UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(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, 2000
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 of (I.R.S. Employer
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) has filed all reports required to be filed by
Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding
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 8,929,047 shares of the registrant's common stock, no par value,
outstanding as of July 18, 2000.
GUM TECH INTERNATIONAL, INC.
FORM 10-Q
INDEX
Part I Financial Information Page
Item 1. Condensed Consolidated Balance Sheet
as of June 30, 2000 and December 31, 1999 1
Condensed Consolidated Statements of
Operations for the three months ended
June 30, 2000 and 1999 3
Condensed Consolidated Statements of
Operations for the six months ended
June 30, 2000 and 1999 4
Condensed Consolidated Statements of
Cash Flows for the six months ended
June 30, 2000 and 1999 5
Notes to Condensed Consolidated
Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
Part II Other Information and Signatures
Item 1. Legal Proceedings 18
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
ZICAM IS A TRADEMARK OF GEL TECH LLC
GUM TECH INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
June 30, 2000 December 31, 1999
------------- -----------------
Current Assets:
Cash and cash equivalents $ 4,541,740 $ 5,595,075
Restricted cash 20,444 270,878
Accounts receivable:
Trade, net allowance for doubtful
accounts of $37,209 and $50,482 2,276,790 8,197,180
Employees 200,000 56,237
Inventories 4,730,267 1,966,819
Prepaid expenses and other 197,258 155,281
------------ ------------
Total Current Assets 11,966,499 16,241,470
------------ ------------
Property and Equipment, at cost:
Machinery and production equipment 4,699,458 4,455,694
Office furniture and equipment 357,119 295,577
Leasehold improvements 436,178 383,854
------------ ------------
Total Property and Equipment 5,492,755 5,135,125
Less accumulated depreciation (1,954,278) (1,724,276)
------------ ------------
Net Property and Equipment 3,538,477 3,410,849
------------ ------------
Other Assets:
Intangible assets, net of accumulated
amortization of $709,403 and $548,744 -- 160,659
Deposits and other 406,635 214,936
------------ ------------
Total Other Assets 406,635 375,595
------------ ------------
Total Assets $ 15,911,611 $ 20,027,914
============ ============
These accompanying notes are an integral part of these
condensed consolidated financial statements.
1
GUM TECH INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Continued)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, 2000 December 31, 1999
------------ ------------
Current Liabilities:
Accounts payable and accrued expenses $ 1,526,161 $ 2,078,358
Customer deposits 6,500 10,500
Sales returns and allowances 652,998 1,202,100
Current portion of long-term debt 8,661 420,043
------------ ------------
Total Current Liabilities 2,194,320 3,711,001
------------ ------------
Long-Term Debt, net of current portion above:
Financial institutions and other -- 2,646,897
Obligations under capital leases 8,661 14,105
Less current portion above (8,661) (420,043)
------------ ------------
Total Long-Term Debt -- 2,240,959
------------ ------------
Minority interest in consolidated affiliate 286,939 1,374,117
------------ ------------
Stockholders' Equity:
Preferred stock: no par value, 1,000,000 shares authorized:
Series A preferred stock, $1,000 stated value, 2,000 shares
authorized, 0 and 1,000 shares issued and outstanding -- 1,000,000
Common stock: no par value, 20,000,000 shares authorized,
8,929,047 and 8,320,705 shares issued and outstanding 29,795,612 23,687,579
Additional paid in capital 3,630,706 3,551,766
Accumulated deficit (19,995,966) (15,537,508)
------------ ------------
Total Stockholders' Equity 13,430,352 12,701,837
------------ ------------
Total Liabilities and Stockholders' Equity $ 15,911,611 $ 20,027,914
============ ============
These accompanying notes are an integral part of these
condensed consolidated financial statements.
2
GUM TECH INTERNATIONAL, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended June 30,
----------------------------
2000 1999
----------- -----------
Net sales $ 2,579,748 $ 1,919,141
Cost of sales 1,435,597 1,289,516
----------- -----------
Gross Profit 1,144,151 629,625
Operating expenses 2,060,064 1,044,340
Research and development 165,206 105,614
----------- -----------
Income (Loss) From Operations (1,081,119) (520,329)
----------- -----------
Other Income (Expense):
Interest and other income 80,784 10,360
Interest expense (2,219) (218,854)
----------- -----------
Total Other Income (Expense) 78,565 (208,494)
----------- -----------
Income (Loss) Before Provision For Income Taxes
and Minority Interest (1,002,554) (728,823)
Provision for income taxes -- --
Minority interest in earnings (loss) of
consolidated affiliate (86,758) --
----------- -----------
Net Income (Loss) (915,796) (728,823)
Preferred stock dividends -- 30,579
----------- -----------
Net Income (Loss) Applicable to Common Shareholders $ (915,796) $ (759,402)
=========== ===========
Net Income (Loss) Per Share of Common Stock:
Basic:
Weighted Average Number of Common Shares Outstanding 8,905,480 7,266,329
=========== ===========
Net Income (Loss) Per Share of Common Stock $ (0.10) $ (0.10)
=========== ===========
Diluted:
Weighted Average Number of Common Shares Outstanding 8,905,480 7,266,329
=========== ===========
Net Income (Loss) Per Share of Common Stock $ (0.10) $ (0.10)
=========== ===========
These accompanying notes are an integral part of these
condensed consolidated financial statements.
3
GUM TECH INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Six months ended June 30,
----------------------------
2000 1999
----------- -----------
Net sales $ 6,595,759 $ 4,364,697
Cost of sales 3,499,157 3,130,396
----------- -----------
Gross Profit 3,096,602 1,234,301
Operating expenses 7,159,746 1,995,511
Research and development 408,187 225,383
----------- -----------
Income (Loss) From Operations (4,471,331) (986,593)
----------- -----------
Other Income (Expense):
Interest and other income 172,429 19,129
Interest expense (411,645) (329,008)
----------- -----------
Total Other Income (Expense) (239,216) (309,879)
----------- -----------
Income (Loss) Before Provision For Income Taxes (4,710,547) (1,296,472)
and Minority Interest
Provision for income taxes 8,585 --
Minority interest in earnings (loss) of
consolidated affiliate (1,087,178) --
----------- -----------
Net Income (Loss) (3,631,954) (1,296,472)
Preferred stock dividends 12,005 30,579
----------- -----------
Net Income (Loss) Applicable to Common Shareholders $(3,643,959) $(1,327,051)
=========== ===========
Net Income (Loss) Per Share of Common Stock:
Basic:
Weighted Average Number of Common Shares Outstanding 8,804,378 7,133,866
=========== ===========
Net Income (Loss) Per Share of Common Stock $ (0.41) $ (0.19)
=========== ===========
Diluted:
Weighted Average Number of Common Shares Outstanding 8,804,378 7,133,866
=========== ===========
Net Income (Loss) Per Share of Common Stock $ (0.41) $ (0.19)
=========== ===========
These accompanying notes are an integral part of these
condensed consolidated financial statements.
4
GUM TECH INTERNATIONAL, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended June 30,
--------------------------
2000 1999
----------- -----------
Cash Flows From Operating Activities:
Net income (loss) $(3,631,954) $(1,296,472)
Adjustments to reconcile net income (loss) to net cash (used)
by operating activities:
Depreciation 230,002 197,692
Amortization 160,659 125,127
Amortization of discount on notes payable 212,500 37,500
Compensation from issuance of stock options 78,940 91,275
Minority interest in earnings of consolidated affiliate (1,087,178) --
Changes in assets and liabilities:
Restricted cash 250,434 --
Accounts receivable 5,920,390 (390,371)
Employee receivables (143,763) --
Inventories (2,763,448) 338,979
Prepaid expenses and other (41,977) (15,046)
Deposits and other (162,655) (157,236)
Accounts payable and accrued expenses (552,197) (736,939)
Sales returns and allowances (549,102) 97,211
Customer deposits (4,000) 15,587
----------- -----------
Net Cash (Used) By Operating Activities (2,083,349) (1,692,693)
----------- -----------
Cash Flows From Investing Activities:
Capital expenditures (357,630) (212,334)
Deposits and other (29,044) --
----------- -----------
Net Cash (Used) By Financing Activities (386,674) (212,334)
----------- -----------
Cash Flows From Financing Activities:
Proceeds from borrowing -- 4,000,000
Principal payments on notes payable (864,841) (173,547)
Issuance of common stock upon exercise of options and warrants 3,108,033 1,469,429
Issuance of preferred stock -- 2,000,000
Debt issuance costs incurred -- (298,650)
Offering costs incurred -- (148,265)
Dividend distribution of subsidiary (814,499) (183,037)
Dividends paid on preferred stock (12,005) (22,246)
----------- -----------
Net Cash Provided By Financing Activities 1,416,688 6,643,684
----------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents (1,053,335) 4,738,657
Cash and Cash Equivalents at Beginning of Period 5,595,075 517,852
----------- -----------
Cash and Cash Equivalents at End of Period $ 4,541,740 $ 5,256,509
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ 38,486 $ 166,889
Income taxes -- --
Supplemental Disclosure of Non Cash Investing and Financing Activities:
Conversion of notes payable into common stock $ 2,000,000 $ 1,155,978
Issuance of common stock to redeem preferred stock $ 1,000,000 $ --
Common stock issured for subscription receivable $ -- $ 8,438
Issuance of warrents in connection with senior notes $ -- $ 600,000
Dividends accrued on preferred stock $ -- $ 8,333
These accompanying notes are an integral part of these
condensed consolidated financial statements.
5
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 six months ended
June 30, 2000 are not necessarily indicative of results of operations that
may be expected for the year ending December 31, 2000. It is recommended
that this financial information be read with the complete financial
statements included in Gum Tech's Annual Report on Form 10-K for the year
ended December 31, 1999 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.
Options, warrants and other incremental shares to purchase 958,310 and
1,597,668 shares of common stock at June 30, 2000 and 1999, respectively,
were not included in the computation of diluted earnings per share because
Gum Tech had a net loss and their effect would be anti-dilutive.
3. Inventories consist of the following at June 30, 2000:
Raw materials and packaging $2,020,196
Work in progress 540,378
Finished goods 2,302,900
Less reserve for obsolescence (132,207)
----------
Total $4,730,267
==========
6
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 five branded and private label consumer products
companies.
In June 2000 Gum Tech announced a joint venture with Swedish Match AB to
develop, manufacture, market and distribute non-tobacco nicotine products
worldwide. Under the agreement Gum Tech will provide the necessary research and
development capability for the joint venture and initially manufacture any
nicotine gum products that the joint venture will require.
Through a joint venture with BioDelivery Technologies, Inc., Gum Tech also
manufactures, markets and distributes Zicam Cold Remedy, a nasal gel formula
that reduces the duration and severity of the common cold. Gum Tech and
BioDelivery Technologies transferred their respective interests in the patent
rights to the nasal gel technology used in Zicam 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 operations. In March
2000, Gel Tech LLC announced a new product, Zicam Allergy Relief, a homeopathic
nasal gel that provides relief to allergy sufferers.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THE
THREE MONTHS ENDED JUNE 30, 1999
The following table details certain financial information for our chewing
gum and Zicam operations for the three months ended June 30, 2000:
7
CHEWING GUM ZICAM CONSOLIDATED*
----------- ----- -------------
Net sales $ 766,189 $ 1,813,559 $ 2,579,748
Cost of sales 871,170 564,427 1,435,597
------------ ----------- ------------
Gross profit (104,981) 1,249,132 1,144,151
Operating expenses 726,298 1,333,766 2,060,064
Research and development 21,252 143,954 165,206
------------ ----------- ------------
Income (Loss) from operations (852,531) (228,588) (1,081,119)
Interest and other income 67,118 23,252 90,370
Interest expense 247 11,558 11,805
------------ ----------- ------------
Income (Loss) before income
taxes and minority interest $ (785,660) $ (216,894) $ (1,002,554)
============ =========== ============
Net assets $ 11,132,369 $ 4,779,242 $ 15,911,611
* Consolidated results shown are prior to the elimination of intercompany
interest transactions.
CHEWING GUM OPERATIONS
Certain information is set forth below for our chewing gum operations
expressed in dollars and as a percentage of net sales for the periods indicated:
THREE MONTHS ENDED JUNE 30,
------------------------------------------
2000 1999
------------------ --------------------
Net sales $ 766,189 100% $ 1,820,552 100%
Cost of sales 871,170 114 1,247,313 69
--------- ---- ----------- ----
Gross profit (104,981) (14) 573,239 31
Operating expenses 726,298 95 720,868 40
Research and development 21,252 3 72,718 4
--------- ---- ----------- ----
Income (Loss) from operations (852,531) (112) (220,347) (13)
Interest and other income 67,118 9 10,025 1
Interest expense 247 -- 218,854 12
Provision (benefit) for income taxes -- -- -- --
--------- ---- ----------- ----
Net income (loss) $(785,660) (103)% $ (429,176) (24)%
========= ==== =========== ====
NET SALES. Net gum sales declined to less than half of the prior year's
level as sales to all of the five principal gum customers declined. Although
sales to these customers will fluctuate from quarter to quarter, the Company
does not expect any significant continuing growth in sales to result from these
customers. Consequently, growth in sales from gum operations are dependent upon
the addition of new customers, including the previously announced relationship
with Swedish Match to develop and market non-tobacco nicotine products and a
potential relationship with a major consumer products company to develop and
market an oral care gum. However, there can be no assurance that the Company
8
will finalize these and or any other contractual arrangements, or that any of
these relationships will ultimately prove successful.
COST OF SALES. Cost of sales declined reflecting the lower sales level.
However, cost of sales increased as a percentage of sales due to the impact of
fixed manufacturing overhead expenses relative to the low production level.
GROSS PROFIT. Gross profit declined as a result of the lower sales level
and an increase in cost of sales as a percentage of sales.
RESEARCH AND DEVELOPMENT. Pursuant to provisions included in the joint
venture agreement with Swedish Match, Gum Tech will recover the cost of research
and development expenses incurred in conjunction with the joint venture.
Expenses in the three months ended June 30, 2000 reflect a credit of $312,000
for this expense recovery. Exclusive of this amount R&D expenses increased to
$333,000 versus $73,000 the year earlier largely due to the nicotine gum
research.
INCOME (LOSS) FROM OPERATIONS. The increase in the loss from operations is
due primarily to the decline in gum sales. Gum Tech does not anticipate gum
operations to become profitable unless and until sales from new contractual
relationships are realized in future periods. There can be no guarantee that any
new contractual relationship will be successful.
INTEREST AND OTHER INCOME. Interest income increased as a result of the
higher cash position for gum operations.
INTEREST EXPENSE. Interest expense decreased primarily due to the repayment
of debt of the gum operations.
ZICAM OPERATIONS
Certain information is set forth below for our Zicam operations expressed
in dollars and as a percentage of net sales for the periods indicated:
9
THREE MONTHS ENDED JUNE 30,
-------------------------------------------
2000 1999
-------------------- -------------------
Net sales $ 1,813,559 100% $ 98,589 100%
Cost of sales 564,427 31 42,203 43
----------- ---- --------- ----
Gross profit 1,249,132 69 56,386 57
Operating expenses 1,333,766 74 323,472 328
Research & development 143,954 8 32,896 33
----------- ---- --------- ----
Income (Loss) from operations (228,588) (13) (299,982) (304)
Interest and other income 23,252 1 335 --
Interest expense 11,558 -- -- --
----------- ---- --------- ----
Income (Loss) before income
taxes and minority interest $ (216,894) (12)% $(299,647) (304)%
=========== ==== ========= ====
NET SALES. Net sales of Zicam products increased to $1.8 million in the
three months ended June 30, 2000 largely reflecting the initial sales of Zicam
Allergy Relief which was introduced early in the quarter. Both Zicam Cold Remedy
and Zicam Allergy Relief are highly seasonal products. Sales of Zicam Cold
Remedy were not significant in the second quarter and we do not anticipate
significant sales of this product prior to retailers' restocking of cold
products for the 2000-2001 cold season, which is expected in the third quarter.
COST OF SALES. Cost of sales increased from last year reflecting the higher
level of sales.
OPERATING EXPENSES. Operating expenses increased to approximately $1.33
million primarily due to advertising expenses and legal expenses.
RESEARCH AND DEVELOPMENT. Research and development expense in this period
primarily reflects research on Zicam Cold Remedy.
INCOME (LOSS) FROM OPERATIONS. Gel Tech LLC recorded a loss from operations
of approximately $229 thousand for the three months ended June 30, 2000.
INTEREST EXPENSE. Amounts owed to Gum Tech for services provided to Gel
Tech LLC that are not paid currently are recorded as a loan and interest is
charged at an annual rate of 10%. In July 2000 Gel Tech borrowed $500,000 under
its revolving credit facility with a commercial bank.
10
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO THE SIX
MONTHS ENDED JUNE 30, 1999
The following table details certain financial information for our chewing
gum and Zicam operations for the six months ended June 30, 2000:
CHEWING GUM ZICAM CONSOLIDATED*
----------- ----- -------------
Net sales $ 1,681,697 $ 4,914,062 $ 6,595,759
Cost of sales 1,885,375 1,613,782 3,499,157
----------- ----------- -----------
Gross profit (203,678) 3,300,280 3,096,602
Operating expenses 1,275,683 5,884,063 7,159,746
Research and development 223,911 184,276 408,187
----------- ----------- -----------
Income (Loss) from operations (1,703,272) (2,768,059) (4,471,331)
Interest and other income 111,759 70,256 182,015
Interest expense 409,674 11,557 421,231
----------- ----------- -----------
Income (Loss) before income
taxes and minority interest $(2,001,187) $(2,709,360) $(4,710,547)
=========== =========== ===========
* Consolidated results shown are prior to the elimination of intercompany
interest transactions.
CHEWING GUM OPERATIONS
Certain information is set forth below for our chewing gum operations
expressed in dollars and as a percentage of net sales for the periods indicated:
SIX MONTHS ENDED JUNE 30,
--------------------------------------------
2000 1999
-------------------- --------------------
Net sales $ 1,681,697 100% $ 3,898,016 100%
Cost of sales 1,885,375 112 2,908,507 75
----------- ---- ----------- ----
Gross profit (203,678) (12) 989,509 25
Operating expenses 1,275,683 76 1,373,428 35
Research and development 223,911 13 192,487 5
----------- ---- ----------- ----
Income (Loss) from operations (1,703,272) (101) (576,406) (15)
Interest and other income 111,759 6 18,794 --
Interest expense 409,674 24 329,008 (8)
Provision (benefit) for income
taxes -- -- -- --
----------- ---- ----------- ----
Net income (loss) $(2,001,187) (119)% $ (886,620) (23)%
=========== ==== =========== ====
NET SALES. Net gum sales declined to less than half of the prior year's
level as sales to all of the five principal gum customers declined. Although
sales to these customers will fluctuate from quarter to quarter, the Company
does not expect any significant continuing growth in sales to result from these
customers. Consequently, growth in sales from gum operations are dependent upon
the addition of new customers, including the previously announced relationship
with Swedish Match to develop and market a nicotine gum and a potential
11
relationship with a major consumer products company to develop and market an
oral care gum. However, there can be no assurance that the Company will finalize
these and or any other contractual arrangements, or that any of these
relationships will ultimately prove successful.
COST OF SALES. Cost of sales declined reflecting the lower sales level.
However, cost of sales increased as a percentage of sales due to the impact of
fixed manufacturing overhead expenses relative to the low production level.
GROSS PROFIT. Gross profit declined as a result of the lower sales level
and an increase in cost of sales as a percentage of sales.
OPERATING EXPENSES. Operating expenses declined approximately $98,000
primarily as a result of charging administrative and warehousing expenses to Gel
Tech LLC.
RESEARCH AND DEVELOPMENT. Pursuant to provisions included in the joint
venture agreement with Swedish Match, Gum Tech will recover the cost of research
and development expenses incurred in conjunction with the joint venture.
Expenses in the six months ended June 30, 2000 reflect a credit of $312,000 for
this expense recovery. Exclusive of this amount R&D expenses increased to
$536,000 versus $192,000 the year earlier largely due to the nicotine gum
research.
INCOME (LOSS) FROM OPERATIONS. The increase in the loss from operations is
due primarily to the decline in gum sales. Gum Tech does not anticipate gum
operations to become profitable unless and until sales from new contractual
relationships are realized in future periods. There can be no guarantee that any
new contractual relationship will be successful.
INTEREST AND OTHER INCOME. Interest income increased as a result of the
higher cash position for gum operations.
INTEREST EXPENSE. Interest expense increased over the prior year period
primarily due to the accelerated amortization of remaining interest charges
associated with the repayment of the Citadel financing. During the first quarter
of 2000, the Corporation redeemed the Citadel financing through the issuance of
additional common stock. In addition, Gum Tech repaid the outstanding balance of
its term loan with Textron Financial Corp. As a result of these two actions, Gum
Tech's gum operations should not record any significant interest expense in
future periods.
12
ZICAM OPERATIONS
Certain information is set forth below for our Zicam operations expressed
in dollars and as a percentage of net sales for the periods indicated:
SIX MONTHS ENDED JUNE 30,
-------------------------------------------
2000 1999
------------------- -------------------
Net sales $ 4,914,062 100% $ 466,681 100%
Cost of sales 1,613,782 33 221,889 48
----------- ---- --------- ----
Gross profit 3,300,280 67 244,792 52
Operating expenses 5,884,063 119 622,083 133
Research & development 184,276 4 32,896 7
----------- ---- --------- ----
Income (Loss) from operations (2,768,059) (56) (410,187) (88)
Interest and other income 70,256 1 335 --
Interest expense 11,557 -- -- --
----------- ---- --------- ----
Income (Loss) before income
taxes and minority interest $(2,709,360) (55)% $(409,852) (88)%
=========== ==== ========= ====
NET SALES. Net sales of Zicam operations increased to $4.9 million in the
six months ended June 30, 2000 from approximately $467,000 the prior year. The
increase in sales over the prior year is due to the introduction of new
products--Zicam Cold Remedy in late 1999 and Zicam Allergy Relief in the second
quarter of 2000. Both Zicam Cold Remedy and Zicam Allergy Relief are highly
seasonal products.
COST OF SALES. Cost of sales increased from last year reflecting the higher
level of sales, but decreased as a percentage of sales due to decreases in cost
of materials and production.
GROSS PROFIT. Zicam produced a gross profit of $3.3 million versus the
prior year amount of approximately $245,000.
OPERATING EXPENSES. Operating expenses increased to approximately $5.9
million from $622,000 last year primarily due to substantial increases in
advertising expense, legal expense and sales commissions.
RESEARCH AND DEVELOPMENT. Research and development expense in this period
primarily reflects research and development expenses for both Zicam Allergy
Relief and Zicam Cold Remedy.
INCOME (LOSS) FROM OPERATIONS. Gel Tech LLC recorded a loss from operations
of approximately $2.8 million for the six months ended June 30, 2000 primarily
due to the relatively large advertising expense recorded in the first quarter
2000.
INTEREST EXPENSE. Amounts owed to Gum Tech for services provided to Gel
Tech LLC that are not paid currently are recorded as a loan, and interest is
charged at an annual rate of 10%. In July 2000, Gel Tech borrowed $500,000 under
its revolving credit facility with a commercial bank.
13
LIQUIDITY AND CAPITAL RESOURCES
Gum Tech's working capital declined from approximately $12.5 million at
December 31,1999 to approximately $9.8 million at June 30, 2000. During the
six-month period ended June 30, 2000, Gum Tech experienced a decrease in cash
from operating activities of approximately $2.1 million, due primarily to a net
income loss of $3.6 million, an increase in inventories of $2.8 million, a
decrease in accounts payable ($0.6 million) and a decrease in allowance for
sales returns ($0.5 million). These decreases were partially offset by a
decrease in accounts receivable of $5.9 million.
Cash flows from investing activities consumed $387,000 primarily for plant
expansion. Cash flows from financing activities provided approximately $1.4
million primarily through the issuance of common stock upon the exercise of
options and warrants of $3.1 million offset in part by $800,000 of cash used to
repay the term loan with Textron and $814,000 used to pay a dividend to the
stockholders of Gel Tech LLC.
During the first quarter of 2000, Gum Tech redeemed the remainder of the
Citadel financing ($2.0 million of Senior Secured Notes and $1.0 million of
Series A preferred stock) by issuing a total of 193,477 shares of common stock.
Gel Tech LLC entered into a $1.0 million revolving credit facility with
Imperial Bank in January 2000 and recently borrowed $500,000 under the facility.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS AND FINANCIAL CONDITION
This report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995, including statements regarding
our anticipated growth in business and future results of operations. These
forward-looking statements are based on our expectations and are subject to a
number of risks and uncertainties, many of which cannot be predicted or
quantified and are beyond our control. Future events and actual results could
differ materially from those set forth in, contemplated by, or underlying the
forward-looking statements. Factors that could cause actual results to differ
materially from our expectations include less than anticipated demand for our
chewing gum or nasal gel products, such as Zicam Cold Remedy and Zicam Allergy
Relief, lack of market acceptance for or uncertainties concerning the efficacy
of both Zicam products, fluctuations in seasonal demand for Zicam Cold Remedy
and Zicam Allergy Relief, difficulties inherent in securing a relationship with
consumer products companies to develop and market an oral care gum product,
including the failure to secure such relationships or to meet anticipated
deadlines, difficulties in increasing production to meet unexpectedly high
demand in the short term, a decrease in the level of reorders from existing
14
customers, financial difficulties encountered by one or more of our 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 patent and contractual claims, product
liabilities and consumer issues. These potential risks and uncertainties,
together with those mentioned below and elsewhere in this report, could affect
our future operating results, financial condition, and the market price of our
common stock.
Information contained in this report includes "forward-looking statements",
which can be identified by the use of forward-looking words such as "believes",
"expects", "may", "should", or "anticipates" or by discussions of trends or
strategy. We may not achieve the future results discussed in these
forward-looking statements.
WE INCURRED SIGNIFICANT LOSSES IN PREVIOUS YEARS
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 four years and for the six months ended June 30,
2000 and we may not be profitable in the future. 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 Cold Remedy and Zicam Allergy Relief, two
relatively new products.
IF OUR ZICAM PRODUCTS DO NOT GAIN MARKET WIDESPREAD ACCEPTANCE, OUR ANTICIPATED
SALES AND RESULTS OF OPERATIONS WILL SUFFER
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 Cold
Remedy. Although studies have indicated that Zicam Cold Remedy can significantly
reduce the duration and severity of the common cold, there is no guarantee that
the product will achieve continuing widespread acceptance by the market. If any
unanticipated problem arises concerning the efficacy of Zicam Cold Remedy or the
product fails to achieve widespread market acceptance for any reason, our
prospects for our anticipated future operating results would be adversely
affected. In addition, we recently launched a homeopathic allergy relief nasal
gel known as Zicam Allergy Relief. If Zicam Allergy Relief does not achieve
widespread market acceptance, our anticipated sales growth in the future would
be adversely affected.
WE MAY BE UNABLE TO MEET DEMAND FOR OUR NEW PRODUCTS
To the extent Zicam Cold Remedy 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
15
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
and allergy seasons, when we expect demand for Zicam Cold Remedy and Zicam
Allergy Relief to peak, respectively.
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.
OUR RELIANCE UPON A FEW GUM 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
immediate gum sales growth on a few customers. These customers include
Herbalife, Breath Asure, Ranir, Heritage Consumer Products and PharmaGreen.
While the decision to contract with these firms relieves us of the direct
responsibility to market products, we become dependent on the financial
resources and marketing capabilities of third parties. Further, we are at risk
for their non-payment or late payment for amounts owed to us. While we intend to
add to this portfolio of customers to reduce the risk of non-performance by any
single customer, we have not yet been 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 the Zicam products, involves claims that these products assist in
weight loss, promote dental hygiene, reduce the duration of the common cold,
provide allergy relief, 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 in support of claims regarding our products, we have
obtained scientific data for all of our products. There can be no assurance that
the scientific data we have obtained in support of our claims will be deemed
acceptable to the FDA or FTC, should either agency request any such data in the
future. If the FDA or the FTC requests any supporting information, and we are
unable to provide support that is acceptable to 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
16
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.
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 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.
WE MAY BE UNABLE TO PREVENT OTHERS FROM DEVELOPING SIMILAR PRODUCTS
We routinely seek trademark and patent protection from the United States
Patent Office and from similar agencies in foreign countries for chewing gum
brands and have done so for the Zicam products. 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.
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.
17
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
as yet 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.
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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On October 16, 1996, a lawsuit was filed against Gum Tech International and
other parties 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 us, principally alleged that we 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 our favor, and dismissed the plaintiff's claims against us
and our current and former directors. The judge's ruling on the motion for
summary judgment is not yet final, and once final, will be subject to appeal.
On January 27, 1999, an action was filed against Gum Tech International 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. 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. We deny the plaintiff's
allegations and intend to vigorously defend this action.
18
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.).
Our 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
our financial advisor. 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 we 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.
On October 21, 1999, an action was filed against Gum Tech International in
the Superior Court of the State of California in and for the County of Los
Angeles, case number BC 218 878, by International Interest Group, Inc. ("IIG").
The complaint alleges the breach of an alleged oral finder's fee agreement
between the parties relating to the introduction of certain Bio Delivery
Technology individuals to Gum Tech in 1996. BioDelivery and Gum Tech formed a
joint venture in 1999 to manufacture, market and distribute Zicam. The complaint
seeks unspecified general contract damages, declaratory relief, and an
accounting. We removed the action to the United States District Court for the
Central District of California on February 2, 2000. We deny the existence, as
well as the validity, of the alleged oral agreement, and intend to vigorously
defend the action.
On November 9, 1999, The Quigley Corporation commenced a civil action
against Gum Tech International, Inc. and Gel-Tech, L.L.C. in the United States
District Court for the Eastern District of Pennsylvania. The complaint alleges
that Zicam Cold Remedy infringes on a patent licensed to The Quigley
Corporation. The complaint seeks compensatory damages and injunctive relief. In
a ruling on April 20, 2000, the judge in the case denied a motion for
preliminary injunctive relief. In an amended order on May 12, 2000, the judge
certified three issues of law for immediate appeal to the United States Court of
Appeals for the Federal circuit. An appeal by Gum Tech International and Gel
Tech LLC based on those three issues is currently pending before the United
States Court of Appeals for the Federal circuit. Each of the defendants denies
the allegations of the complaint.
ITEM 2. CHANGES IN SECURITIES
None
19
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 000-27646).
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).
10.1 Shareholders' Agreement between the Registrant and Swedish Match
AB.
10.2 Consulting Agreement with Gary Kehoe. Certain information in
this exhibit will be omitted and filed separately with the
Securities and Exchange Commission pursuant to a confidential
treatment request under Rule 24b-2 of the Securities and
Exchange Act of 1934, as amended.
27 Financial Data Schedule
B. REPORTS ON FORM 8-K
None
20
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
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 14, 2000
21