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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 September 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 (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) 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 9,047,047 shares of the registrant's common stock, no par value,
outstanding as of October 23, 2000.
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GUM TECH INTERNATIONAL, INC.
FORM 10-Q
INDEX
Part I Financial Information Page
Item 1. Condensed Consolidated Balance Sheet
as of September 30, 2000 and
December 31, 1999 1
Condensed Consolidated Statements of
Operations for the three months ended
September 30, 2000 and 1999 3
Condensed Consolidated Statements of
Operations for the nine months ended
September 30, 2000 and 1999 4
Condensed Consolidated Statements of Cash
Flows for the nine months ended September
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 4. Submission of Matters to a Vote
of Security Holders 20
Signatures 21
ZICAM IS A TRADEMARK OF GEL TECH LLC
GUM TECH INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
September 30, December 31,
2000 1999
------------ ------------
Current Assets:
Cash and cash equivalents $ 4,316,502 $ 5,595,075
Restricted cash 20,609 270,878
Accounts receivable:
Trade, net allowance for doubtful accounts of
$90,506 and $50,482 2,320,059 8,197,180
Employees -- 56,237
Inventories 4,388,164 1,966,819
Prepaid expenses and other 172,898 155,281
------------ ------------
Total Current Assets 11,218,232 16,241,470
------------ ------------
Property and Equipment, at cost:
Machinery and production equipment 4,867,191 4,455,694
Office furniture and equipment 346,541 295,577
Leasehold improvements 453,962 383,854
------------ ------------
Total Property and Equipment 5,667,694 5,135,125
Less accumulated depreciation (2,051,572) (1,724,276)
------------ ------------
Net Property and Equipment 3,616,122 3,410,849
------------ ------------
Other Assets:
Intangible assets, net of accumulated
amortization of $709,403 and $548,744 -- 160,659
Deposits and other 842,276 214,936
------------ ------------
Total Other Assets 842,276 375,595
------------ ------------
Total Assets $ 15,676,630 $ 20,027,914
============ ============
The 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
September 30, December 31,
2000 1999
------------ ------------
Current Liabilities:
Accounts payable and accrued expenses $ 1,424,946 $ 2,078,358
Accrued interest 7,585 --
Customer deposits 31,377 10,500
Sales returns and allowances 653,692 1,202,100
Current portion of long-term debt 5,842 420,043
------------ ------------
Total Current Liabilities 2,123,442 3,711,001
------------ ------------
Long-Term Debt, net of current portion above:
Financial institutions and other 500,000 2,646,897
Obligations under capital leases 5,842 14,105
Less current portion above (5,842) (420,043)
------------ ------------
Total Long-Term Debt 500,000 2,240,959
------------ ------------
Minority interest in consolidated affiliate 197,467 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,
9,047,047 and 8,320,705 shares issued and outstanding 30,459,362 23,687,579
Additional paid in capital 3,650,539 3,551,766
Accumulated deficit (21,254,180) (15,537,508)
------------ ------------
Total Stockholders' Equity 12,855,721 12,701,837
------------ ------------
Total Liabilities and Stockholders' Equity $ 15,676,630 $ 20,027,914
============ ============
The 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
September 30,
------------------------------
2000 1999
----------- -----------
Net sales $ 1,782,669 $ 2,268,782
Cost of sales 1,374,267 1,419,728
----------- -----------
Gross Profit 408,402 849,054
Operating expenses 1,503,132 916,641
Research and development 299,169 155,065
----------- -----------
Income (Loss) From Operations (1,393,899) (222,652)
----------- -----------
Other Income (Expense):
Interest and other income 64,382 46,766
Interest expense (18,169) (500,357)
----------- -----------
Total Other Income (Expense) 46,213 (453,591)
----------- -----------
Income (Loss) Before Provision For Income Taxes and
Minority Interest (1,347,686) (676,243)
Provision for income taxes -- --
Minority interest in earnings (loss) of
consolidated affiliate (89,472) --
----------- -----------
Net Income (Loss) (1,258,214) (676,243)
Preferred stock dividends -- 119,021
----------- -----------
Net Income (Loss) Applicable to Common Shareholders $(1,258,214) $ (795,264)
=========== ===========
Net Income (Loss) Per Share of Common Stock:
Basic:
Weighted Average Number of Common Shares Outstanding 8,967,803 7,553,410
=========== ===========
Net Income (Loss) Per Share of Common Stock $ (0.14) $ (0.11)
=========== ===========
Diluted:
Weighted Average Number of Common Shares Outstanding 8,967,803 7,553,410
=========== ===========
Net Income (Loss) Per Share of Common Stock $ (0.14) $ (0.11)
=========== ===========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
3
GUM TECH INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Nine months ended
September 30,
-----------------------------
2000 1999
----------- -----------
Net sales $ 8,378,428 $ 6,633,479
Cost of sales 4,873,424 4,550,124
----------- -----------
Gross Profit 3,505,004 2,083,355
Operating expenses 8,662,878 2,912,152
Research and development 707,356 380,448
----------- -----------
Income (Loss) From Operations (5,865,230) (1,209,245)
----------- -----------
Other Income (Expense):
Interest and other income 236,811 65,895
Interest expense (429,814) (829,365)
----------- -----------
Total Other Income (Expense) (193,003) (763,470)
----------- -----------
Income (Loss) Before Provision For Income Taxes and
Minority Interest (6,058,233) (1,972,715)
Provision for income taxes 8,585 --
Minority interest in earnings (loss) of
consolidated affiliate (1,176,650) --
----------- -----------
Net Income (Loss) (4,890,168) (1,972,715)
Preferred stock dividends 12,005 149,600
----------- -----------
Net Income (Loss) Applicable to Common Shareholders $(4,902,173) $(2,122,315)
=========== ===========
Net Income (Loss) Per Share of Common Stock:
Basic:
Weighted Average Number of Common Shares Outstanding 8,859,485 7,275,248
=========== ===========
Net Income (Loss) Per Share of Common Stock $ (0.55) $ (0.29)
=========== ===========
Diluted:
Weighted Average Number of Common Shares Outstanding 8,859,485 7,275,248
=========== ===========
Net Income (Loss) Per Share of Common Stock $ (0.55) $ (0.29)
=========== ===========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
GUM TECH INTERNATIONAL, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended
September 30,
-------------------------------
2000 1999
----------- -----------
Cash Flows From Operating Activities:
Net income (loss) $(4,890,168) $(1,972,715)
Adjustments to reconcile net income (loss) to
net cash (used) by operating activities:
Depreciation 327,296 321,237
Amortization 160,659 227,666
Amortization of discount on notes payable 212,500 230,000
Compensation from forgiveness of note receivable 209,753 --
Compensation from extension and issuance of stock options 98,773 91,285
Accrued interest 7,585 --
Minority interest in earnings of consolidated affiliate (1,176,650) --
Common stock issued for payment of interest -- 144,526
Changes in assets and liabilities:
Restricted cash 250,269 --
Accounts receivable 5,877,121 (1,353,445)
Employee receivables (153,516) --
Inventories (2,421,345) 139,057
Prepaid expenses and other (17,617) 5,765
Deposits and other (162,655) (169,939)
Accounts payable and accrued expenses (653,412) (785,303)
Sales returns and allowances (548,408) 320,210
Customer deposits 20,877 (34,200)
----------- -----------
Net Cash (Used) By Operating Activities (2,858,938) (2,835,856)
----------- -----------
Cash Flows From Investing Activities:
Capital expenditures (532,569) (240,947)
Deposits and other (464,685) --
----------- -----------
Net Cash (Used) By Financing Activities (997,254) (240,947)
----------- -----------
Cash Flows From Financing Activities:
Proceeds from borrowing 500,000 4,000,000
Principal payments on notes payable (867,660) (282,498)
Issuance of common stock upon exercise of options and warrants 3,771,783 1,683,918
Issuance of preferred stock -- 2,000,000
Debt issuance costs incurred -- (310,462)
Offering costs incurred -- (155,231)
Dividend distribution of subsidiary (814,004) (183,037)
Dividends paid on preferred stock (12,500) (89,600)
----------- -----------
Net Cash Provided By Financing Activities 2,577,619 6,663,090
----------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents (1,278,573) 3,586,287
Cash and Cash Equivalents at Beginning of Period 5,595,075 517,852
----------- -----------
Cash and Cash Equivalents at End of Period $ 4,316,502 $ 4,104,139
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ 51,447 $ 229,510
Income taxes -- --
Supplemental Disclosure of Non Cash Investing and Financing Activities:
Conversion of notes payable into common stock $ 2,000,000 $ 1,505,973
Issuance of common stock to redeem preferred stock $ 1,000,000 $ --
Issuance of warrents in connection with senior notes $ -- $ 600,000
Dividends accrued on preferred stock $ -- $ 20,000
The 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 nine months ended
September 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 weighted average
number of common shares outstanding. Diluted earnings per share is computed
on the basis of the weighted 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
954,310 and 2,006,168 shares of common stock at September 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 September 30, 2000:
Raw materials and packaging $ 1,877,385
Work in progress 442,290
Finished goods 2,193,526
Less reserve for obsolescence (125,037)
-----------
Total $ 4,388,164
===========
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. 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. 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 at cost to 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. 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.
7
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO
THE THREE MONTHS ENDED SEPTEMBER 30, 1999
The following table details certain financial information for our chewing
gum and Zicam operations for the three months ended September 30, 2000:
CHEWING GUM ZICAM CONSOLIDATED*
------------ ------------ ------------
Net sales $ 555,283 $ 1,227,386 $ 1,782,669
Cost of sales 944,963 429,304 1,374,267
------------ ------------ ------------
Gross profit (389,680) 798,082 408,402
Operating expenses 731,702 837,010 1,568,712
Research and development 146,561 152,608 299,169
------------ ------------ ------------
Income (loss) from operations (1,267,943) (191,536) (1,459,479)
Interest and other income 141,479 -- 141,479
Interest expense (2,154) 29,504 27,350
------------ ------------ ------------
Income (loss) before income
taxes and minority interest $ (1,124,310) $ (221,040) $ (1,345,350)
============ ============ ============
Net assets $ 10,910,609 $ 4,766,021 $ 15,676,630
- ----------
* Consolidated income statement is prior to the elimination of intercompany
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 September 30,
----------------------------------------
2000 1999
------------------ ------------------
Net sales $ 555,283 100% $ 1,084,888 100%
Cost of sales 944,963 170 1,051,022 97
----------- ---- ----------- ----
Gross profit (389,680) (70) 33,866 3
Operating expenses 731,702 132 448,229 41
Research and development 146,561 26 83,888 8
----------- ---- ----------- ----
Income (loss) from operations (1,267,943) (228) (498,251) (46)
Interest and other income 141,479 26 23,271 2
Interest expense (2,154) -- 500,357 46
Provision (benefit) for income taxes -- -- -- --
----------- ---- ----------- ----
Net income (loss) $(1,124,310) (202)% $ (975,337) (90)%
=========== ==== =========== ====
8
NET SALES. Net gum sales declined to less than half of the prior year's
level as sales to all of Gum Tech's 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
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 increased to approximately $732,000
from $448,000 in the year earlier period largely due to a non-recurring charge
of approximately $200,000.
RESEARCH AND DEVELOPMENT. Research and development expenses exclude the
cost of research and development work recovered from the joint venture with
Swedish Match. The increase in research and development expense for the period
is primarily due to work in other product areas.
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 and income realized from the usage of
barter credits in Zicam marketing efforts.
INTEREST EXPENSE. Interest expense decreased primarily due to the repayment
of debt in early 2000.
9
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:
Three Months Ended September 30,
----------------------------------------
2000 1999
------------------ ------------------
Net sales $ 1,227,386 100% $ 1,183,894 100%
Cost of sales 429,304 35 368,706 31
----------- ---- ----------- ----
Gross profit 798,082 65 815,188 69
Operating expenses 837,010 68 468,412 40
Research & development 152,608 13 71,177 6
----------- ---- ----------- ----
Income (loss) from operations (191,536) (16) 275,599 23
Interest and other income -- -- 23,495 2
Interest expense 29,504 2 -- --
----------- ---- ----------- ----
Income (loss) before income
taxes and minority interest $ (221,040) (18)% $ 299,094 25%
=========== ==== =========== ====
NET SALES. Net sales of Zicam products increased to $1.2 million in the
three months ended September 30, 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.
OPERATING EXPENSES. Operating expenses increased to approximately $0.8
million primarily due to increased advertising expenses for both Zicam products.
RESEARCH AND DEVELOPMENT. Research and development expense in this period
primarily reflects on-going research of Zicam Cold Remedy.
INCOME (LOSS) FROM OPERATIONS. Gel Tech LLC recorded a loss from operations
of approximately $192,000 for the three months ended September 30, 2000 due to
increased advertising and research and development expenses.
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 addition, Gel Tech borrowed $500,000 under
its revolving credit facility with a commercial bank during the period.
10
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO
THE NINE MONTHS ENDED SEPTEMBER 30, 1999
The following table details certain financial information for our chewing
gum and Zicam operations for the nine months ended September 30, 2000:
CHEWING GUM ZICAM CONSOLIDATED*
----------- ----------- -----------
Net sales $ 2,236,979 $ 6,141,449 $ 8,378,428
Cost of sales 2,830,338 2,043,086 4,873,424
----------- ----------- -----------
Gross profit (593,359) 4,098,363 3,505,004
Operating expenses 2,004,746 6,723,712 8,728,458
Research and development 370,472 336,884 707,356
----------- ----------- -----------
Income (loss) from operations (2,968,577) (2,962,233) (5,930,810)
Interest and other income 253,238 70,256 323,494
Interest expense 409,855 41,062 450,917
----------- ----------- -----------
Income (loss) before income
taxes and minority interest $(3,125,194) $(2,933,039) $(6,058,233)
=========== =========== ===========
- ----------
* Consolidated results shown are prior to the elimination of intercompany
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:
Nine Months Ended September 30,
----------------------------------------
2000 1999
------------------ ------------------
Net sales $ 2,236,979 100% $ 4,982,904 100%
Cost of sales 2,830,338 127 3,959,529 79
----------- ---- ----------- ----
Gross profit (593,359) (27) 1,023,375 21
Operating expenses 2,004,746 90 1,821,658 37
Research and development 370,472 16 276,375 6
----------- ---- ----------- ----
Income (loss) from operations (2,968,577) (133) (1,074,658) (22)
Interest and other income 253,238 11 42,065 1
Interest expense 409,855 18 829,365 16
Provision (benefit) for income taxes -- -- -- --
----------- ---- ----------- ----
Net income (loss) $(3,125,194) (140)% $(1,861,958) (37)%
=========== ==== =========== ====
NET SALES. Net gum sales declined to less than half of the prior year's
level as sales to all of Gum Tech's 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
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.
11
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 increased due to a non-recurring
charge of approximately $200,000 in the third quarter.
RESEARCH AND DEVELOPMENT. Research and development expenses exclude the
cost of research and development work recovered from the joint venture with
Swedish Match. The increase in research and development expense for the period
is primarily due to work in other product areas.
INCOME (LOSS) FROM OPERATIONS. The increase in the loss from operations was
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 and income realized from the usage of
barter credits in Zicam marketing efforts.
INTEREST EXPENSE. Interest expense decreased from 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, Gum Tech redeemed the Citadel financing through the issuance of
additional common stock. Interest was also reduced from the repayment of the
Company's term loan with Textron Financial Corp in early 2000. Gum Tech's gum
operations do not currently have any outstanding debt.
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:
12
Nine Months Ended September 30,
----------------------------------------
2000 1999
------------------ ------------------
Net sales $ 6,141,449 100% $ 1,650,575 100%
Cost of sales 2,043,086 33 590,595 36
----------- ---- ----------- ----
Gross profit 4,098,363 67 1,059,980 64
Operating expenses 6,723,712 110 1,090,494 66
Research & development 336,884 5 104,073 6
----------- ---- ----------- ----
Income (loss) from operations (2,962,233) (48) (134,587) (8)
Interest and other income 70,256 1 23,830 1
Interest expense 41,062 1 -- --
----------- ---- ----------- ----
Income (loss) before income
taxes and minority interest $(2,933,039) (48)% $ (110,757) (7)%
=========== ==== =========== ====
NET SALES. Net sales of Zicam operations increased to $6.1 million in the
nine months ended September 30, 2000 from approximately $1.7 million 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.
GROSS PROFIT. Zicam produced a gross profit of $4.1 million versus the
prior year amount of approximately $1.1 million.
OPERATING EXPENSES. Operating expenses increased to approximately $6.7
million from $1.1 million 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 $3.0 million 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 $9.1 million at September 30, 2000. During
the nine-month period ended September 30, 2000, Gum Tech experienced a decrease
in cash from operating activities of approximately $2.9 million, due primarily
to a net loss of $4.9 million, an increase in inventories of $2.4 million, a
decrease in accounts payable of $0.7 million and a decrease in allowance for
sales returns and allowances of $0.6 million. These decreases were partially
offset by a decrease in accounts receivable of $5.9 million.
Cash flows from investing activities consumed approximately $1.0 million
primarily for plant expansion. Cash flows from financing activities provided
approximately $2.6 million primarily through the issuance of common stock upon
the exercise of options and warrants of $3.8 million, which was 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 a
commercial bank in January 2000 and has borrowed $500,000 under the facility.
RECENTLY ISSUED ACCOUNTING STANDARDS
The Securities and Exchange Commission (SEC) issued Staff Accounting
Bulletin (SAB) 101, REVENUE RECOGNITION IN FINANCIAL STATEMENT, in December
1999. The SAB summarizes certain of the SEC staff's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
In June 2000, the SEC issued SAB 101B, which delays the implementation date of
SAB 101 until no later than the fourth fiscal quarter of fiscal years beginning
after December 15, 1999. The Company does not believe that adoption of this SAB
will have a material impact on its financial statements.
In March 2000, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation (FIN) 44, ACCOUNTING FOR CERTAIN TRANSACTIONS INVOLVING STOCK
COMPENSATION, which clarifies the application of APB 25 for certain issues. The
interpretation is effective July 1, 2000, except for the provisions that relate
to modifications that directly or indirectly reduce the exercise price of an
award and the definition of an employee, which are effective after December 15,
1998. The Company does not believe that adoption of FIN 44 will have a material
impact on its financial statements.
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
14
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
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 nine months ended
September 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 2000, we also 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.
15
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
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. 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, and
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.
16
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.
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, the
availability of a large number of additional shares for sale, or short-selling
activities 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 number of shares of available
stock could 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 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. An appeal from this judgement has been filed by
GCN Products, Inc.
On January 27, 1999, an action was filed against Gum Tech and certain other
parties in the Superior Court of the State of Arizona in and for the County of
Maricopa, CV-99-01528, by Paul F. Janssens-Lens. 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.
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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 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 BioDelivery 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 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 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
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the 2000 Annual Meeting of Stockholders, held on September 1, 2000, the
stockholders approved the election of directors to serve for the following year
or until their successors are elected:
Name For Against
---- --- -------
W. Brown Russell* 8,664,516 29,665
William D. Boone 8,664,516 29,665
Gary Kehoe 8,665,016 29,665
William A. Yuan 8,664,516 29,665
* Mr. Russell resigned from the Board of Directors effective September 28,
2000 concurrent with the appointment of three additional board members,
including Messrs. Ed Faber, Ed Walsh and Michael Zeher. In addition, Mr. Ken
Waters, a consultant to Gum Tech, was added to the Board effective November 1,
2000.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
3(a) 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(b) 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).
4(a) 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).
4(b) Shareholders' Agreement between the Registrant and Swedish
Match AB (incorporated by reference to Registrant's
Quarterly Report on Form 10-Q for the period ending June 30,
2000).
10 Consulting Agreement with Gary Kehoe. (incorporated by
reference to Registrant's Quarterly Report on Form 10-Q for
the period ending June 30, 2000).
27 Financial Data Schedule
B. REPORTS ON FORM 8-K
None
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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
November 14, 2000
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