773 for the six months ended June 30, 1996, compared to $12,392 for the same
period in 1995. The majority of these costs were related to the development and
production scale-up of the Jack Lalanne product line, DentaHealth, Vita A-C-E
and Repose and the development of three "over the counter" products and various
private label endeavors.
Interest and Other Income and Interest Expense. Interest and other income
was $45,733, an increase of $19,273 primarily as a result of an increase in
working capital from equity financings that were invested in short-term
investments. Interest expense was $137,611, an increase of $112,195 for the six
months ended June 30, 1996 compared to the same period in 1995. This increase
was a result of the Company issuing $2.4 million of debt securities and
equipment financing for the manufacturing plant. Proceeds from the loans were
used to pay deposits on chewing gum manufacturing equipment, to build
inventories of new products, for marketing expenses and working capital. .
Proceeds from the Offering were used to retire the debt in early May, 1996. In
addition, the Company entered into a $1.85 million equipment financing agreement
with Textron Financial Corporation for the Company's gum manufacturing
equipment.
Net Income. Net income decreased to ($579,024) for the six months ended
June 30, 1996 compared to $258,513 for the same period in 1995. The loss
incurred in this period was primarily due to an increase in operating expenses.
Liquidity and Capital Resources
As of June 30, 1996, the Company's working capital was $5.6 million
compared to $1.74 million at June 30, 1995. For the six months ended June 30,
1996, the Company experienced a decrease in cash provided by operating
activities of $1,765,090 primarily as a result of an increase in accounts
receivable and inventories. The increase in inventory was directly related to
the build up of new product finished goods and raw materials for the
manufacturing plant.
Investing activities consumed $764,056 in cash for the six months June 30,
1996 compared to $808,637 of cash consumed in the same period of 1995. This was
primarily from equipment purchased to start up the manufacturing plant in
Phoenix, Arizona.
9
<PAGE>
Financing activities provided $5,343,548 in cash for the six months ended
June 30, 1996 compared to $1,892,498 in cash for the same period in 1995. This
increase in cash was primarily a result of the Company successfully completing
its initial public offering of 400,000 units (each unit consisted of three
shares of no par value common stock and one redeemable common stock purchase
warrant) for gross proceeds of $7.2 million on April 24, 1996. In addition, the
Underwriter exercised their Overallotment Option of 60,000 units and the Company
received gross proceeds of $1.08 million on May 24, 1996. The Company paid $1.45
million in commissions, underwriter's expenses and other costs related to the
Offering. The Company used $2.57 million from this Offering to repay its debt
securities provided by stockholders in 1995.
Also, Textron Financial Corporation provided financing for the Company's
gum manufacturing equipment. The Company entered into a six-year equipment lease
agreement with Textron in December 1995. Textron funded approximately $1.85
million of gum manufacturing equipment. Monthly lease payments commenced in
January 1996.
Management believes that the proceeds of the Offering and the Overallotment
will be sufficient to meet the Company's working capital requirements during
1996.
Outlook
The statements contained in this section are based on current expectations.
These statements are forward looking, and actual results may differ materially.
The Company believes its new manufacturing facility will continue to
operate at levels significantly below capacity through the end of 1996.
The advertising campaign for NuGum (ChromaTrim, CitrusSlim, DentaHealth,
Repose, and Vita A-C-E) and the Jack Lalanne product line (Diet, Ginseng, Power,
Dental, Vitamin C, and Digestive Gums) began in June, 1996. These new products
are now available in the drug, food, health and mass market arenas. The Company
expects to spend approximately $465,000 in advertising for third quarter, ending
September 30, 1996. Also, the Company is going to begin the ChromaTrim
infomercial starting in late August, 1996. The Company is currently working on
the possibility of producing another infomercial for a different NuGum product.
The Company is continuing ongoing discussions with various major co-packers
concerning products which the Company can manufacture for others using its
"over-the-counter" capabilities. The manufacturing facility will be
"over-the-counter" ready by approximately August, 1996. The Company will then
introduce an antacid gum product in late September, 1996.
The Company's future results of operations and the other forward looking
statements contained in this document, in particular the statement(s) concerning
plant efficiencies and capacities, capital spending, research and development
and other expenses involve a number of risks and uncertainties. In addition to
the factors discussed above, among the other factors that could cause actual
results to differ materially are the following: business conditions and the
general economy; competitive factors, such as rival gum manufacturers' pricing
and marketing efforts; availability of third-party material products at
reasonable prices; risk of nonpayment of accounts receivable; risks of inventory
obsolescence due to shifts in market demand; timing of product introductions;
and litigation involving product liabilities and consumer issues.
10
<PAGE>
Item 1. Legal Proceedings
-----------------
None
Item 2. Changes in Securities
---------------------
None
Item 3. Defaults Upon Senior Securities
-------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
Item 5. Other
-----
None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
None
11
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorize
Gum Tech International, Inc.
/s/ John Epert
- ----------------------------
John Epert
Chairman of the Board and
President
/s/ Jeffrey L. Bouchy
- ----------------------------
Jeffrey L. Bouchy
Chief Financial Officer
August 14, 1996
12
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 3,317,729
<SECURITIES> 0
<RECEIVABLES> 1,233,349
<ALLOWANCES> 10,555
<INVENTORY> 1,459,880
<CURRENT-ASSETS> 6,357,028
<PP&E> 3,493,390
<DEPRECIATION> 203,786
<TOTAL-ASSETS> 10,329,054
<CURRENT-LIABILITIES> 756,785
<BONDS> 0
0
0
<COMMON> 7,851,060
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 10,329,054
<SALES> 2,044,531
<TOTAL-REVENUES> 2,044,531
<CGS> 1,069,832
<TOTAL-COSTS> 1,069,832
<OTHER-EXPENSES> 50,773
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 137,611
<INCOME-PRETAX> (792,367)
<INCOME-TAX> (213,343)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (579,024)
<EPS-PRIMARY> (.15)
<EPS-DILUTED> (.15)
</TABLE>
