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, 1999
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 7,519,845 shares of the registrant's common stock, no par value
outstanding as of August 2, 1999.
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GUM TECH INTERNATIONAL, INC.
FORM 10-QSB
INDEX
Part I Financial Information Page
Item 1. Condensed Consolidated Balance Sheet
as of June 30, 1999 1
Condensed Consolidated Statements of
Operations for the three months ended
June 30, 1999 and 1998 3
Condensed Consolidated Statements of
Operations for the six months ended
June 30, 1999 and 1998 4
Condensed Consolidated Statements of
Cash Flows for the six months ended
June 30, 1999 and 1998 5
Notes to Condensed Consolidated
Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Part II Other Information and Signatures
Item 1. Legal Proceedings 19
Item 2. Change in Securities 19
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
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GUM TECH INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1999
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 5,256,509
Restricted cash 271,173
Accounts receivable, net of allowance for
doubtful accounts of $39,598 1,853,010
Inventories 1,557,182
Prepaid expenses and other 75,897
------------
Total Current Assets 9,013,771
------------
Property and Equipment, at cost:
Machinery and production equipment 4,418,404
Office furniture and equipment 267,389
Leasehold improvements 370,110
------------
Total Property and Equipment 5,055,903
Less accumulated depreciation (1,493,034)
------------
Net Property and Equipment 3,562,869
------------
Other Assets:
Intangible assets, net of accumulated
amortization of $281,653 288,378
Deposits and other 193,781
------------
Total Other Assets 482,159
------------
Total Assets $ 13,058,799
============
The accompanying notes are an integral part of these condensed
consolidated financial statements.
1
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GUM TECH INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1999
(Continued)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 608,696
Accrued interest 40,881
Dividends payable 8,333
Customer deposits 50,350
Reserve for customer returns 97,211
Current portion of long-term debt 2,400,193
------------
Total Current Liabilities 3,205,664
------------
Long Term Debt, net of current portion above:
Senior notes payable 3,437,500
Financial institutions and other 1,411,956
Obligations under capital leases 19,300
Less current portion above (2,400,193)
------------
Total Long Term Debt 2,468,563
------------
Stockholders' Equity:
Preferred stock, no par value, 1,000,000 shares authorized:
Series A preferred stock, no par value, 2,000 shares
authorized, issued and outstanding 2,000,000
Common stock: no par value, 20,000,000 shares authorized,
7,429,662 shares issued and outstanding 17,778,872
Additional paid in capital 3,458,172
Accumulated deficit (15,852,472)
------------
Total Stockholders' Equity 7,384,572
------------
Total Liabilities and Stockholders' Equity $ 13,058,799
============
The accompanying notes are an integral part of these condensed
consolidated financial statements.
2
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GUM TECH INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended June 30,
--------------------------
1999 1998
----------- -----------
Net sales $ 1,919,141 $ 1,213,086
Cost of sales 1,289,516 1,025,272
----------- -----------
Gross Profit 629,625 187,814
Operating expenses 1,044,340 720,403
Research and development 105,614 27,401
----------- -----------
Income (Loss) From Operations (520,329) (559,990)
----------- -----------
Other Income (Expense):
Interest and other income 10,360 32,320
Interest expense (218,854) (137,698)
----------- -----------
Total Other Income (Expense) (208,494) (105,378)
----------- -----------
Income (Loss) Before Provision For Income Taxes (728,823) (665,368)
Provision for income taxes -- 150
----------- -----------
Net Income (Loss) (728,823) (665,518)
Preferred stock dividends 30,579 --
----------- -----------
Net Income (Loss) Applicable to Common
Shareholders $ (759,402) $ (665,518)
=========== ===========
Net Income (Loss) Per Share of Common Stock:
Basic:
Weighted Average Number of Common Shares
Outstanding 7,266,329 6,441,724
=========== ===========
Net Income (Loss) Per Share of Common Stock $ (.10) $ (.10)
=========== ===========
Diluted:
Weighted Average Number of Common Shares
Outstanding 7,266,329 6,441,724
=========== ===========
Net Income (Loss) Per Share of Common Stock $ (.10) $ (.10)
=========== ===========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
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GUM TECH INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Six months ended June 30,
--------------------------
1999 1998
----------- -----------
Net sales $ 4,364,697 $ 2,317,517
Cost of sales 3,130,396 1,815,100
----------- -----------
Gross Profit 1,234,301 502,417
Operating expenses 1,995,511 3,989,672
Research and development 225,383 141,872
----------- -----------
Income (Loss) From Operations (986,593) (3,629,127)
----------- -----------
Other Income (Expense):
Interest and other income 19,129 75,128
Interest expense (329,008) (261,624)
----------- -----------
Total Other Income (Expense) (309,879) (186,496)
----------- -----------
Income (Loss) Before Provision For Income Taxes (1,296,472) (3,815,623)
Provision for income taxes -- 150
----------- -----------
Net Income (Loss) (1,296,472) (3,815,773)
Preferred stock dividends 30,579 --
----------- -----------
Net Income (Loss) Applicable to Common
Shareholders $(1,327,051) $(3,815,773)
=========== ===========
Net Income (Loss) Per Share of Common Stock:
Basic:
Weighted Average Number of Common Shares
Outstanding 7,133,866 6,151,259
=========== ===========
Net Income (Loss) Per Share of Common Stock $ (.19) $ (.62)
=========== ===========
Diluted:
Weighted Average Number of Common Shares
Outstanding 7,133,866 6,151,259
=========== ===========
Net Income (Loss) Per Share of Common Stock $ (.19) $ (.62)
=========== ===========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
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GUM TECH INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended June 30,
--------------------------
1999 1998
----------- -----------
Cash Flows From Operating Activities:
Net income (loss) $(1,296,472) $(3,815,772)
Adjustments to reconcile net income (loss) to
net cash (used) by operating activities:
Depreciation 197,692 126,063
Amortization 125,127 50,938
Compensation from forgiveness of note receivable -- 114,012
Compensation from extension and issuance
of stock options 91,275 1,478,750
Accrued interest on notes receivable -- 60,164
Amortization of discount on notes payable 37,500 --
Changes in assets and liabilities:
(Increase) Decrease in accounts receivable (390,371) 114,332
Decrease in employee receivable -- 61,054
(Increase) Decrease in inventories 338,979 (197,003)
(Increase) in prepaid expenses and other (15,046) (24,134)
(Increase) in deposits and other (157,236) (59,489)
(Decrease) in accounts payable and accrued
expenses (736,939) (265,593)
Increase in customer returns and allowances 97,211 --
Increase in customer deposits 15,587 32,515
----------- -----------
Net Cash (Used) By Operating Activities (1,692,693) (2,324,163)
----------- -----------
Cash Flows From Investing Activities:
Capital expenditures (212,334) (198,825)
Receipt of principal on notes receivable -- 250,000
----------- -----------
Net Cash (Used) By Investing Activities (212,334) 51,175
----------- -----------
Cash Flows From Financing Activities:
Proceeds from borrowing 4,000,000 --
Principal payments on notes payable (173,547) (165,938)
Issuance of common stock upon exercise
of options and warrants 1,469,429 1,484,397
Issuance of preferred stock 2,000,000 --
Debt issuance costs incurred (298,650) (11,733)
Offering costs incurred (148,265) --
Dividend distribution of subsidiary (183,037) --
Dividends paid (22,246) --
----------- -----------
Net Cash Provided By Financing Activities 6,643,684 1,306,726
----------- -----------
Net Increase (Decrease) in Cash and
Cash Equivalents 4,738,657 (966,262)
Cash and Cash Equivalents at Beginning
of Period 517,852 3,607,913
----------- -----------
Cash and Cash Equivalents at End of Period $ 5,256,509 $ 2,641,651
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ 166,889 $ 221,944
Income taxes -- --
Supplemental Disclosure of Non Cash Investing
and Financing Activities:
Conversion of notes payable into common stock $ 1,155,978 $ 399,000
Common stock issued for subscription receivable $ 8,438 $ --
Issuance of warrents in connection with senior
notes $ 600,000 $ --
Dividends accrued on preferred stock $ 8,333
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
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GUM TECH INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED 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 six months ended
June 30, 1999 are not necessarily indicative of results of operations that
may be expected for the year ending December 31, 1999. 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, 1998 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 1999 and 1998 and the inclusion of stock
options and other incremental shares would be antidilutive. Options,
warrants and other incremental shares to purchase 1,597,668 and 1,533,680
shares of common stock at June 30, 1999 and 1998, 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.
3. On June 2, 1999 Gum Tech completed a $6.0 million financing with Citadel
Investment Group. The financing consists of $4.0 million in principal
amount of 8% Senior Secured Notes and $2.0 million of 14% Series A
Preferred Stock. The financing is detailed in a Form 8-K filing made on
June 9, 1999. The terms of the financing permit the Company to redeem the
6
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debt and preferred stock at any time, subject to certain conditions, in
cash or common stock, but require that one half of the debt and preferred
stock must be redeemed at a 10% premium by June 2, 2000. The cost of this
premium is amortized over a twelve-month period through non-cash charges to
interest and preferred dividends.
In conjunction with the financing, Gum Tech issued 360,000 warrants to
purchase Gum Tech common stock: 300,000 to the purchaser of the securities,
Citadel Investment Group, and 60,000 to the consultant involved in the
transaction, Intercontinental Capital Corp. The cost of the warrants is
allocated between the debt and preferred stock components of the financing.
The amount of the debt financing has been recorded at the principal amount
($4,000,000) less the cost of the warrants allocated to the debt component
($600,000). The warrant cost associated with the debt is amortized as a
non-cash interest expense over the term of the notes. The cost of the
warrants associated with the preferred stock component has been charged
against paid in capital.
4. Certain financial information for the Company's gum operations (excluding
the Company's joint venture operations) is required to be supplied to
Citadel Investment Group in conjunction with financial covenants contained
in the financing agreement. Below is the required financial information as
of June 30, 1999:
A. EBITDA: Net income $ (337,901)
Add - Depreciation & amortization 82,127
Add - Interest expense, net of interest income 210,479
Add - Accrued income taxes -0-
----------
EBITDA $ (45,295)
Net Income adjusted to exclude the cost ($91,275) of issuing
stock options to Whitehill Oral Care Technologies recorded in
the three months ended June 30,1999.
B. Net Revenue
Gross revenue $1,948,116
Less returns & allowances 36,601
Less sales discounts, slotting, other 90,963
----------
Net Revenue $1,820,552
C. Cash & Cash Equivalents
Cash on deposit $1,876,040
Cash equivalents -0-
----------
Total $1,876,040
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Gum Tech develops and manufactures specialty chewing gum products for
branded and private label customers, as well as products marketed under its own
brand labels. Specialty chewing gums include vitamins, herbals and active
over-the-counter drug ingredients formulated to provide specific health-related
benefits to the user. Gum Tech currently targets four market segments: oral
care, smoking cessation, dietary supplement, and over-the-counter (OTC) drug. A
substantial majority of Gum Tech's sales currently are attributable to products
developed, manufactured and packaged by Gum Tech for marketing and sale by major
branded and private label consumer products companies.
Gum Tech entered into a joint venture with BioDelivery Technologies, Inc.
to manufacture, market and distribute Zicam(TM), a nasal gel formula. Under an
operating agreement that was signed on May 6, 1999, Gum Tech and BioDelivery
Technologies transferred their respective interest in the patent rights to the
nasal gel technology in exchange for membership interests in Gel Tech LLC, a
recently formed Arizona limited liability company. Gum Tech has a 60% interest
in the capital and profits of the joint venture and has provided $3.5 million of
capital to the joint venture. Gum Tech reports financial results of Gel Tech LLC
on a consolidated basis, but identifies certain information by its two business
segments--chewing gum operations and Zicam(TM) operations
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THE
THREE MONTHS ENDED JUNE 30, 1998
The following table details certain financial information for Gum Tech's
chewing gum and Zicam(TM) operations for the three months ended June 30, 1999:
Chewing gum Zicam(TM) Consolidated
------------ ------------ ------------
Net sales $ 1,820,552 $ 98,589 $ 1,919,141
Cost of sales 1,247,313 42,203 1,289,516
------------ ------------ ------------
Gross profit 573,239 56,386 629,625
Operating expenses 720,868 323,472 1,044,340
Research and development 72,718 32,896 105,614
------------ ------------ ------------
Income (Loss) from operations (220,347) (299,982) (520,329)
Interest and other income 10,025 335 10,360
Interest expense 218,854 0 218,854
------------ ------------ ------------
Net income (loss) $ (429,176) $ (299,647) $ (728,823)
============ ============ ============
Net Assets $ 9,479,880 $ 3,583,919 $ 13,058,099
============ ============ ============
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ZICAM(TM) OPERATIONS
Although the Gel Tech operating agreement was not signed until May 6, 1999,
Gum Tech and Gel Tech Inc., the predecessor to Gel Tech LLC, began initial
marketing and distribution of Zicam(TM) in the first quarter of 1999. Operating
expenses for the three months ended June 30,1999 include certain expenses that
were incurred in the first quarter of 1999 by Gel Tech Inc., the predecessor
company to Gel Tech LLC, but were not consolidated into Gum Tech's financial
results prior to the conclusion of the operating agreement in May 1999.
CHEWING GUM OPERATIONS
The remainder of this discussion addresses Gum Tech's chewing gum
operations compared to those operations in the prior year period. Certain
information is set forth below, expressed in dollars and as a percentage of net
sales for the periods indicated:
Three Months Ended June 30,
---------------------------------------------
1999 1998
-------------------- --------------------
Net sales $ 1,820,552 100% $ 1,213,086 100%
Cost of sales 1,247,313 69 1,025,272 85
----------- ----- ----------- -----
Gross profit 573,239 31 187,814 15
Operating expenses 720,868 40 720,403 59
Research and development 72,718 4 27,401 2
----------- ----- ----------- -----
Income (Loss) from operations (220,347) (13) (559,990) (46)
Interest and other income 10,025 1 32,320 2
Interest expense 218,854 12 137,698 11
Provision (benefit) for
income taxes -- -- 150 --
----------- ----- ----------- -----
Net income (loss) $ (429,176) (24)% $ (665,518) (55)%
=========== ===== =========== =====
NET SALES. Net sales increased to approximately $1.8 million for the three
months ended June 30, 1999, or 50% above the prior year's level of $1.2 million.
The majority of gum sales in the second quarter were attributable to sales of
dental gum for several Ranir/DCP private label customers; Breath Asure Dental
Gum(TM); Accutrim(TM), Chooz(R),and Aspergum(R) to Heritage Consumer Products;
and several different gum products for PharmaGreen Ltd. Sales in the 1998 period
were largely attributable to sales of energy and diet gums to Herbalife.
COST OF SALES. Cost of sales increased to approximately $1.2 million
reflecting the higher level of sales.
GROSS PROFIT. Gross profit increased by approximately $400,000 in 1999 over
the prior year due to an improvement in the Company's manufacturing operations
and the increase in sales.
9
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OPERATING EXPENSES. Operating expenses were approximately $720,000,
virtually unchanged from the prior year level. The 1999 period includes a
non-cash charge of $91,275 to reflect the cost of issuing options to certain
principals of Whitehill Oral Technologies, the supplier of Microdent(R) which is
used in several of the Company's products.
INTEREST AND OTHER INCOME. Interest and other income decreased due to lower
cash balance.
INTEREST EXPENSE. Interest expense for the first quarter was approximately
$219,000 or $81,000 above the prior year level. The 1999 amount includes a
charge of $54,000 associated with the accelerated amortization of issuance costs
associated with the Company's convertible debt securities that were either
converted or scheduled to be converted into common equity by July 2, 1999.
Interest expense also includes approximately one month of charges associated
with the Citadel debt financing. These charges include a cash interest charge of
$26,000 and a total of $73,200 non-cash interest charges. The non-cash charge
consists of $37,500 for the warrants issued in conjunction with the debt,
$16,700 for accrual of the required prepayment premium and $19,000 for the
amortization of debt issuance costs.
NET INCOME (LOSS) Net loss for the 1999 period was approximately $429,000.
The improvement in net loss is attributable to an increase in the Company's
gross profit margin and higher sales level.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO THE SIX
MONTHS ENDED JUNE 30, 1998
The following table details certain financial information for Gum Tech's chewing
gum and Zicam(TM) operations for the six months ended June 30, 1999:
Chewing gum Zicam(TM) Consolidated
----------- ----------- -----------
Net sales $ 3,898,016 $ 466,681 $ 4,364,697
Cost of sales 2,908,507 221,889 3,130,396
----------- ----------- -----------
Gross profit 989,509 244,792 1,234,301
Operating expenses 1,373,428 622,083 1,995,511
Research and development 192,487 32,896 225,383
----------- ----------- -----------
Income (Loss) from operations (576,406) (410,187) (986,593)
Interest and other income 18,794 335 19,129
Interest expense 329,008 -- 329,008
----------- ----------- -----------
Net income (loss) $ (886,620) $ (409,852) $(1,296,472)
=========== =========== ===========
ZICAM(TM) OPERATIONS
Zicam(TM) sales and operations began January 1, 1999. Significant expense items
in this period were advertising expenses and legal expenses associated with
structuring the Gel Tech operating agreement.
10
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CHEWING GUM OPERATIONS
The remainder of this discussion addresses Gum Tech's chewing gum operations
compared to those operations in the prior year period. Certain information is
set forth below, expressed in dollars and as a percentage of net sales for the
periods indicated:
Six Months Ended June 30,
---------------------------------------------
1999 1998
-------------------- --------------------
Net sales $ 3,898,016 100% $ 2,317,517 100%
Cost of sales 2,908,507 75 1,815,100 78
----------- ----- ----------- -----
Gross profit 989,509 25 502,417 22
Operating expenses 1,373,428 35 3,989,672 173
Research and development 192,487 5 141,872 6
----------- ----- ----------- -----
Income (Loss) from operations (576,406) (15) (3,629,127) (157)
Interest and other income 18,794 -- 75,128 3
Interest expense 329,008 8 261,624 11
Provision (benefit) for
income taxes -- -- 150 --
----------- ----- ----------- -----
Net income (loss) $ (886,620) (23)% $(3,815,773) (165)%
=========== ===== =========== =====
NET SALES. Net sales increased to $3.9 million for the six months ended
June 30, 1999 or 68% over the prior year. The increase reflects the addition of
several new customers and/or products in mid- to late 1999. Among these are
Ranir DCP, Breath Asure, Heritage Consumer Products' Accutrim gum and
Pharmagreen. Sales in the prior year largely reflect sales of Cigarest's smoking
cessation gum, Herbalife's diet and energy gums, Aspergum and Chooz.
COST OF SALES. The cost of sales increased by approximately $1.1 million to
$2.9 million reflecting the higher level of sales.
GROSS PROFIT. Gross profit increased from $502,000 to $990,000 reflecting
the higher level of sales and an improved gross profit margin.
OPERATING EXPENSES Operating expenses declined by approximately $2.6
million to $1.4 million. The amount for 1998 includes a charge of $1,478,750 to
reflect the cost of an extension of options to a former officer and severance
compensation expense of $618,230. Exclusive of these charges, expenses in 1998
were $1,892,692 or $519,000 greater than the 1999 level. The decrease is
attributable to lower advertising expenses associated with the Company's change
in strategy to a focus on contract manufacturing and lower legal expenses.
INTEREST AND OTHER INCOME Interest and other income decreased due to a
lower cash balance.
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INTEREST EXPENSE Interest expense increased by approximately $67,000 above
the prior year primarily due to non-cash interest charges associated with the
Citadel financing.
NET INCOME (LOSS) Net loss decreased by approximately $2.9 million
primarily due to the decrease in Operating expenses and higher sales level.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1999 Gum Tech's working capital was approximately $5.8
million compared to $2.2 million at December 31, 1998. During the six months
ended June 30, 1999, Gum Tech experienced a decrease in cash used by operating
activities of approximately $1.7 million, versus $2.3 million the prior year
principally due to the decrease in losses recorded for the two periods. Of the
amount for 1999, approximately $1.3 million was attributable to the net loss
incurred for the period ($887,000 for gum operations and $410,000 for Gel Tech
LLC), which was offset in part by depreciation, amortization and other non-cash
operating charges for the period. A reduction in accounts payable of almost
$737,000 contributed significantly to the decrease in cash from operations.
Investing activities consumed $212,000 of cash for the six months ended
June 30, 1999, compared to $51,000 provided in the same period in 1998. The 1998
amount reflects the repayment of two outstanding notes by two former officers of
the Corporation.
Financing activities provided approximately $6.6 million of cash for the
six months ended June 30, 1999 compared to $1.3 million in 1998. Approximately
$5.5 million of the 1999 amount reflects net proceeds realized from the Citadel
financing in June 1999. Details of the Citadel financing are contained in a Form
8-K filing made on June 9,1999. Proceeds realized from the exercise of options
and warrants contributed approximately $1.5 million in both periods.
In February 1999, Gum Tech entered into a $2.0 million financing
arrangement with a commercial bank for the sale of accounts receivable submitted
to the bank. Gum Tech canceled this facility in conjunction with the completion
of the Citadel financing. Gum Tech did not borrow under this facility while it
was outstanding.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
Certain written or oral forward-looking statements may be made by the
Company from time to time in filings with the Securities & Exchange Commission
or otherwise. Such forward-looking statements are within the meaning of that
term in Section 27A of the Securities Act of 1933, as amended, and Section 21E
of the Securities Act of 1934, as amended. Such statements may include, but may
not be limited to, projections of revenues, income or loss, estimate of capital
expenditures, plans for future operations, products or services, and financing
needs or plans, as well as assumptions relating to the foregoing. The words
"believe," "expect," "anticipate," "estimate," "project," and similar
expressions identify forward-looking statements, which speak only as of the date
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the statement was made. Specifically, this report contains forward-looking
statements concerning plant efficiencies and capacities, capital spending,
research and development, and other projected expenses, among others.
Forward-looking statements are inherently subject to risks and uncertainties,
some of which cannot be predicted or quantified. Future events and actual
results could differ materially from those set forth in, contemplated by, or
underlying the forward-looking statements. The statements included in this
report, particularly those contained in this Item 2, "Management's Discussion
and Analysis of Financial Condition and Results of Operations," and in the Notes
to the Company's Financial Statements, describe factors that could contribute to
or cause such differences. These factors include, among others, less than
anticipated demand for Gum Tech's chewing gum products, a lack of market
acceptance for or uncertainties concerning the efficacy of Zicam(TM), a failure
to maintain compliance with various covenants contained in the Citadel
financing, a decrease in the level of reorders from existing customers,
financial difficulties encountered by one or more of Gum Tech's principal
customers, difficulties in obtaining additional capital for marketing, research
and development, and other expenses, the possibility of material charges
incurred as a result of prior activities, aggressive pricing and marketing
efforts by rival gum manufacturers, unavailability of third-party material
products at reasonable prices, inventory obsolescence due to shifts in market
demand, and material litigation involving product liabilities and consumers
issues. These potential risks and uncertainties, together with those mentioned
below and elsewhere in this report, could affect Gum Tech's future operating
results, financial condition, and the market price of its common stock.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS AND FINANCIAL CONDITION
Our future operating results and financial condition are dependent on a
number of factors that we must successfully manage in order to achieve favorable
future operating results that maintain our financial condition. The following
potential risks and uncertainties, together with those mentioned elsewhere in
this report, could affect our future operating results, financial condition and
the market price of our common stock.
WE HAVE INCURRED SIGNIFICANT LOSSES AND MAY NOT BECOME PROFITABLE
We began operations in February 1991 and have a limited operating history
upon which potential investors may evaluate our performance. We reported
significant losses for the last three years and for the first two quarters of
1999. We can give no assurance that future operations will be profitable. The
likelihood of our success must be considered relative to the problems,
difficulties, complications and delays frequently encountered in connection with
the development and operation of a new business, the significant change in
strategy in early 1998, and the development and marketing of Zicam, a new
product.
OUR RELIANCE ON A FEW CUSTOMERS MAY NEGATIVELY IMPACT OUR FINANCIAL RESULTS
With our shift in strategy in early 1998 to a focus on contract
manufacturing, Gum Tech has become very dependent for its current sales and
future growth on a few customers. These customers include Herbalife, Breath
Asure, Ranir, Heritage Consumer Products, and PharmaGreen. While the decision to
partner with
13
<PAGE>
these firms relieves Gum Tech of the direct responsibility of marketing
products, it does introduce a dependability on these customers to market their
products. Further, we are at risk for their non-payment or late payment for
amounts owed us. While Gum Tech intends to add to this portfolio of customers to
reduce the risk of non-performance by any single customer, there can be no
assurance that we will be successful in that effort.
OUR INABILITY TO PROVIDE SCIENTIFIC PROOF FOR PRODUCT CLAIMS MAY ADVERSELY
AFFECT OUR SALES
The marketing of certain of our chewing gum products involves claims that
such products assist in weight loss, promote dental hygiene and the like. Under
FDA and FTC rules, we are required to obtain scientific data to support any
health claims we make concerning our products. Although we have not provided nor
been requested to provide any scientific data to the FDA, we have obtained such
scientific data for all of our products. There can be no assurance that the
scientific data we have obtained in support of such claims will be deemed
acceptable by the FDA or FTC, should either agency request any such data in the
future. If we are unable to provide support that is acceptable by the FDA or the
FTC, either agency could force us to stop making the claims in question or
restrict us from selling the affected products.
FDA AND OTHER GOVERNMENT REGULATION MAY RESTRICT OUR ABILITY TO SELL OUR
PRODUCTS
We are subject to various federal, state and local laws affecting our
business. Our chewing gum products are subject to regulation by the FDA,
including regulations with respect to labeling of products, approval of
ingredients in products, claims made regarding the products, and disclosure of
product ingredients. If we do not comply with these regulations, the FDA could
force us to stop selling the affected products or incur substantial costs in
adopting measures to maintain compliance with these regulations.
Our advertising claims regarding our products are subject to the
jurisdiction of the FTC as well as the FDA. In both cases we are required to
obtain scientific data to support any advertising or labeling health claims we
make concerning our products, although no pre-clearance or filing is required to
be made with either agency. If we are unable to provide the required support for
such claims, the FTC may stop us from making such claims or require us to stop
selling the related product.
Our chewing gum manufacturing facility is subject to regulation by various
governmental agencies, including state and local licensing, zoning, land use,
construction, and environmental regulations and various health, sanitation,
safety and fire codes and standards. Suspension of certain licenses or
approvals, due to failure to comply with applicable regulations or otherwise,
could interrupt our manufacturing operations.
We are subject to federal and state laws establishing minimum wages and
regulating overtime and working conditions. Since many of our personnel are paid
at rates based on the federal minimum wage, an increase in such minimum wage
will result in an increase in our labor costs.
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UNANTICIPATED PROBLEMS ASSOCIATED WITH PRODUCT DEVELOPMENT COULD DELAY OR HINDER
INTRODUCTION OF NEW PRODUCTS
We may experience unanticipated difficulties in developing new products
that could delay or prevent the introduction of those products. We may be
dependent in the near future upon chewing gum products that are currently being
developed. If we are unable to develop new chewing gum products on a timely
basis, our business, operating results, and financial condition could be
materially adversely affected.
WE MAY BE UNABLE TO SUCCESSFULLY EXPAND OUR OPERATIONS
We intend to continue expanding our manufacturing and marketing operations.
Expansion will place substantial strains on our newly retained management and
our operational, accounting, and information systems. Successful management of
growth will require us to improve our financial controls, operating procedures,
and management information systems, and to train, motivate, and manage our
employees.
Failure to manage growth effectively would have a material adverse effect
on the results of our operations and our ability to execute our business
strategy.
TERMS OF SERIES A PREFERRED STOCK AND NOTES COULD DEPRESS THE PRICE OF OUR STOCK
OR LEAD TO FORECLOSURE
The terms of the Series A Preferred Stock and Notes issued to the selling
stockholders in June 1999 contain a number of restrictive covenants that we must
satisfy and that require repayment of the Series A Preferred Stock and Notes at
various times during the two year period following the closing of that offering.
We generally have the ability to make these payments in shares of stock rather
than cash, which could depress the price of our common stock if demand for our
shares does not meet the increased number of shares being sold into the market.
In addition, failure to meet any of the restrictive covenants or failure or
inability to pay the required amounts under the Series A Preferred Stock or the
Notes when due will enable the selling stockholders to exercise a variety of
remedies, including foreclosure of its security interests in substantially all
the assets of Gum Tech. In that event, Gum Tech's operations and financial
results will be severely and adversely affected and the price of our common
stock could decline significantly.
FAILURE TO SATISFY FINANCIAL COVENANTS WOULD TRIGGER ADVANCE REMEDIES
The terms of Series A Preferred Stock and Notes issued to the selling
stockholders in June 1999 require us to meet a number of financial covenants on
a quarterly basis during the life of the Notes, including cash, revenue, and
EBITDA. If we fail to satisfy or cure breaches any of these financial covenants,
or otherwise breach any of the negative covenants included in this agreement,
the applicable interest rate will increase to 15% and the holders of the Notes
15
<PAGE>
may exercise a number of remedies, including accelerating the principal and
interest due on the Notes, or closing on the collateral pledged to secure the
Notes, and forcing conversion of the Notes into common stock. There can be no
assurance that we will be able to satisfy the financial covenants contained in
this agreement on an ongoing basis.
THE LARGE NUMBER OF SHARES ELIGIBLE FOR IMMEDIATE AND FUTURE SALES MAY DEPRESS
THE PRICE OF OUR STOCK
Sales of substantial amounts of common stock in the open market or the
availability of such shares for sale could adversely affect the market price for
the common stock. Substantially all of our outstanding shares of common stock,
as well as the shares underlying vested but unexercised warrants and options,
have either been registered for public sale or may be sold under Rule 144
promulgated under the Securities Act. Therefore, all of these shares may be
immediately sold by the holders. A substantial increase in the volume of trading
in our stock may depress the price of our common stock.
WE MAY BE UNABLE TO PREVENT OTHERS FROM DEVELOPING SIMILAR PRODUCTS
We routinely seek trademark protection from the United States Patent Office
("USPO") and from similar agencies in foreign countries for chewing gum brands.
There can be no assurance that we will be able to successfully defend any
trademarks or trade names against claims from or use by competitors or that
trademark or trade name applications will be approved by the USPO or any similar
foreign agency.
We consider some of our chewing gum formulations and processes to be
proprietary in nature and rely upon a combination of non-disclosure agreements,
other contractual restrictions and trade secrecy laws to protect such
proprietary information. There can be no assurance that these steps will be
adequate to prevent misappropriation of our proprietary information or that our
competitors will not independently develop chewing gum formulations and
processes that are substantially equivalent or superior to our own.
THE PRICE OF OUR STOCK MAY CONTINUE TO BE VOLATILE
The market price of our common stock has been highly volatile and may
continue to be volatile in the future. Factors such as our operating results or
public announcements may cause the market price of our stock to decline quickly.
Market prices for securities of many small capitalization companies have
experienced wide fluctuations in response to variations in quarterly operating
results, general economic indicators and other factors beyond our control.
16
<PAGE>
WE MAY INCUR SIGNIFICANT COSTS RESULTING FROM PRODUCT LIABILITY CLAIMS
We are subject to significant liability should use or consumption of our
products cause injury, illness or death. Although we carry product liability
insurance, there can be no assurance that our insurance will be adequate to
protect us against product liability claims or that insurance coverage will
continue to be available on reasonable terms.
WE MAY REQUIRE ADDITIONAL FINANCING, WHICH MAY NOT BE AVAILABLE ON ACCEPTABLE
TERMS
We may be required to seek additional debt or equity financing in the
future in order to fund anticipated expansion of our manufacturing activities.
There can be no assurance that such additional financing will be available on
acceptable terms or at all. Any future equity financing may involve substantial
dilution to the interests of our stockholders.
INABILITY TO RETAIN CURRENT MANAGEMENT COULD NEGATIVELY IMPACT OUR OPERATIONS
Our operations are dependent upon our ability to hire and retain qualified
management personnel and upon the continued services of our executive officers.
The loss of the services of any of our executive officers, whether as a result
of death, disability, or otherwise, could have a material adverse effect upon
our business.
We experienced significant management and Board changes in 1998, including
the appointment of a new President and a new Chief Financial Officer. We have
entered into employment agreements with our current executive officers and have
applied for key man life insurance upon certain of their lives.
YEAR 2000 PROBLEMS MAY ADVERSELY AFFECT OUR OPERATIONS
We recognize the potential business impacts related to the Year 2000
computer system issue and are implementing a plan to assess and improve our
state of readiness with respect to such issues. The Year 2000 issue is one where
computer systems may recognize the designation "00" as 1900 when it means 2000,
resulting in system failure or miscalculations.
In recognition of the Year 2000 issue, we have been conducting a
comprehensive review of all information technology and non-information
technology systems that we use. This review includes testing and analysis, and
inquiries of third parties supplying information technology and non-information
technology systems, computer hardware and software products and components, and
other equipment to us.
As a result of our review to date, we have made modifications to our
software systems, including upgrades required of our principal
manufacturing/financial software system. In addition, we have identified
modifications that are required of our computer hardware system and expect to
have the necessary modifications completed by the end of 1999. Modifications to
other information technology systems, including internal telecommunications
systems, will also be completed by then.
17
<PAGE>
We are nearing completion of a review of our non-information technology
equipment, including our manufacturing equipment. Our analysis to date of this
equipment has not identified any required modifications. Finally, we continue to
review our exposure from critical suppliers and customers to ascertain whether
those entities are taking the necessary steps to address their Year 2000 issues.
The cost of modifications to Gum Tech's systems and equipment have not had,
and are not expected to have, a material impact on our financial position or
results of operations.
At this time, we have not developed Year 2000 contingency plans, other than
the review and remedial actions described above, and do not intend to do so
unless we believe such plans are merited by the results of our continuing Year
2000 review.
If we or the third parties with which we have relationships were to cease
or not successfully complete Year 2000 remediation efforts, we could encounter
disruptions to our operations that could have a material adverse effect on our
business, financial condition, and results of operations. We also could be
materially and adversely impacted by widespread economic or financial market
disruption caused by Year 2000 computer system failures.
18
<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. On September 4, 1998, the court granted a motion for summary
judgment in Gum Tech's favor, and dismissed the plaintiff's claims against Gum
Tech and its current and former directors. The ruling remains subject to appeal.
On July 2, 1998, Kirk Gossett, a former employee of Gum Tech, filed a
lawsuit against Gum Tech and three officers and employees of Gum Tech, and their
spouses, alleging violation of overtime requirements of the Fair Labor Standards
Act. Mr. Gossett claimed damages of over $80,000, in addition to seeking treble
damages permitted under the Fair Labor Standards Act. The parties have reached
an agreement to settle all claims against Gum Tech for an amount that is not
material to Gum Tech's operations.
On January 27, 1999, an action was filed against Gum Tech and certain other
parties in the Superior Court of the State of Arizona in and for the County of
Maricopa, CV-99-01528, by Paul F. Janssens-Lens. As it relates to Gum Tech, the
complaint alleges intentional interference with business relations, intentional
misrepresentation, negligent misrepresentation, securities fraud, and consumer
fraud. The plaintiff seeks compensatory damages of $720,000, unspecified
punitive damages, and attorneys' fees and costs. Gum Tech denies the plaintiff's
allegations and intends to vigorously defend the action.
On June 2, 1999, Gum Tech filed a Complaint in the Superior Court of
Maricopa County, Arizona against DJ Ltd. ("DJ"), CIV 99-1136-PHX-PGR (D. Ariz.)
Gum Tech's Complaint sought a declaratory judgment that DJ was not owed any fee
under an agreement entered into between the parties pursuant to which DJ was to
act as financial advisor to Gum Tech. DJ removed the case to the United States
District Court for the District of Arizona and filed a counterclaim. In its
counterclaim, DJ alleges that Gum Tech breached the contract between the parties
and that Gum Tech has been unjustly enriched. DJ seeks damages in the amount of
$480,000, plus costs, expenses and warrants to purchase 50,000 shares of common
stock in Gum Tech. DJ also seeks a declaratory judgment confirming its version
of its rights under the agreement.
ITEM 2. CHANGES IN SECURITIES
On June 2, 1999 Gum Tech completed a financing with Citadel Investment
Group Inc. consisting of $4.0 million of Senior Secured Notes and $2.0 million
of Series A Preferred Stock. Details of the transaction are contained in a Form
8-K filed on June 9, 1999.
19
<PAGE>
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
3.1 Amended and Restated Articles of Incorporation of the Company
(incorporated by reference to Registrant's Quarterly Report on
Form 10-QSB for the period ending March 31, 1999, file number
000-27646).
3.2 Amended Bylaws of the Company (incorporated by reference to
Registrant's Quarterly Report on Form 10-QSB for the period
ending March 31, 1999, file number 000-277646).
3.3 Certificate of Designations, Preference and Rights of Series A
Preferred Stock of Gum Tech International, Inc.(incorporated by
reference to Registrant's Current Report on Form 8-K filed June
9, 1999, file number 000-27646).
27 Financial Data Schedule
20
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B. REPORTS ON FORM 8-K
On April 5, 1999, the Company filed a Current Report on Form 8-K
regarding a potential investment in the Company. The Current Report
provided the details of a press release entitled "Gum Tech Arranges $6
Million in Financing from Citadel Investment Group."
On June 9, 1999, the Company filed a Current Report on Form 8-K
regarding a June 2, 1999 transaction pursuant to which the Company issued
2,000 shares of its Series A Preferred Stock and $4,000,000 in aggregate
principal amount of its 8% Senior Secured Notes, and granted warrants
representing the right to receive 300,000 shares of its common stock in a
private placement to institutional investors. The Company estimates the net
proceeds of the offering, after expenses, was approximately $5,571,000.
Pursuant to a Registration Rights Agreement, the Company prepared and filed
with the Securities and Exchange Commission a registration statement
covering the resale of the shares of Common Stock issuable pursuant to the
terms of the Series A Preferred Stock, the 8% Senior Secured Notes and the
Warrants.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has
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/ William J. Hemelt
----------------------------
William J. Hemelt
Chief Financial Officer,
Treasurer & Secretary
August 16, 1999
21
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