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, 1998
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)
246 East Watkins Street
Phoenix, AZ 85004
--------------------------------------
(Address of principal executive offices)
(602) 252-1617
-------------------------
(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 6,056,460 shares of the registrant's common stock, no par value
outstanding as of May 5, 1998.
<PAGE>
GUM TECH INTERNATIONAL, INC.
FORM 10-QSB
INDEX
Part I Financial Information Page
Item 1. Condensed Balance Sheet as of
March 31, 1998 1
Condensed Statements of Operations
for the three months ended March 31, 1998
and 1997 3
Condensed Statements of Cash Flows
for the three months ended March 31, 1998
and 1997 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, 1998
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 2,539,911
Restricted cash 57,639
Accounts receivable, net of allowance for
doubtful accounts of $48,283 834,048
Inventories 1,081,512
Notes receivable 150,000
Interest receivable 26,071
Prepaid expenses and other 108,131
-----------
Total Current Assets 4,797,312
-----------
Property and Equipment, at cost:
Machinery and production equipment 3,564,952
Office furniture and equipment 140,865
Leasehold improvements 194,087
-----------
Total Property and Equipment 3,899,904
Less accumulated depreciation (1,070,077)
-----------
Net Property and Equipment 2,829,827
-----------
Other Assets:
Intangible assets, net of accumulated
amortizat ion of $61,649 209,732
Deposits and other 93,161
-----------
Total Other Assets 302,893
-----------
Total Assets $ 7,930,032
===========
The accompanying notes are an integral part of
these condensed financial statements.
1
<PAGE>
GUM TECH INTERNATIONAL, INC.
CONDENSED BALANCE SHEET
March 31, 1998
(Continued)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 726,926
Accrued interest 68,622
Customer deposits 49,549
Current portion of long-term debt 474,597
------------
Total Current Liabilities 1,319,694
------------
Long Term Debt, net of current portion above:
Financial institutions and other 4,016,199
Obligations under capital leases 31,269
Less current portion above (474,597)
------------
Total Long Term Debt 3,572,871
------------
Commitments and Contingencies --
Stockholders' Equity:
Preferred stock: no par value,
1,000,000 shares authorized, none
issued or outstanding --
Common stock: no par value,
10,000,000 shares authorized,
5,876,460 shares issued and
outstanding 12,124,150
Additional paid in capital 2,144,540
(Accumulated deficit) (11,231,223)
------------
Total Stockholders' Equity 3,037,467
------------
Total Liabilities and Stockholders' Equity $ 7,930,032
============
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,
------------------------------------
1998 1997
------------------------------------
<S> <C> <C>
Net sales $ 1,104,431 $ 723,611
Cost of sales 789,828 1,166,453
----------- -----------
Gross Profit 314,603 (442,842)
Operating expenses 3,269,269 627,393
Research and development 114,471 49,940
----------- -----------
Income (Loss) From Operations (3,069,137) (1,120,175)
----------- -----------
Other Income (Expense):
Interest and other income 42,808 31,222
Interest expense (123,926) (739,443)
----------- -----------
Total Other Income (Expense) (81,118) (708,221)
----------- -----------
Income (Loss) Before Provision For Income Taxes (3,150,255) (1,828,396)
Provision (benefit) for income taxes -- --
----------- -----------
Net Income (Loss) $(3,150,255) $(1,828,396)
=========== ===========
Net Income (Loss) Per Share of Common Stock:
Basic:
Weighted Average Number of Common Shares Outstanding 5,857,571 4,948,740
=========== ===========
Net Income (Loss) Per Share of Common Stock $ (0.54) $ (0.37)
=========== ===========
Diluted:
Weighted Average Number of Common Shares Outstanding 5,857,571 4,948,740
=========== ===========
Net Income (Loss) Per Share of Common Stock $ (0.54) $ (0.37)
=========== ===========
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,
----------------------------------
1998 1997
----------------------------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $(3,150,255) $(1,828,426)
Adjustments to reconcile net
income (loss) to net cash (used)
by operating activities :
Depreciation 67,323 141,545
Amortization 13,939 8,114
Compensation from forgiveness of
note receivable 66,000 --
Compensation from extension of stock options 1,478,750 --
Interest expense from beneficial
conversion feature of notes payable -- 665,790
Accrued interest on notes receivable 34,093 (35,110)
Changes in assets and liabilities:
Decrease in accounts receivable 248,186 244,795
Decrease in employee receivable 61,054 --
Decrease in current portion of
note receivable 148,012 --
(Increase) decrease in inventories (48,130) 289,167
Decrease in prepaid expenses and other 8,074 26,751
Decrease in deposits and other 53,313 184,012
(Decrease) in accounts payable and
accrued expenses (4,910) (59,542)
Increase (decrease) in customer deposits 34,549 (65,500)
----------- -----------
Net Cash (Used) By Operating Activities (990,002) (428,404)
----------- -----------
Cash Flows From Investing Activities:
Capital expenditures (21,780) (132,531)
Increase in notes receivable -- (195,888)
----------- -----------
Net Cash Provided (Used) By
Financing Activities (21,780) (328,419)
----------- -----------
Cash Flows From Financing Activities:
Proceeds from borrowing -- 2,530,000
Principal payments on notes payable (80,487) (53,976)
Issuance of common stock upon exercise
of options 36,000 --
Debt issuance costs incurred (11,733) (258,448)
----------- -----------
Net Cash Provided (Used) By
Financing Activities (56,220) 2,217,576
----------- -----------
Net Increase (Decrease) in Cash
and Cash Equivalents (1,068,002) 1,460,753
Cash and Cash Equivalents at
Beginning of Period 3,607,913 1,116,751
----------- -----------
Cash and Cash Equivalents at End of Period $ 2,539,911 $ 2,577,504
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ 125,451 $ 39,199
Income taxes -- --
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, 1998 are not necessarily indicative of results of
operations that may be expected for the year ending December 31, 1998. 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, 1997 previously filed with the Securities
and Exchange Commission.
2 As of December 31, 1997, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings Per Share", which specifies
the method of computation, presentation and disclosure of earnings per
share. SFAS No. 128 requires the presentation of two earnings per share
amounts, basic and diluted. Basic earnings per share is calculated using
the average number of common shares outstanding. Diluted earnings per share
is computed on the basis of the average number of common shares outstanding
plus the dilutive effect of outstanding stock options using the "treasury
stock" method. The basic and diluted earnings per share are the same since
the Company had a net loss in 1998 and 1997 and the inclusion of stock
options and other incremental shares would be antidilutive. Options,
warrants and other incremental shares to purchase 2,819,812 and 2,933,132
shares of common stock at March 31, 1998 and 1997, respectively were not
included in the computation of diluted earnings per share because the
Company had a net loss and their effect would be antidilutive.
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 under its own brand names and on a private label
basis for other chewing gum marketers. 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 currently has 46 employees and by the end of 1996 the
Company produced 100% of its chewing gum products. The Company consolidated its
corporate offices with its manufacturing facility in April, 1998.
The Company's current chewing gum products contain ingredients which it
claims (i) reduce tobacco cravings (under the "CigArrest" brand name which is
licensed to Bancroft Pharmaceuticals), (ii) may reduce the risk of osteoporosis
(under the "Calcium Gum" brand name, (iii) contribute to energy and endurance
(under the "High Gear" "Ginseng Gum", "Love Gum", and "Buzz Gum" brand names),
(iv) promote weight loss (under the "ChromaTrim" and "CitrusSlim" brand names),
(v) reduces free radicals (under the "Complete Antioxidant Formula" brand name
and (vi) promotes oral hygiene and breath freshness (under the "DentaHealth"
brand name). The Company also produces gum under the "Chew and Sooth Zinc" brand
name for the cold and flu season. Sales of CigArrest, Calcium Gum, Ginseng Gum,
High Gear and Chew and Sooth Zinc Gum commenced in 1997. Sales of Buzz Gum,
ChromaTrim, Love Gum, CitrusSlim and DentaHealth commenced in 1991, 1993, 1994,
1995 and 1996, respectively. The Complete Antioxidant Formula Gum will be
introduced in mid-1998. In 1998, the Company also plans to include its
DentaHealth product in a line with other oral care products marketed as an OTC
anti-plaque oral care regimen. These dental technologies will be shared by
several other market leaders in 1998-99. The Company is also involved in many
private label endeavors, including the research and development of various
nicotine and non-nicotine smoking cessation products. Private label customers
market under their own brand names.
The Company markets its branded nutrient and therapeutic chewing gum
products directly and through wholesale distributors who distribute primarily to
drug store and convenience chains (Duane Reade, Genovese, CVS, Rite Aid, Drug
Emporium, Long's, Thrifty, Payless, Phar-Mor, Eckard and 7-11), mass market
chains (Kmart and Pamida), major supermarket chains (Smith's, Randall's, H.E.
Butt, Pathmark and Fry's) and to various natural food stores. In addition, the
Company sells its products in a number of international markets including
Europe, Asia and Canada.
6
<PAGE>
Results of Operations for the three months ended March 31, 1998 compared to the
three months ended March 31, 1997.
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>
Three Months Ended December 31,
-------------------------------
1998 1997
---- ----
<S> <C> <C> <C> <C>
Net sales $ 1,104,431 100% $ 723,611 100%
Cost of sales 789,828 72 1,166,453 161
Gross profit 314,603 28 (442,842) (61)
Operating expenses 3,269,269 296 627,393 87
Research and development 114,471 10 49,940 7
Income (Loss) from operations (3,069,137) (278) (1,120,175) (155)
Interest and other income 42,808 4 31,222 4
Interest expense 123,926 11 739,443 102
Provision (benefit) for income taxes -- -- -- --
Net income (Loss) (3,150,255) (285) (1,828,396) (253)
</TABLE>
Net Sales. Net sales increased by $380,820, or 53%, to $1,104,431 for the
three months ended March 31, 1998 compared to $723,611 for the three months
ended March 31, 1997. Private label sales increased to $864,109 in 1998 compared
to $1,100 for the same period in 1997. The Company saw a decrease of 19% in net
retail sales of its branded products to $185,000 for the period in 1998 compared
to $228,000 for the same period in 1997.
Cost of Sales. Cost of sales, as a percentage of net sales, decreased 89%
to $789,828 or 72% of net sales for the three months ended March 31, 1998
compared to $1,166,453 or 161% of net sales for the same period in 1997.
Approximately $218,124 of plant operating expenses were allocated to cost of
sales for the period ended March 31, 1998, of which $55,000 was directly related
to depreciation of the plant's manufacturing equipment, compared to $395,286 of
operating expenses and $131,570 of depreciation expense for the period ended
March 31, 1997. The Company recorded the sales under its barter agreements at a
zero value with a cost of sales of $309,000 for the period ending March 31,
1997.
Gross Profit. Gross profit, as a percentage of net sales, increased by 89%
to $314,603 or 28% of net sales for the three months ended March 31, 1998
compared to $(442,842) or (61%) of net sales for the same period in 1997. The
increase in gross profit percentage was directly related to the decrease in cost
of sales.
Operating Expenses. Operating expenses were $3,269,269, an increase of
$2,641,876 for the three months ended March 31, 1998 compared to the same period
in 1997. Significant non-manufacturing operating expenses for the three months
ended March 31, 1998, was non-cash compensation due to the extension of stock
options to a former officer of the company ($1,478,750), severance compensation
7
<PAGE>
to various officers of the company ($599,985) advertising ($342,797),
administrative management labor($228,998), accounting and professional
consulting fees ($142,359), legal fees ($136,531) and travel and trade shows
($79,432).
Research and Development. Research and Development expenditures were
$114,471 for the three months ended March 31, 1998 compared to $49,940 for the
same period in 1997. The majority of these costs were related to the production
scale-up of various gums for Nabisco, Inc. and Schering-Plough's OTC Aspergum,
an analgesic gum and Chooz, an antacid gum. The Company also continued the
formulations of various private label projects. These private label products
consisted of dental gums, diet gums, multi-vitamin gums, ginseng gum and
nicotine and non-nicotine smoking cessation gums.
Interest and Other Income and Interest Expense. Interest and other income
was $42,808, an increase of $11,586 for the three months ended March 31, 1998,
primarily as a result of an increase in working capital from equity financings
that were invested in short-term investments. Interest expense was $123,926 for
the three months ended March 31, 1998, a decrease of $615,517 from the same
period in 1997. During 1997, the Company issued $2,530,000 of subordinated
convertible notes. These debentures had a beneficial conversion feature to the
individual investors that resulted in a $665,790 non-cash charge to interest
expense for the period ended March 31, 1997.
Net Loss. Net loss increased to $3,150,255 for the three months ended March
31, 1998 compared to a net loss of $1,828,396 for the same period in 1997.
Liquidity and Capital Resources
As of March 31, 1998, the Company's working capital was $3.48 million
compared to $5.09 million at December 31, 1997. For the three months ended March
31, 1998, the Company experienced a decrease in cash used by operating
activities of $990,002 primarily as a result of the net loss for the period.
Investing activities used $21,780 in cash for the three months ended March
31, 1998 compared to $328,419 of cash used in the same period of 1997. The cash
used in 1998 was primarily from the purchases of capital equipment.
Financing activities used $56,220 in cash the three months ended March 31,
1998 compared to $2.22 million in cash provided for the same period in 1997. The
increase in cash provided in 1997 was due to the Company selling an aggregate of
$2.53 million of convertible debentures in March, 1997.
The Company's future results of operations and 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.
On August 27, 1997, a lawsuit was filed by Paul R. Janssens-Lens against
Gum Tech International, Inc., in the case of Janssens-Lens v. Gum Tech
International, Inc., Kensington Securities, Inc., Kirtis Wyatt and Jane Doe
Wyatt in the Superior Court of Arizona, in and for the County of Maricopa, case
number CV97-15896. The Janssens Lens lawsuit alleges both breach of contract and
tort actions, including intentional interference with prospective economic
advantage, misrepresentation, securities fraud and consumer fraud and seeks
compensatory damages in an amount of no less than $1,680,000, together with an
award of punitive damages in an amount to be determined at trial. The lawsuit
settled in the early stages between plaintiff Paul R. Janssens-Lens and
defendants Kensington Securities, Inc. and Kirtis Wyatt. The Company did not
participate in this settlement agreement. The plaintiff is now in the process of
determining whether he believes he still has a viable cause of action against
the Company. In the event the plaintiff elects to proceed against the Company,
the Company intends to vigorously defend the lawsuit. The Company believes it is
insured for its costs in this matter.
On March 26, 1998, Roy Kaplan filed a charge of discrimination with the
California Department of Fair Employment and Housing and the Equal Employment
Opportunity Commission alleging discrimination based on age and religion.
Specifically, he alleges that he was terminated from his position as Executive
Vice President of Sales because of his age (63) and religion (Jewish). The
Company will respond to this charge on or before May 26, 1998. The Company
denies that Mr. Kaplan's termination was based on his age or his religion. At
this time, no prediction as to the outcome of the matter can be expressed.
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
--------------------------------
A. Exhibits
None
9
<PAGE>
B. Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated February 13, 1998. On
February 10, 1998, the Board of Directors of Gum Tech International, Inc.
accepted the resignation of Chairman, Chief Executive Officer and President,
Gerald N. Kern prior to a scheduled review of Mr. Kern's performance. The
severance package includes a payment of $200,000, of which, $50,000 will be held
in trust for 120 days and is subject to a non-disparagement clause. The Company
will also forgive $116,000 of debt and officer's advances owed by Mr. Kern to
the Company. Additionally, Mr. Kern received 100,000 shares of Gum Tech stock
options, exercisable up to one year at $5.81 per share.
10
<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/ Gary S. Kehoe
- -----------------------
Gary S. Kehoe
President and
Chief Operating Officer
/s/ Jeffrey L. Bouchy
- ----------------------
Jeffrey L. Bouchy
Senior Vice President-Chief Financial Officer
May 15, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 2,539,911
<SECURITIES> 0
<RECEIVABLES> 883,331
<ALLOWANCES> 48,283
<INVENTORY> 1,081,512
<CURRENT-ASSETS> 4,797,312
<PP&E> 3,899,904
<DEPRECIATION> 1,070,077
<TOTAL-ASSETS> 7,930,032
<CURRENT-LIABILITIES> 1,319,694
<BONDS> 0
0
0
<COMMON> 12,124,150
<OTHER-SE> 2,144,540
<TOTAL-LIABILITY-AND-EQUITY> 7,930,032
<SALES> 1,104,431
<TOTAL-REVENUES> 1,104,431
<CGS> 789,828
<TOTAL-COSTS> 789,828
<OTHER-EXPENSES> 114,471
<LOSS-PROVISION> (3,069,137)
<INTEREST-EXPENSE> 123,926
<INCOME-PRETAX> (3,150,255)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,150,255)
<EPS-PRIMARY> (.54)
<EPS-DILUTED> (.54)
</TABLE>
