UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarter ended September 30, 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 were 7,676,597 shares of the registrant's common stock, no par value,
outstanding as of November 5, 1999.
<PAGE>
GUM TECH INTERNATIONAL, INC.
FORM 10-QSB
INDEX
Part I Financial Information Page
Item 1. Condensed Consolidated Balance Sheet
as of September 30, 1999 1
Condensed Consolidated Statements of
Operations for the three months ended
September 30, 1999 and 1998 3
Condensed Consolidated Statements of
Operations for the nine months ended
September 30, 1999 and 1998 4
Condensed Consolidated Statements of
Cash Flows for the nine months ended
September 30, 1999 and 1998 5
Notes to Condensed Consolidated
Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Part II Other Information and Signatures
Item 1. Legal Proceedings 21
Item 4. Submission of Matters to a Vote of
Security Holders 22
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
<PAGE>
GUM TECH INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1999
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 4,104,139
Restricted cash 273,752
Accounts receivable, net of allowance for
doubtful accounts of $132,025 2,816,084
Inventories 1,757,104
Prepaid expenses and other 55,086
------------
Total Current Assets 9,006,165
------------
Property and Equipment, at cost:
Machinery and production equipment 4,423,951
Office furniture and equipment 278,872
Leasehold improvements 381,693
------------
Total Property and Equipment 5,084,516
Less accumulated depreciation (1,616,579)
------------
Net Property and Equipment 3,467,937
------------
Other Assets:
Intangible assets, net of accumulated amortization
of $384,192 197,651
Deposits and other 195,467
------------
Total Other Assets 393,118
------------
Total Assets $ 12,867,220
============
The accompanying notes are an integral part of
these condensed consolidated financial statements.
1
<PAGE>
GUM TECH INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1999
(Continued)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 561,101
Accrued interest 40,112
Dividends payable 20,000
Customer deposits 563
Reserve for customer returns 320,210
Current portion of long-term debt 1,209,998
------------
Total Current Liabilities 2,151,984
------------
Long-Term Debt, net of current portion above:
Senior notes payable 2,830,000
Financial institutions and other 955,577
Obligations under capital leases 16,733
Less current portion above (1,209,998)
------------
Total Long-Term Debt 2,592,312
------------
Stockholders' Equity:
Preferred stock: no par value, 1,000,000 shares
authorized: Series A preferred stock, no par value,
2,000 shares authorized, 1,600 shares issued and outstanding 1,600,000
Common stock: no par value, 20,000,000 shares authorized,
7,662,597 shares issued and outstanding 19,719,454
Additional paid in capital 3,451,206
Accumulated deficit (16,647,736)
------------
Total Stockholders' Equity 8,122,924
------------
Total Liabilities and Stockholders' Equity $ 12,867,220
============
The accompanying notes are an integral part of
these condensed consolidated financial statements.
2
<PAGE>
GUM TECH INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended September 30,
-------------------------------
1999 1998
----------- -----------
Net sales $ 2,268,782 $ 1,286,176
Cost of sales 1,419,728 1,000,323
----------- -----------
Gross Profit 849,054 285,853
Operating expenses 916,641 545,237
Research and development 155,065 273,237
----------- -----------
Income (Loss) From Operations (222,652) (532,621)
----------- -----------
Other Income (Expense):
Interest and other income 46,766 34,045
Interest expense (500,357) (122,056)
----------- -----------
Total Other Income (Expense) (453,591) (88,011)
----------- -----------
Income (Loss) Before Provision For
Income Taxes (676,243) (620,632)
Provision for income taxes -- --
----------- -----------
Net Income (Loss) (676,243) (620,632)
Preferred stock dividends 119,021 --
----------- -----------
Net Income (Loss) Applicable to
Common Shareholders $ (795,264) $ (620,632)
=========== ===========
Net Income (Loss) Per Share of Common Stock:
Basic:
Weighted Average Number of Common Shares
Outstanding 7,553,410 6,808,776
=========== ===========
Net Income (Loss) Per Share of Common Stock $ (0.11) $ (0.09)
=========== ===========
Diluted:
Weighted Average Number of Common Shares
Outstanding 7,553,410 6,808,776
=========== ===========
Net Income (Loss) Per Share of Common Stock $ (0.11) $ (0.09)
=========== ===========
The accompanying notes are an integral part of
these condensed consolidated financial statements.
3
<PAGE>
GUM TECH INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Nine months ended September 30,
-------------------------------
1999 1998
----------- -----------
Net sales $ 6,633,479 $ 3,603,693
Cost of sales 4,550,124 2,815,423
----------- -----------
Gross Profit 2,083,355 788,270
Operating expenses 2,912,152 4,534,909
Research and development 380,448 415,109
----------- -----------
Income (Loss) From Operations (1,209,245) (4,161,748)
----------- -----------
Other Income (Expense):
Interest and other income 65,895 109,173
Interest expense (829,365) (383,680)
----------- -----------
Total Other Income (Expense) (763,470) (274,507)
----------- -----------
Income (Loss) Before Provision For
Income Taxes (1,972,715) (4,436,255)
Provision for income taxes -- 150
----------- -----------
Net Income (Loss) (1,972,715) (4,436,405)
Preferred stock dividends 149,600 --
----------- -----------
Net Income (Loss) Applicable to Common
Shareholders $(2,122,315) $(4,436,405)
=========== ===========
Net Income (Loss) Per Share of Common Stock:
Basic:
Weighted Average Number of Common Shares
Outstanding 7,275,248 6,372,842
=========== ===========
Net Income (Loss) Per Share of Common Stock $ (0.29) $ (0.70)
=========== ===========
Diluted:
Weighted Average Number of Common Shares
Outstanding 7,275,248 6,372,842
=========== ===========
Net Income (Loss) Per Share of Common Stock $ (0.29) $ (0.70)
=========== ===========
The accompanying notes are an integral part of
these condensed consolidated financial statements.
4
<PAGE>
GUM TECH INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30,
--------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $(1,972,715) $(4,436,405)
Adjustments to reconcile net income (loss)
to net cash (used) by operating activities:
Depreciation 321,237 201,260
Amortization 227,666 91,828
Compensation from forgiveness of note receivable -- 114,012
Compensation from extension and issuance of stock options 91,285 1,508,566
Accrued interest on notes receivable -- 60,164
Amortization of discount on notes payable 230,000 --
Common stock issued for payment of interest 144,526 --
Changes in assets and liabilities:
(Increase) in accounts receivable (1,353,445) (139,731)
Decrease in employee receivable -- 61,054
(Increase) decrease in inventories 139,057 (472,320)
Decrease in prepaid expenses and other 5,765 9,157
(Increase) in deposits and other (169,939) (246,664)
(Decrease) in accounts payable and accrued expenses (785,303) (105,119)
Increase in customer returns and allowances 320,210 --
Increase (decrease) in customer deposits (34,200) 123,852
----------- -----------
Net Cash (Used) By Operating Activities (2,835,856) (3,230,346)
----------- -----------
Cash Flows From Investing Activities:
Capital expenditures (240,947) (585,903)
Receipt of principal on notes receivable -- 250,000
----------- -----------
Net Cash (Used) By Investing Activities (240,947) (335,903)
----------- -----------
Cash Flows From Financing Activities:
Proceeds from borrowing 4,000,000 --
Principal payments on notes payable (282,498) (253,483)
Issuance of common stock upon exercise of
options and warrants 1,683,918 2,004,765
Issuance of preferred stock 2,000,000 --
Debt issuance costs incurred (310,462) (11,733)
Offering costs incurred (155,231) --
Dividend distribution of subsidiary (183,037) --
Dividends paid (89,600) --
----------- -----------
Net Cash Provided By Financing Activities 6,663,090 1,739,549
----------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents 3,586,287 (1,826,700)
Cash and Cash Equivalents at Beginning of Period 517,852 3,607,913
----------- -----------
Cash and Cash Equivalents at End of Period $ 4,104,139 $ 1,781,213
=========== ===========
</TABLE>
The accompanying notes are an integral part of
these condensed consolidated financial statements.
5
<PAGE>
GUM TECH INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
(Unaudited)
<TABLE>
<S> <C> <C>
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ 229,510 $ 316,204
Income taxes -- --
Supplemental Disclosure of Non Cash Investing and
Financing Activities:
Conversion of notes payable into common stock $1,505,973 $ 924,000
Issuance of warrants in connection with senior notes 600,000 --
Dividends accrued on preferred stock 20,000 --
Issuance of common stock to repay senior notes and
redeem preferred stock 1,240,000 --
</TABLE>
The accompanying notes are an integral part of
these condensed consolidated financial statements.
6
<PAGE>
GUM TECH INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The accompanying financial information of Gum Tech is prepared in
accordance with the rules prescribed for filing condensed interim financial
statements and, accordingly, does not include all disclosures that may be
necessary for complete financial statements prepared in accordance with
generally accepted accounting principles. The disclosures presented are
sufficient, in management's opinion, to make the interim information
presented not misleading. All adjustments, consisting of normal recurring
adjustments, which are necessary so as to make the interim information not
misleading, have been made. Results of operations for the nine months ended
September 30, 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 Gum Tech'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, Gum Tech 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 Gum Tech 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 2,006,168 and 1,354,968 shares of common
stock at September 30, 1999 and 1998, respectively, were not included in
the computation of diluted earnings per share because Gum Tech had a net
loss and their effect would be antidilutive.
7
<PAGE>
3. On June 2, 1999 Gum Tech completed a $6.0 million financing with Citadel
Investment Group. The financing consisted 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 Gum Tech to redeem the 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 300,000 warrants to
purchase Gum Tech common stock to Citadel Investment Group and 60,000
warrants to purchase Gum Tech common stock to Intercontinental Capital
Corp., a consultant involved in the transaction. The cost of the warrants
is allocated between the debt and preferred stock components of the
financing. The amount of the debt financing was 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.
In September 1999, as permitted by the terms of the financing, Gum Tech
issued 117,759 shares of common stock to Citadel Investment Group to redeem
$800,000 principal amount of Senior Secured Notes and $400,000 stated value
of the Series A Preferred Stock, and to cover the related $120,000
prepayment charge. The unamortized portion of the prepayment premium and
warrants related to the amount redeemed was expensed in September in
connection with the redemption.
4. Certain financial information for Gum Tech's gum 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 September 30, 1999:
A. EBITDA: Net income $ (975,337)
Add - Depreciation & amortization 122,308
Add - Interest expense, net of interest income 477,087
Add - Accrued income taxes -0-
----------
EBITDA $ (375,942)
==========
8
<PAGE>
B. Net Revenue
Gross revenue $1,182,305
Less returns & allowances (58,638)
Less sales discounts, slotting, other (38,779)
----------
Net Revenue $1,084,888
==========
In September 1999, Citadel agreed to waive compliance with the Net
Revenue covenant for the third and fourth quarters of 1999 in exchange
for an extension on the call protection on the warrants given to
Citadel from June 2, 2000 to June 2, 2001 and acceleration of the
prepayment requirement originally due June 2, 2000.
C. Cash & Cash Equivalents
Cash on deposit $1,736,379
Cash equivalents -0-
----------
Total $1,736,379
==========
9
<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 from its gum operations 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.
In January 1999, 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 signed May 6, 1999, Gum Tech and
BioDelivery Technologies transferred their respective interests in the patent
rights to the nasal gel technology used in Zicam(TM) in exchange for membership
interests in Gel Tech LLC, an 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 SEPTEMBER 30, 1999 COMPARED TO
THE THREE MONTHS ENDED SEPTEMBER 30, 1998
The following table details certain financial information for Gum Tech's
chewing gum and Zicam(TM) operations for the three months ended September 30,
1999:
Chewing gum Zicam(TM) Consolidated
------------ ------------ ------------
Net sales $ 1,084,888 $ 1,183,894 $ 2,268,782
Cost of sales 1,051,022 368,706 1,419,728
------------ ------------ ------------
Gross profit 33,866 815,188 849,054
Operating expenses 448,229 468,412 916,641
Research and development 83,888 71,177 155,065
------------ ------------ ------------
Income (loss) from operations (498,251) 275,599 (222,652)
Interest and other income 23,271 23,495 46,766
Interest expense 500,357 0 500,357
------------ ------------ ------------
Net income (loss) $ (975,337) $ 299,094 $ (676,243)
============ ============ ============
Net Assets $ 9,119,682 $ 3,747,538 $ 12,867,220
10
<PAGE>
CHEWING GUM OPERATIONS
Certain information is set forth below for Gum Tech's chewing gum
operations expressed in dollars and as a percentage of net sales for the periods
indicated:
<TABLE>
<CAPTION>
Three Months Ended September 30,
-------------------------------------------------
1999 1998
---------------------- ----------------------
<S> <C> <C> <C> <C>
Net sales $ 1,084,888 100% $ 1,286,176 100%
Cost of sales 1,051,022 97 1,000,323 78
----------- -------- ----------- --------
Gross profit 33,866 3 285,853 22
Operating expenses 448,229 41 545,237 42
Research and development 83,888 8 273,237 21
----------- -------- ----------- --------
Income (loss) from operations (498,251) (46) (532,621) (41)
Interest and other income 23,271 2 34,045 3
Interest expense 500,357 46 122,056 10
Provision (benefit) for income taxes -- -- -- --
----------- -------- ----------- --------
Net income (loss) $ (975,337) (90)% $ (620,632) (48)%
=========== ======== =========== ========
</TABLE>
NET SALES. Net sales decreased approximately $200,000 from the prior year
period. The decrease in net sales was primarily attributable to less than
anticipated demand for certain gum products introduced in late 1998 and early
1999. Because five customers currently account for a significant percentage of
Gum Tech's gum sales, demand for Gum Tech's products is impacted from period to
period by a number of factors affecting these customers, including the
difficulties inherent in launching a new gum product, the success or failure and
cost of sales promotions, the costs and time required to expand into new markets
and demand for the customers' products at the consumers level. In addition,
certain gum products are somewhat impacted by seasonal effects. Significant
sales in the 1999 period were deliveries of Breath Asure Dental Gum(TM) and
several functional chewing gums to Pharma-Green Ltd. Sales in 1998 included
initial deliveries of Breath Asure Dental Gum(TM), a diet gum to Herbablife, and
Aspergum(R) and Chooz(R) to Heritage Consumer Products.
COST OF SALES. Cost of sales increased slightly from the year earlier
period despite a lower sales level primarily due to an increase in overhead
expenses incurred in conjunction with the expansion of facilities, equipment and
manpower over the past several months in anticipation of higher planned sales
levels.
GROSS PROFIT. Gross profit decreased due to the decrease in sales and the
cost of support given to certain of Gum Tech's customers to assist them in their
promotional programs.
OPERATING EXPENSES. Operating expenses decreased approximately $97,000
principally due to the cost of certain administrative services (sales,
accounting, warehousing) being charged to Gel Tech LLC.
11
<PAGE>
RESEARCH AND DEVELOPMENT. Research and development expense decreased
principally due to a reclassification of expenses for prior periods in 1998
which increased the 1998 expense level and the cost of production scale-up of
several new products in 1998.
INTEREST EXPENSE. Interest expense increased to $500,000 from $122,000 for
the year earlier. Interest expense in 1999 largely reflects non-cash interest
charges associated with the financing with Citadel Investment Group in early
June. These non-cash interest accruals include the cost of the warrants,
required prepayment premium and amortization of debt issuance costs. The
redemption of $800,000 principal amount of this debt in September 1999 resulted
in an additional interest expense of approximately $175,000 due to the
accelerated amortization of these interest charges related to the debt redeemed.
NET INCOME (LOSS). Net loss for the 1999 period was approximately $975,000
compared to a net loss of approximately $621,000 for the prior period. This
increase in net loss was primarily due to the increase in interest expense.
ZICAM(TM) OPERATIONS
Zicam(TM) operations began January 1, 1999. As a result, the financial
results for Zicam(TM) operations cannot be compared to the prior period. During
the three months ended September 30, 1999, Gel Tech LLC recorded net sales of
Zicam(TM) of approximately $1.18 million reflecting initial deliveries of the
product to an increased number of retail establishments. The gross profit for
the period was $815,000, or 69% of net sales. Gum Tech anticipates that sales of
Zicam(TM) will increase significantly in future periods due to increased market
awareness of the product coupled with the onset of the cold season.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO
THE NINE MONTHS ENDED SEPTEMBER 30, 1998
The following table details certain financial information for Gum Tech's
chewing gum and Zicam(TM) operations for the nine months ended September 30,
1999:
Chewing gum Zicam(TM) Consolidated
----------- ----------- -----------
Net sales $ 4,982,904 $ 1,650,575 $ 6,633,479
Cost of sales 3,959,529 590,595 4,550,124
----------- ----------- -----------
Gross profit 1,023,375 1,059,980 2,083,355
Operating expenses 1,821,658 1,090,494 2,912,152
Research and development 276,375 104,073 380,448
----------- ----------- -----------
Income (loss) from operations (1,074,658) (134,587) (1,209,245)
Interest and other income 42,065 23,830 65,895
Interest expense 829,365 -- 829,365
----------- ----------- -----------
Net income (loss) $(1,861,958) $ (110,757) $(1,972,715)
=========== =========== ===========
12
<PAGE>
CHEWING GUM OPERATIONS
Certain information is set forth below for the Corporation's chewing gum
operations expressed in dollars and as a percentage of net sales for the periods
indicated:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-----------------------------------------------
1999 1998
--------------------- ---------------------
<S> <C> <C> <C> <C>
Net sales $ 4,982,904 100% $ 3,603,693 100%
Cost of sales 3,959,529 79 2,815,423 78
----------- ------- ----------- -------
Gross profit 1,023,375 21 788,270 22
Operating expenses 1,821,658 37 4,534,909 126
Research and development 276,375 6 415,109 11
----------- ------- ----------- -------
Income (loss) from operations (1,074,658) (22) (4,161,748) (115)
Interest and other income 42,065 1 109,173 3
Interest expense 829,365 16 383,680 11
Provision (benefit) for income taxes -- -- 150 --
----------- ------- ----------- -------
Net income (loss) $(1,861,958) (37)% $(4,436,405) (123)%
=========== ======= =========== =======
</TABLE>
NET SALES. Net sales increased to approximately $5.0 million for the nine
months ended September 30, 1999 or 38% over the prior year. The increase
reflects the addition of several new customers and/or products in mid- to late
1998. Among these are Ranir DCP, Breath Asure, Heritage Consumer Products'
AcuTrim(R) gum and Pharma-Green Ltd. Sales in the prior year largely reflect
sales of Cigarest's smoking cessation gum, Herbalife's diet and energy gums,
Aspergum(R) and Chooz(R) and initial deliveries of Breath Asure Dental Gum(TM).
COST OF SALES. The cost of sales increased by approximately $1.1 million to
$4.0 million reflecting the higher level of sales.
GROSS PROFIT. Gross profit increased from $788,000 to $1,023,000 reflecting
the higher level of sales.
OPERATING EXPENSES. Operating expenses declined by approximately $2.7
million to $1.8 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 $2,437,929 or $616,271 greater than the 1999 level. This decrease was
primarily attributable to lower advertising expenses associated with Gum-Tech's
change in strategy in early 1998 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.
13
<PAGE>
INTEREST EXPENSE. Interest expense increased by approximately $446,000
compared to the prior year primarily due to interest charges associated with the
Citadel financing.
NET INCOME (LOSS). Net loss decreased by approximately $2.6 million
primarily due to the higher level of sales and the decrease in operating
expenses.
ZICAM(TM) OPERATIONS
Zicam(TM) sales and operations began January 1, 1999. As a result, the
financial results for Zicam(TM) operations cannot be compared to the prior
period. For the nine months ended September 30, 1999, Gel Tech LLC recorded net
sales of approximately $1.65 million and a gross profit of $1.06 million, or 64%
of net sales.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1999, Gum Tech's working capital was approximately $6.9
million compared to $2.2 million at December 31, 1998. During the nine months
ended September 30, 1999, Gum Tech experienced a decrease in cash used by
operating activities of approximately $2.8 million, versus $3.2 million the
prior year. The decrease in cash for 1999 is attributable to the net loss for
the period ($2.0 million), an increase in accounts receivable ($1.4 million) and
a decrease in accounts payable ($0.8 million), which were offset in part by a
variety of non-cash charges for the period.
Investing activities used $241,000 of cash for the nine months ended
September 30, 1999, compared to $336,000 for the same period in 1998.
Financing activities provided approximately $6.7 million of cash for the
nine months ended September 30, 1999 compared to $1.7 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 $1.7 million versus
$2.0 million in 1998. In September 1999, as permitted by the Citadel financing
arrangement, Gum Tech issued 117,759 shares of common stock to Citadel
Investment Group to repay $800,000 principal amount of Senior Secured Notes and
$400,000 of Series A Preferred Stock, including a prepayment charge of $120,000.
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
Gum Tech may make certain written or oral forward-looking statements from
time to time in filings with the Securities & Exchange Commission or otherwise.
These forward-looking statements are within the meaning of that term in Section
27A of the Securities Act of 1933, as amended, and
14
<PAGE>
Section 21E of the Securities Act of 1934, as amended. Such statements may
include, but are not limited to, projections of revenues, income or loss,
estimates 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 the statement was made. Specifically, this report contains
forward-looking statements concerning an expected significant increase in
Zicam(TM) sales, 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 Gum Tech's financial statements, describe
factors that could contribute to or cause such differences. Factors that could
cause actual results to differ materially from Gum Tech's expectations include
the possibility of less favorable than anticipated results of ongoing clinical
studies regarding the efficacy of Zicam(TM), the lack of market acceptance for
or other uncertainties concerning Zicam(TM), the inability to manufacture and
deliver sufficient quantities of Zicam(TM) to meet anticipated demand, Gum
Tech's inability to redeem the debt and preferred stock issued in the Citadel
financing, the inability to secure contracts on favorable terms with additional
partners for Gum Tech's chewing gum operations, a decrease in the level of
reorders from existing customers, financial difficulties encountered by one or
more of Gum Tech's chewing gum customers, and difficulties in obtaining
additional capital for marketing, research and development, and other expenses.
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 depend on a number of
factors that we must successfully manage in order to achieve favorable future
operating results. 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 three 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(TM), a new
product.
15
<PAGE>
OUR RELIANCE ON A FEW CUSTOMERS MAY NEGATIVELY IMPACT OUR FINANCIAL RESULTS
The shift in our chewing gum strategy in early 1998 to a focus on contract
manufacturing has made our chewing gum operations dependent for 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 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 and nasal gel products,
including Zicam(TM), involves claims that such products assist in weight loss,
promote dental hygiene, and reduce the duration of the common cold, among
others. 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 and nasal gel 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.
16
<PAGE>
WE CANNOT INSURE THAT ZICAM(TM) WILL BE A SUCCESSFUL PRODUCT
In 1999, Gel Tech LLC, a joint venture in which we hold a 60% interest in
profits and capital, launched a new homeopathic cold remedy known as Zicam(TM).
Although initial internal studies have indicated that Zicam(TM) can
significantly reduce the duration and severity of the common cold, no
independent study has yet been completed supporting this claim. In addition,
even if an independent study is eventually published that supports the efficacy
of Zicam(TM), there is no guarantee that the product will achieve widespread
acceptance by the market. If any unanticipated problem arises concerning the
efficacy of Zicam(TM) or the product fails to achieve widespread market
acceptance for any reason , our prospects for our future operating results would
be adversely affected.
WE MAY BE UNABLE TO MEET DEMAND FOR OUR NEW PRODUCTS
To the extent Zicam(TM) or any other new product we introduce achieves
widespread market acceptance and generates significant demand, we may be unable
to produce and deliver sufficient quantities of the product to meet our
customers' demands on a timely basis. If so, we could lose opportunities to sell
larger quantities of the product and damage relationships with distributors
whose orders could not be timely filled. This problem, if encountered, could be
particularly damaging if we are not able to meet customer demand during the cold
season, when we expect demand for sales of Zicam(TM) to peak.
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.
In addition, to the extent that actual demand for our products in the
future is less than anticipated, we may incur higher than necessary costs in
preparing for an anticipated growth in sales that does not materialize or
materializes more slowly than expected.
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.
17
<PAGE>
TERMS OF SERIES A PREFERRED STOCK AND SENIOR SECURED NOTES COULD DEPRESS THE
PRICE OF OUR STOCK OR LEAD TO FORECLOSURE
The terms of the Series A Preferred Stock and Senior Secured Notes issued
in June 1999 contain a number of restrictive covenants that we must satisfy and
that require repayment of the Series A Preferred Stock and Senior Secured 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 Senior Secured Notes when due will enable the holders of the Notes
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 the Series A Preferred Stock and the Notes issued in June 1999
require us to meet a number of financial covenants on a quarterly basis while
the Notes remain outstanding, including cash, revenue, and EBITDA. If we fail to
satisfy any of these financial covenants, or otherwise breach any of the
negative covenants included in this financing, the applicable interest rate will
increase to 15% and the holders of the Notes 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 a large number of additional 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 and patent protection from the United States
Patent Office ("USPO") and from similar agencies in foreign countries for
chewing gum brands and have done so for Zicam(TM). There can be no assurance
that we will be able to successfully defend any trademarks, trade names or
patents against claims from or use by competitors or that trademark, trade name
or patent applications will be approved by the USPO or any similar foreign
agency.
18
<PAGE>
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.
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.
19
<PAGE>
YEAR 2000 PROBLEMS MAY ADVERSELY AFFECT OUR OPERATIONS
We recognize the potential business impacts related to the Year 2000
computer system issue. 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.
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 other
information technology systems, including telecommunications systems. We expect
the necessary modifications to be completed by the end of 1999. Also, we will
have modifications to our non-information technology equipment, including our
manufacturing equipment, completed by year-end. 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.
20
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On October 16, 1996, a lawsuit was filed against Gum Tech 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 Gum Tech, principally alleges that Gum Tech 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. The claim against all parties has been settled for an amount that is not
material to Gum Tech's operations.
On January 27, 1999, an action was filed against Gum Tech in the Superior
Court of the State of Arizona in and for the County of Maricopa, CV-99-01528, by
Paul F. Janssens-Lens. 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 Gum
Tech common stock. DJ also seeks a declaratory judgment confirming its version
of its rights under the agreement.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
21
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the 1999 Annual Meeting of Stockholders, held on August 11, 1999, the
stockholders approved the election of five directors to serve for the following
year or until their successors are elected:
Name For Against
--------- --- -------
W. Brown Russell 6,823,477 16,432
William D. Boone 6,814,177 25,732
Bruce Jorgenson, M.D. 6,817,077 22,832
Gary Kehoe 6,818,477 21,432
William A. Yuan 6,811,527 28,382
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 Gum Tech
International, Inc. (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 Gum Tech International (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
B. REPORTS ON FORM 8-K
None
22
<PAGE>
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
November 15, 1999
23
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