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 September 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 4,896,740 shares of the registrant's common stock, no par value
outstanding as of September 30, 1996.
<PAGE>
GUM TECH INTERNATIONAL, INC.
FORM 10-QSB
INDEX
Part I Financial Information Page
Item 1. Condensed Balance Sheet as of
September 30, 1996 1
Condensed Statements of Operations
for the three months ended September 30, 1996
and 1995 3
Condensed Statements of Operations
for the nine months ended September 30, 1996
and 1995 4
Condensed Statements of Cash Flows
for the nine months ended September 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 12
<PAGE>
GUM TECH INTERNATIONAL, INC.
CONDENSED BALANCE SHEET
September 30, 1996
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 1,992,093
Accounts receivable, net of allowance
for doubtful accounts of $10,567 631,879
Inventories 1,459,319
Deferred income taxes 215,412
Prepaid expenses and other 104,729
-----------
Total Current Assets 4,403,432
-----------
Property and Equipment, at cost:
Machinery and production equipment 3,171,069
Office furniture and equipment 97,716
Leasehold improvements 190,526
-----------
Total Property and Equipment 3,459,511
Less accumulated depreciation (337,720)
-----------
Net Property and Equipment 3,121,791
-----------
Other Assets:
Deposits 296,028
Notes receivable 336,652
Restricted Cash 103,908
Other 158,012
-----------
Total Other Assets 894,600
-----------
Total Assets $ 8,419,823
===========
The accompanying notes are an integral part
of these condensed financial statements.
1
<PAGE>
GUM TECH INTERNATIONAL, INC.
CONDENSED BALANCE SHEET
September 30, 1996
(Continued)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable $ 306,241
Current portion of long-term debt 210,253
-----------
Total Current Liabilities 516,494
-----------
Long Term Debt, net of current portion above:
Equipment Lease Obligations 1,553,756
-----------
Total Long Term Debt 1,553,756
-----------
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, 4,896,740 shares
issued and outstanding 7,881,060
Retained Earnings (1,531,487)
-----------
Total Stockholders' Equity 6,349,573
-----------
Total Liabilities and Stockholders' Equity $ 8,419,823
===========
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 September 30,
--------------------------------
1996 1995
--------------------------------
Net Sales $ 396,757 $1,577,717
Cost of Sales 291,153 681,501
------------ ----------
Gross Profit 105,604 896,216
Operating Expenses 1,605,487 281,808
Research and Development 144,551 28,630
------------ ----------
Income (Loss) From Operations (1,644,434) 585,778
Other Income (Expense):
Interest and Other Income 27,714 5,761
Interest Expense (41,816) (35,587)
------------ ----------
Total Other Income (Expense) (14,102) (29,826)
------------ ----------
Income (Loss) Before Provision
For Income Taxes (1,658,536) 555,952
Provision for income taxes -- 152,418
------------ ----------
Net Income (Loss) $ (1,658,536) $ 403,534
============ ==========
Net Income (Loss) Per Share of Common Stock:
Primary:
Weighted Average Number of
Common Shares Outstanding 4,879,566 4,392,658
============ ==========
Net Income (Loss) Per Share
of Common Stock $ (0.34) $ 0.09
============ ==========
Diluted:
Weighted Average Number of
Common Shares Outstanding 4,879,566 4,392,658
============ ==========
Net Income (Loss) Per Share
of Common Stock $ (0.34) $ 0.09
============ ==========
The accompanying notes are an integral part
of these condensed financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
GUM TECH INTERNATIONAL, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Nine months ended September 30,
-------------------------------
1996 1995
-------------------------------
<S> <C> <C>
Net Sales $ 2,441,288 $ 3,310,542
Cost of Sales 1,360,985 1,649,261
----------- -----------
Gross Profit 1,080,303 1,661,281
Operating Expenses 3,229,902 634,006
Research and Development 195,324 41,022
----------- -----------
Income (Loss) From Operations (2,344,923) 986,253
----------- -----------
Other Income (Expense):
Interest and Other Income 73,447 32,221
Interest Expense (179,427) (61,003)
----------- -----------
Total Other Income (Expense) (105,980) (28,782)
----------- -----------
Income (Loss) Before Provision For Income Taxes (2,450,903) 957,471
Provision for income taxes (213,343) 295,424
----------- -----------
Net Income (Loss) $(2,237,560) $ 662,047
=========== ===========
Net Income (Loss) Per Share of Common Stock:
Primary:
Weighted Average Number
of Common Shares Outstanding 4,278,128 4,392,658
=========== ===========
Net Income (Loss) Per Share of Common Stock $ (0.52) $ 0.15
=========== ===========
Diluted:
Weighted Average Number
of Common Shares Outstanding 4,278,128 4,392,658
=========== ===========
Net Income (Loss) Per Share of Common Stock $ (0.52) $ 0.15
=========== ===========
</TABLE>
The accompanying notes are in integral part
of these condensed financial statement.
4
<PAGE>
<TABLE>
<CAPTION>
GUM TECH INTERNATIONAL, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended September 30,
--------------------------------
1996 1995
------------ -----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $(2,237,560) $ 662,047
Adjustments to reconcile net income (loss)
to net cash (used) by operating activities:
Depreciation 317,446 7,310
Deferred income taxes (215,412) --
Changes in assets and liabilities:
(Increase) Decrease in accounts receivable 303,452 (704,596)
(Increase) in interest receivable (20,652) (1,759)
(Increase) in inventories (560,654) (543,684)
(Increase) in prepaid expenses and other (60,241) (17,616)
(Increase) in deposits and other (120,049) (93,109)
Increase (Decrease) in accounts payable
and accrued expenses (337,914) 177,811
Increase (Decrease) in customer deposits (36,959) 71,499
---------- ----------
Net Cash (Used) By Operating Activities (2,968,543) (442,097)
Cash Flows From Investing Activities:
Capital expenditures (648,339) (221,132)
Deposits on purchases of equipment -- (869,834)
Increase in notes receivable (216,000) (100,000)
Receipt of principal on notes receivable -- 100,000
---------- ----------
Net Cash (Used) By Investing Activities (864,339) 1,090,966)
---------- ----------
Cash Flows From Financing Activities:
Proceeds from borrowing 706,397 1,900,000
Principal payments on notes payable (2,536,942) (41,742)
Issuance of common stock 8,430,000 756,000
Cash dividends -- (37,449)
Offering costs incurred (1,277,807) (184,311)
---------- ----------
Net Cash Provided By Financing Activities 5,321,648 2,392,498
---------- ----------
Net Increase in Cash and Cash Equivalents 1,488,766 859,435
Cash and Cash Equivalents at Beginning of Period 503,327 25,231
---------- ----------
Cash and Cash Equivalents at End of Period $1,992,093 $ 884,666
========== ==========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ 286,790 $ 1,617
Income taxes 23,165 197,809
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
</TABLE>
<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 nine months ended
September 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.
2. 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 24 employees and is expected by the end of 1996 to produce most of
the Company's chewing gum products.
The Company distributes its products to more than 75 percent of the
nation's top drugstore chains, including Walgreens, Osco, Thrifty, Sav-On and
Payless. The Company also has a strong nationwide position in convenience-store
chains and health food stores and has entered major supermarket chains. In
addition, the Company is increasing distribution and further expanding its
presence in international markets, including Europe and the Far East.
Results of Operations for the Three Months Ended September 30, 1996 Compared to
the Three Months Ended September 30, 1995
Net Sales. Net sales decreased by $1,180,960 or 75%, to $396,757 for the
three months ended September 30, 1996 compared to $1,577,717 for the three
months ended September 30, 1995. The decrease in sales was a result of the
Company's two largest distributors in 1995 not making any purchases during the
quarter.
Cost of Sales. Cost of sales, as a percentage of sales, increased 30% to
$291,154 or 73% of net sales for the three months ended September 30, 1996,
compared to $681,501 or 43% of net sales for the same period in 1995. The
primary reason for the increase was the manufacturing plant was operating at a
minimal capacity which resulted in a higher cost per pound of gum.
Gross Profit. Gross profit, as a percentage of sales, decreased by 30% to
$105,604 or 27% of net sales for the three months ended September 30, 1996,
compared to $896,216 or 57% of net sales for the same period in 1995.
Operating Expenses. Operating expenses were $1,605,487 an increase of
$1,323,679 for the three months ended September 30, 1996 compared to the same
period in 1995. Approximately $461,131 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 increases in
non-manufacturing operating expenses were related to advertising ($549,672),
labor ($169,698), professional fees for legal, accounting, art/production, and
general consulting ($158,725), insurance ($75,194), and infomercial expenses
($193,314).
7
<PAGE>
The following table sets forth certain expenses related only to the operations
of the Company's manufacturing facility:
Depreciation Expense $122,919
Rent 32,664
Utilities 23,073
Insurance 31,207
Maintenance & Repairs 15,683
Labor 143,558
Interest Expense and Taxes on Equipment 48,425
Other Expenses 43,602
------
Total $461,131
Research and Development. Research and development expenditures were
$144,551 for the three months ended September 30, 1996, compared to $28,630 for
the same period in 1995. The majority of these costs, approximately 84%, were
related to the write-offs of various gums used in the debugging, testing and the
production scale-up of new products.
Interest and Other Income and Interest Expense. Interest and other income
was $27,714, an increase of $21,953 primarily as a result of an increase in
working capital from equity financings that were invested in short-term
investments. Interest expense was $41,816, an increase of $6,229 for the three
months ended September 30, 1996 compared to the same period in 1995. This
increase was a result of the Company issuing $2.4 million of debt securities in
1995. 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 January, 1996, the Company entered into a $1.85
million equipment financing agreement with Textron Financial Corporation in
December, 1995.
Net Income. Net income decreased to ($1,658,536) for the three months ended
September 30, 1996 compared to $403,534 for the same period in 1995. The loss
incurred in this period was primarily due to increased operating expenses and a
decrease in net sales.
Results of Operations for the Nine Months Ended September 30, 1996 Compared to
the Nine Months Ended September 30, 1995
Net Sales. Net sales decreased by $869,254, or 26%, to $2,441,288 for the
nine months ended September 30, 1996 compared to $3,310,542 for the nine months
ended September 30, 1995.
Cost of Sales. Cost of sales, as a percentage of sales, increased 6% to
$1,360,985 or 56% of net sales for the nine months ended September 30, 1996,
compared to $1,649,261 or 50% of net sales for the same period in 1995. The
primary reason for the increase was the manufacturing plant has been operating
at a minimal capacity which has resulted in a higher cost per pound of gum.
8
<PAGE>
Gross Profit. Gross profit, as a percentage of sales, decreased by 6% to
$1,080,303 or 44% of net sales for the nine months ended September 30, 1996,
compared to $1,661,281 or 50% of net sales for the same period in 1995.
Operating Expenses. Operating expenses were $3,299,902, an increase of
$2,595,896 for the nine months ended September 30, 1996, compared to the same
period in 1995. Approximately $1,182,235 of these operating expenses were
directly attributable to the operations of the manufacturing plant. No
manufacturing expenses were incurred for the nine months ended September 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 ($869,197),
labor ($484,358), professional fees for legal, accounting, art/production, and
general consulting ($326,448), insurance ($157,192), and infomercial expenses
($193,314).
Research and Development. Research and development expenditures were
$195,324 for the nine months ended September 30, 1996, compared to $41,022 for
the same period in 1995. The majority of these costs were related to the
write-offs of various gums used in the debugging and testing of the new
manufacturing equipment, 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 products.
Interest and Other Income and Interest Expense. Interest and other income
was $73,447, an increase of $41,226 primarily as a result of an increase in
working capital from equity financings that were invested in short-term
investments. Interest expense was $179,427, an increase of $118,424 for the nine
months ended September 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
January, 1996, 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 ($2,237,560) for the nine months ended
September 30, 1996 compared to $662,047 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 September 30, 1996, the Company's working capital was $4.0 million
compared to $2.4 million at September 30, 1995. For the nine months ended
September 30, 1996, the Company experienced a decrease in cash provided by
operating activities of $2,968,543 primarily as a result of an increase in
operating expenses 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.
9
<PAGE>
Investing activities consumed $864,339 in cash for the nine months
September 30, 1996 compared to $1,090,966 of cash consumed in the same period of
1995. This was primarily from equipment purchased to start up the manufacturing
plant in Phoenix, Arizona and loans provided to three company officers.
Financing activities provided $5,321,648 in cash for the nine months ended
September 30, 1996 compared to $2,392,498 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.
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.
During the third quarter, the Company agreed to manufacture, sell and
distribute a chewing gum product containing the hormone DHEA, to be marketed
under the Body Ammo brand. The product will be widely available at leading drug,
grocery and health food stores. Body Ammo is a leader in DHEA products
nationwide. The Company will also sell and distribute Body Ammo's other DHEA
products, which include a skin cream, an antioxidant product and a bone and
joint formula.
The Company's international sales received another boost after the third
quarter ended. The Company's Japanese distributor of CitrusSlim has agreed to
introduce the DentaHealth product into that country.
In November, the Company expects to run a series of 750 short infomercials
to be aired nationwide. The campaign, along with print advertising direct
response is expected to help significantly boost retail sales in the fourth
quarter.
The Company is continuing ongoing discussions with various major brand
companies concerning products which the Company can manufacture and/or co-pack
using its "over-the-counter" capabilities. The manufacturing facility was
"over-the-counter" ready 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
10
<PAGE>
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.
11
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
-----------------
On October 16, 1996, a lawsuit was filed against the Company in the United
States District Court for the Central District of California, CV-95-9784. The
action is entitled GCN Products, Inc. vs. Roy Kelly, et al. The complaint, as it
relates to the Company, principally alleges that the Company engaged in unlawful
rebates, appropriations and overcharges, commercial bribery, fraud and unjust
enrichment. Plaintiff seeks compensatory and punitive damages. The Company
denies all allegations and intends to vigorously defend the suit.
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
----------------------------------
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K, dated August 15, 1996, in
connection with Gerald N. Kern joining the company in the capacities of
President and Chief Executive Officer, pursuant to a 16 month employment
agreement, which calls for a salary of $150,000, options to purchase 50,000
shares of common stock at $6.00 per share and a one year employment extention
(through December 31, 1998) at the option of the Company.
12
<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/ Gerald N. Kern
- ---------------------------
Gerald N. Kern
Chief Executive Officer and
President
/s/ Jeffrey L. Bouchy
- ---------------------------
Jeffrey L. Bouchy
Chief Financial Officer
November 14, 1996
13
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,992,093
<SECURITIES> 0
<RECEIVABLES> 642,446
<ALLOWANCES> 10,567
<INVENTORY> 1,459,319
<CURRENT-ASSETS> 4,403,432
<PP&E> 3,459,511
<DEPRECIATION> 337,720
<TOTAL-ASSETS> 8,419,823
<CURRENT-LIABILITIES> 516,494
<BONDS> 0
0
0
<COMMON> 7,881,060
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 8,419,823
<SALES> 2,441,288
<TOTAL-REVENUES> 2,441,288
<CGS> 1,360,895
<TOTAL-COSTS> 1,360,985
<OTHER-EXPENSES> 195,324
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (179,427)
<INCOME-PRETAX> (2,450,903)
<INCOME-TAX> (213,343)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,237,560)
<EPS-PRIMARY> (.52)
<EPS-DILUTED> (.52)
</TABLE>
