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 March 31, 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 3,496,740 shares of the registrant's common stock, no par value
outstanding as of March 31, 1996.
<PAGE>
GUM TECH INTERNATIONAL, INC.
FORM 10-QSB
INDEX
Part I Financial Information Page
Item 1. Condensed Balance Sheet as of
March 31, 1996 1
Condensed Statements of Operations
for the three months ended March 31, 1996 3
and 1995
Condensed Statements of Cash Flows
for the three months ended March 31, 1996
and 1995 4
Notes to Condensed Financial Statements 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 6
Part II Other Information and Signatures 9
<PAGE>
GUM TECH INTERNATIONAL, INC.
CONDENSED BALANCE SHEET
March 31, 1996
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 252,593
Accounts receivable, net of allowance for
doubtful accounts of $9,567 1,184,551
Inventories 1,103,427
Deferred income taxes 124,683
Prepaid expenses and other 57,507
----------
Total Current Assets 2,722,761
----------
Property and Equipment, at cost:
Machinery and production equipment 2,816,543
Office furniture and equipment 61,584
Leasehold improvements 118,010
----------
Total Property and Equipment 2,996,137
Less accumulated depreciation (79,590)
----------
Net Property and Equipment 2,916,547
----------
Other Assets:
Deposits 124,089
Notes receivable 259,945
Deferred offering costs 304,597
Other 118,863
----------
Total Other Assets 807,494
----------
Total Assets $6,446,802
==========
The accompanying notes are an integral part of
these condensed financial statements.
1
<PAGE>
GUM TECH INTERNATIONAL, INC.
CONDENSED BALANCE SHEET
March 31, 1996
(Continued)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable $ 542,042
Customer Deposits 28,000
-----------
Total Current Liabilities 570,042
-----------
Long Term Debt:
Stockholders and others 2,555,231
Equipment Lease Obligations 1,818,551
----------
Total Long Term Debt 4,373,782
----------
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,
3,496,740 shares issued and outstanding 1,037,117
Retained Earnings 465,861
----------
Total Stockholders' Equity 1,502,978
----------
Total Liabilities and Stockholders' Equity $6,446,802
==========
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 March 31,
----------------------------
1996 1995
----------------------------
Net Sales $ 890,637 $ 691,569
Cost of Sales 525,953 332,712
--------- ---------
Gross Profit 364,684 358,857
Operating Expenses 630,343 200,236
Research and Development 31,795 -
--------- ---------
Income (Loss) From Operations (297,454) 158,621
--------- ---------
Other Income (Expense):
Interest and Other Income 13,271 2,540
Interest Expense (78,643) (5,225)
--------- ---------
Total Other Income (Expense) (65,372) (2,685)
--------- ---------
Income (Loss) Before Provision For Income Taxes (362,826) 155,936
Provision for income taxes (122,614) 49,100
--------- ---------
Net Income (Loss) $(240,212) $ 106,836
========= =========
Net Income (Loss) Per Share of Common Stock $ (0.05) $ 0.02
========= =========
Weighted Average Number of Common Shares
Outstanding 4,392,658 4,392,658
========= =========
The accompanying notes are an integral part of
these condensed financial statements.
3
<PAGE>
GUM TECH INTERNATIONAL, INC.
CONDENSED STATEMENTS OF CASH FLOWS
( Unaudited)
Three months ended March 31,
----------------------------
1996 1995
----------------------------
Cash Flows From Operating Activities:
Net income (Loss) $ (240,212) $ 106,836
Adjustments to reconcile net income to
cash (used) by operating activities:
Depreciation 59,316 1,655
Deferred income taxes (124,683) -
Accrued interest on notes receivable (4,046) -
Changes in assets and liabilities:
(Increase) in accounts receivable (249,220) (257,366)
(Increase) in inventories (204,762) (393,662)
(Increase) in prepaid expenses and other (13,019) (5,080)
(Increase) in deposits and other (55,624) (8,727)
Increase in accounts payable and
accrued expenses 484,074 145,409
(Decrease) in customer deposits (8,959) -
---------- ----------
Net Cash (Used) By Operating Activities (357,135) (410,935)
---------- ----------
Cash Flows From Investing Activities:
Capital expenditures (418,976) (15,755)
Increase in notes receivable (150,000) (50,230)
Receipt of principal on notes receivable - 100,000
---------- ----------
Net Cash Provided (Used) By Investing
Activities (568,976) 34,015
---------- ----------
Cash Flows From Financing Activities:
Proceeds from borrowing 706,397 504,000
Principal payments on notes payable (34,673) (41,742)
Issuance of common stock 120,000 -
Cash dividends - (37,449)
Offering costs incurred (116,347) (46,250)
---------- ----------
Net Cash Provided By Financing Activities 675,377 378,559
---------- ----------
Net Increase (Decrease) in Cash and
Cash Equivalents (250,734) 1,639
Cash and Cash Equivalents at Beginning
of Period 503,327 25,231
---------- ----------
Cash and Cash Equivalents at End of
Period $ 252,593 $ 26,870
========== ==========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ 30,744 $ 2,051
Income taxes 26,477 -
Supplemental Disclosure of Non Cash Investing
and Financing Activities:
Capital lease obligation incurred for new
equipment $1,146,827 $ -
The accompanying notes are an integral part of
these condensed financial statements.
4
<PAGE>
GUM TECH INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. 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 three months
ended March 31, 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.
2. Net income (loss) per share of common stock is based upon the weighted
average number of outstanding shares of common stock and, pursuant to the
Securities and Exchange Commission Staff Accounting Bulletins, common
shares, options and warrants issued by the Company at prices below the
initial public offering price during the twelve months immediately
preceding the offering date are included in the calculation as if they were
outstanding for all periods presented.
5
<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 32 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 March 31, 1996 Compared to the
Three Months Ended March 31, 1995
Net Sales. Net sales increased by $199,068, or 29%, to $890,637 for the
three months ended March 31, 1996 compared to $691,569 for the three months
ended March 31, 1995. The increase in sales was a result of increased shipments
of existing products to the Company's main distributor.
Cost of Sales. Cost of sales increased 11% to $525,953 or 59% of net sales
for the three months ended March 31, 1996, compared to $332,712 or 48% of net
sales for the same period in 1995. The primary reasons were investments in new
packaging designs, increased production costs, raw material write-offs to test
and debug the new manufacturing equipment and the sale of a foreign supplied
gum. Cost of sales are expected to decline as the manufacturing plant becomes
more efficient. Gross profit decreased by 11% to $364,684 or 41% of net sales
for the three months ended March 31, 1996, compared to $358,857 or 52% of net
sales for the same period in 1995. The decrease in gross profit was directly
related to cost of sales.
Operating Expenses. Operating expenses were $630,343, an increase of
$430,107 for the three months ended March 31, 1996 compared to the same period
in 1995. Approximately $290,000 of these operating expenses were directly
attributable to the operations of the manufacturing plant (See table below). No
manufacturing expenses were incurred for the three months ended March 31, 1995
as the Company had not yet commenced manufacturing operations. Moreover, because
the manufacturing facility operated 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 ($80,012), labor ($73,499), and trade shows ($16,850).
6
<PAGE>
The following table sets forth certain expenses related only to the
operations of the Company's manufacturing facility:
Depreciation Expense $53,592
Rent 39,707
Relocation Expense 41,935
Utilities 12,938
Insurance 13,297
Maintenance & Repairs 12,312
Labor 61,315
Professional Fees 14,819
Other Expenses 40,145
------
Total $290,060
Research and Development. Research and development expenditures were
$31,795 for the three months ended March 31, 1996, compared to $0 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.
Interest and Other Income and Interest Expense. Interest and other income
was $13,271, an increase of $10,731 primarily as a result of an increase in
working capital from equity financings that were invested in short-term
investments. Interest expense was $78,643, an increase of $73,418 for the three
months ended March 31, 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.
Net Income. Net income decreased to ($240,212) for the three months ended
March 31, 1996 compared to $106,836 for the same period in 1995. The loss
incurred in this period was primarily due to the start-up of the manufacturing
plant in Phoenix, Arizona (See Table in Operating Expenses).
Liquidity and Capital Resources
As of March 31, 1996, the Company's working capital was $2.15 million
compared to $949,253 at March 31, 1995. For the three months ended March 31,
1996, the Company experienced a decrease in cash provided by operating
activities of $357,135 primarily as a result of an increase in accounts
receivable and inventories which was a result of an increase in sales for the
period and inventory build-up of raw materials for the manufacturing plant.
Investing activities consumed $568,976 in cash for the three months ended
March 31, 1996 compared to $34,015 of cash provided in the same period of 1995.
This was primarily from equipment purchased to start up the manufacturing plant
and corporate offices in Phoenix, Arizona.
Financing activities provided $675,377 in cash for the three months ended
March 31, 1996 compared to $378,559 in cash for the same period in 1995. This
increase in cash was primarily a result of financing by Textron Financial
Corporation 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 $1.1 million of gum manufacturing equipment. Monthly lease
payments commenced in January 1996.
7
<PAGE>
The Company successfully completed 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 the net proceeds of $6.48 million
on April 24, 1996. In addition, the Underwriter exercised their Overallotment
Option of 60,000 units and the Company received net proceeds of $939,600 on May
24, 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 second quarter,
ending June 30, 1996. During the third quarter ending September 30, 1996, the
Company expects the manufacturing facility to produce gum at costs equal to or
below the current costs.
The advertising campaign for NuGum (ChromaTrim, CitrusSlim, DentaHealth,
Repose, and Vita A-C-E) is scheduled to begin in June. These new products are
now available in the drug, food, health and mass market arenas. Also, the
Company is currently working on the possibility of producing up to three
different infomercials for NuGum.
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's future results of operations and the other forward looking
statements contained in this section, 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.
8
<PAGE>
Part II. Other Information
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
9
<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
authorized.
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
June 6, 1996
10
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 252,593
<SECURITIES> 0
<RECEIVABLES> 1,194,118
<ALLOWANCES> 9,567
<INVENTORY> 1,103,427
<CURRENT-ASSETS> 2,722,761
<PP&E> 2,996,137
<DEPRECIATION> 79,590
<TOTAL-ASSETS> 6,446,802
<CURRENT-LIABILITIES> 570,042
<BONDS> 0
0
0
<COMMON> 1,037,117
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 6,446,802
<SALES> 890,637
<TOTAL-REVENUES> 890,637
<CGS> 525,953
<TOTAL-COSTS> 525,953
<OTHER-EXPENSES> 31,795
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 78,643
<INCOME-PRETAX> (362,826)
<INCOME-TAX> (122,614)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (240,212)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> (.05)
</TABLE>
