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, 1997
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 4,948,740 shares of the registrant's common stock, no par value
outstanding as of March 31, 1997.
<PAGE>
GUM TECH INTERNATIONAL, INC.
FORM 10-QSB
INDEX
Part I Financial Information Page
Item 1. Condensed Balance Sheets as of
March 31, 1997 1
Condensed Statements of Operations
for the three months ended March 31, 1997
and 1996 3
Condensed Statements of Cash Flows
for the three months ended March 31, 1997
and 1996 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, 1997
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 2,577,504
Restricted cash 55,226
Accounts receivable, net of allowance for
doubtful accounts of $33,516 509,077
Inventories 1,077,777
Current portion of notes receivable 445,888
Accrued interest 35,110
Income taxes receivable 234,440
Prepaid expenses and other 760,096
------------
Total Current Assets 5,695,118
------------
Property and Equipment, at cost:
Machinery and production equipment 3,417,636
Office furniture and equipment 122,254
Leasehold improvements 190,526
------------
Total Property and Equipment 3,730,416
Less accumulated depreciation (600,948)
------------
Net Property and Equipment 3,129,468
------------
Other Assets:
Prepaid advertising 1,732,798
Notes receivable 66,000
Intangible assets, net of accumulated amortization 250,334
Deposits and other 229,463
------------
Total Other Assets 2,278,595
------------
Total Assets $ 11,103,181
============
The accompanying notes are an integral part of these condensed financial
statements.
1
<PAGE>
GUM TECH INTERNATIONAL, INC.
CONDENSED BALANCE SHEET
March 31, 1997
(Continued)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable $ 312,383
Accrued interest 26,340
Current portion of long-term debt 220,164
------------
Total Current Liabilities 558,887
------------
Long Term Debt:
Notes Payable 2,530,000
Equipment Lease Obligations 1,437,481
------------
Total Long Term Debt 3,967,481
------------
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,
4,948,740 shares issued and outstanding 7,965,060
Retained Earnings (Deficit) (1,388,247)
------------
Total Stockholders' Equity 6,576,813
------------
Total Liabilities and Stockholders' Equity $ 11,103,181
============
The accompanying notes are an integral part of these condensed financial
statements.
2
<PAGE>
<TABLE>
<CAPTION>
GUM TECH INTERNATIONAL, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended March 31,
--------------------------------------
1997 1996
--------------------------------------
<S> <C> <C>
Net Sales $ 2,427,822 $ 890,637
Cost of Sales 1,166,453 525,953
----------- -----------
Gross Profit 1,261,369 364,684
----------- -----------
Operating Expenses 627,393 630,343
Research and Development 49,940 31,795
Income (Loss) From Operations 584,006 (297,454)
----------- -----------
Other Income (Expense):
Interest and Other Income 31,222 13,271
Interest Expense (73,653) (78,643)
----------- -----------
Total Other Income (Expense) (42,431) (65,372)
----------- -----------
Income (Loss) Before Provision For Income Taxes 541,575 (362,826)
Provision (benefit) for income taxes -- (122,614)
----------- -----------
Net Income (Loss) $ 541,575 $ (240,212)
=========== ===========
Net Income (Loss) Per Share of Common Stock $ 0.09 $ (0.05)
=========== ===========
Weighted Average Number of Common
Shares Outstanding 6,873,436 4,392,658
=========== ===========
The accompanying notes are an integral part of these condensed financial
statements.
3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GUM TECH INTERNATIONAL, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended March 31,
-------------------------------
1997 1996
-------------------------------
Cash Flows From Operating Activities:
<S> <C> <C>
Net income $ 541,575 $ (240,212)
Adjustments to reconcile net income to cash (used)
by operating activities:
Depreciation 141,545 59,316
Amortization 8,114 --
Deferred income taxes -- (124,683)
Accrued interest on notes receivable (35,110) (4,046)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable 244,795 (249,220)
(Increase) decrease in inventories 289,167 (204,762)
(Increase) decrease in prepaid expenses
and other 55,338 (13,019)
(Increase) in prepaid advertising expenses (1,732,798) --
(Increase) decrease in deposits and other 184,012 (55,624)
Increase (decrease) in accounts payable and
accrued expenses (59,542) 484,074
(Decrease) in customer deposits (65,500) (8,959)
----------- -----------
Net Cash (Used) By Operating Activities (428,404) (357,135)
----------- -----------
Cash Flows From Investing Activities:
Capital expenditures (132,531) (418,976)
(Increase) in notes receivable (195,888) (150,000)
----------- -----------
Net Cash Provided (Used) By Investing Activities (328,419) (568,976)
----------- -----------
Cash Flows From Financing Activities:
Proceeds from borrowing 2,530,000 706,397
Principal payments on notes payable (53,976) (34,673)
Issuance of common stock -- 120,000
Debt issuance costs incurred (258,488) --
Offering costs incurred -- (116,347)
----------- -----------
Net Cash Provided (Used) By
Financing Activities 2,217,576 675,377
----------- -----------
Net Increase (Decrease) in Cash and
Cash Equivalents 1,460,753 (250,734)
Cash and Cash Equivalents at
Beginning of Period 1,116,751 503,327
----------- -----------
Cash and Cash Equivalents at End of Period $ 2,577,504 $ 252,593
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ 39,199 $ 30,744
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
</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 three months
ended March 31, 1997 are not necessarily indicative of results of
operations that may be expected for the year ending December 31, 1997. It
is recommended that this financial information be read with the complete
financial statements included in the Company's Annual Report on Form 10-KSB
for the year ended December 31, 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 33 employees and by the end of 1996 the Company produced 100% of
its chewing gum products.
The Company distributes its products to more than 80 percent of the
nation's top drugstore chains, including Walgreens, Drug Emporium, Longs,
Thrifty, Sav-On, Phar-Mor, Eckard and Payless. The Company also has a strong
nationwide position in the mass market chains (Target, Kmart, Meijer), major
supermarket chains (Safeway, Smith's, Lucky's) and various health food
distributors. In addition, the Company is increasing distribution and further
expanding its presence in international markets including Japan, Korea, Russia,
Scandinavia, and Eastern Europe.
Results of Operations for the Three Months Ended March 31, 1997 Compared to the
Three Months Ended March 31, 1996
The following table sets forth certain statement of operations information
expressed both in dollars and as a percentage of net sales for the periods
indicated:
<TABLE>
<CAPTION>
Quarters Ended March 31,
------------------------
1997 1996
<S> <C> <C> <C> <C>
Net Sales $ 2,427,822 100% $ 890,637 100%
Cost of sales 1,166,453 48 525,953 59
Gross profit 1,261,369 52 364,684 41
Operating expenses 627,393 26 630,343 71
Research and development 49,970 2 31,795 4
Income (loss) from operations 584,006 24 (297,454) (33)
Interest and other income 31,222 1 13,271 1
Interest expense (73,653) (3) (78,643) (9)
Provision (benefit) for income taxes -- -- (122,614) (14)
Net income (loss) 541,575 22 (240,212) (27)
</TABLE>
6
<PAGE>
Net Sales. Net sales increased by $1,537,185, or 173%, to $2,427,822 for
the three months ended March 31, 1997 compared to $890,637 for the three months
ended March 31, 1996. The increase in sales was a result of $1.7 million of
discontinued and excess inventories sold in a barter agreement that the Company
entered into in December, 1996 with Active Media Services, Inc. The product sold
in the agreement consisted of ChromaTrim, CitrusSlim, Vita ACE and gum from the
Jack Lalanne line of products.
Cost of Sales. Cost of sales decreased 11% to $1,166,453 or 48% of net
sales for the three months ended March 31, 1997, compared to $525,953 or 59% of
net sales for the same period in 1996. The primary reason for the decrease is
the Company has eliminated its dependence upon outside manufacturers for its
chewing gum products.
Gross Profit. Gross profit increased by 11% to $1,261,369 or 52% of net
sales for the three months ended March 31, 1997, compared to $364,684 or 41% of
net sales for the same period in 1996. The decrease in gross profit was directly
related to cost of sales.
Operating Expenses. Operating expenses were $627,393, a decrease of $2,950
for the three months ended March 31, 1997 compared to the same period in 1996.
Approximately $395,286 of these operating expenses were attributable to the
operations of the manufacturing plant, of which, $131,570 were directly related
to depreciation of the plant's manufacturing equipment. Factors contributing to
an increase in non-manufacturing operating expenses were related to
administrative management labor ($174,622), travel ($66,526), general
administrative labor ($65,295), art/production fees ($42,370), accounting fees
for the audit and tax returns ($41,610), sales labor ($32,375), trade shows
($28,147) and advertising ($24,608).
Research and Development. Research and development expenditures were
$49,970 for the three months ended March 31, 1997, compared to $31,795 for the
same period in 1996. The majority of these costs were related to the formulation
of the following: Vita ACES+, an anti-oxidant gum; Chew and Sooth Zinc gum, a
throat soother; High Gear, an energy gum; and other various dental, smoking
cessation and body building cube gums.
Interest and Other Income and Interest Expense. Interest and other income
was $31,222, an increase of $17,951 primarily as a result of an increase in
working capital from equity financings that were invested in short-term
investments. Interest expense was $73,653 a decrease of $4,990 for the three
months ended March 31, 1997 compared to the same period in 1996.
Net Income. Net income increased to $541,575 for the three months ended
March 31, 1997 compared to $ ($240,212) for the same period in 1996.
7
<PAGE>
Liquidity and Capital Resources
As of March 31, 1997, the Company's working capital was $5.14 million
compared to $3.65 million at December 31, 1996. For the three months ended March
31, 1997, the Company experienced a decrease in cash provided by operating
activities of $428,404 primarily as a result of an increase in prepaid
advertising expenses related to the Active Media Services, Inc. barter
agreement.
Investing activities consumed $328,419 in cash for the three months ended
March 31, 1997 compared to $568,976 of cash used in the same period of 1996.
This was primarily from the acquisition of additional manufacturing equipment.
Financing activities provided $2,217,576 in cash for the three months ended
March 31, 1997 compared to $675,377 in cash for the same period in 1996. This
increase in cash was primarily a result of the Company successfully completing
the sale of an aggregate of $2,530,000 of convertible debentures on March 6,
1997.
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 will introduce five new products in May, 1997. These products
are 1) Chew and Sooth Zinc gum which includes echinacea, vitamin C and slippery
elm bark; 2) Vita ACES+, an anti-oxidant gum containing vitamins A, C, E,
selenium and grape seed extract; 3) a dental health gum with xylitol and
Co-enzyme Q-10 plus breath fresheners; 4) High Gear energy gum with caffeine,
kola nut and guarana; and 5) a calcium supplement gum which offers antacid
properties as well as the usual calcium benefits.
The accumulated advertising credits resulting from the barter transaction
described under March 31, 1997 Results of Operations and totaling approximately
$2.4 million will be used to launch this new product line. The Company also
expects to continue to support the re-formulated ChromaTrim and CitrusSlim
weight loss/control gums with various advertising campaigns and direct response
advertising.
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
-----------------
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 March 6, 1997, in
regards to the completed sale of $2,530,000 of convertible debentures. The
convertible debentures bear interest at 11% per annum which is payable on a
quarterly basis. The debentures are interest only until January 1, 2000 at which
time the principal and interest will be paid in twenty-four equal monthly
installments through January 1, 2002. The debentures are convertible into shares
of the Company's common stock at $4.75 per share. The common stock issuable
under the convertible debentures carries certain registration rights after July
31, 1997 and are subject to a lock-up agreement with the Company which prohibits
the holder from selling their common stock prior to January 31, 1998.
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/ Gerald N. Kern
- -------------------
Gerald N. Kern
President and Chief Executive Officer
/s/ Jeffrey L. Bouchy
- ----------------------
Jeffrey L. Bouchy
Senior Vice President-Chief Financial Officer
May 9, 1997
10
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 2,577,504
<SECURITIES> 0
<RECEIVABLES> 542,593
<ALLOWANCES> 33,516
<INVENTORY> 1,077,777
<CURRENT-ASSETS> 5,695,118
<PP&E> 3,730,416
<DEPRECIATION> (600,948)
<TOTAL-ASSETS> 11,103,181
<CURRENT-LIABILITIES> 558,887
<BONDS> 0
0
0
<COMMON> 7,965,060
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 11,103,181
<SALES> 2,427,822
<TOTAL-REVENUES> 2,427,822
<CGS> 1,166,453
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 49,970
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 73,653
<INCOME-PRETAX> 541,575
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 541,575
<EPS-PRIMARY> .09
<EPS-DILUTED> .09
</TABLE>
