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 March 31, 2002
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.
(Name of registrant as specified in its charter)
UTAH 87-0482806
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2375 EAST CAMELBACK ROAD, SUITE 500
PHOENIX, AZ 85016
(Address of principal executive offices)
(602) 387-5353
(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 9,432,251 shares of the registrant's common stock, no par value,
outstanding as of April 30, 2002.
GUM TECH INTERNATIONAL, INC.
FORM 10-Q
INDEX
Page
----
PART I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Balance Sheet
as of March 31, 2002 and December 31, 2001 1
Condensed Consolidated Statements of
Operations for the three months ended
March 31, 2002 and 2001 3
Condensed Consolidated Statements of
Cash Flows for the three months ended
March 31, 2002 and 2001 4
Notes to Condensed Consolidated
Financial Statements 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 14
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
UNLESS OTHERWISE INDICATED IN THIS FILING, "GUM TECH," "US," "WE," "OUR", "THE
COMPANY" AND SIMILAR TERMS REFER TO GUM TECH INTERNATIONAL, INC. AND ITS
SUBSIDIARIES. ZICAM IS A REGISTERED TRADEMARK OF THE COMPANY'S SUBSIDIARY, GEL
TECH, L.L.C. AND THE GUM TECH NAME AND LOGO ARE TRADEMARKS OF GUM TECH
INTERNATIONAL, INC.
GUM TECH INTERNATIONAL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
March 31, December 31,
2002 2001
------------ ------------
Current Assets:
Cash and cash equivalents $ 17,459,559 $ 7,342,985
Restricted cash -- 1,503,150
Accounts receivable:
Trade, net allowance for doubtful accounts of $578,117 and $468,389 1,556,276 4,461,156
Inventories 1,269,952 1,580,912
Marketable securities -- 10,656,380
Prepaid expenses and other 152,360 508,462
Interest receivable 11,383 --
Notes receivable 200,000 200,000
------------ ------------
Total Current Assets 20,649,530 26,253,045
------------ ------------
Property and Equipment, at cost:
Office furniture and equipment 208,937 94,277
Leasehold improvements 2,112 2,112
------------ ------------
Total Property and Equipment 211,049 96,389
Less accumulated depreciation (21,095) (33,245)
------------ ------------
Net Property and Equipment 189,954 63,144
------------ ------------
Other Assets:
Deposits and other 63,886 32,400
Patents, net of accumulated amortization of $21,389 and $4,619 1,102,211 1,118,981
Goodwill 15,039,836 15,039,836
------------ ------------
Total Other Assets 16,205,933 16,191,217
------------ ------------
Total Assets $ 37,045,417 $ 42,507,406
============ ============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
1
GUM TECH INTERNATIONAL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Continued)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, December 31,
2002 2001
------------ ------------
Current Liabilities:
Accounts payable and accrued expenses $ 992,487 $ 5,928,985
Sales returns and allowances 420,679 1,031,897
Notes payable -- 1,000,000
Current portion of long-term debt 5,004,329 4,923,882
------------ ------------
Total Current Liabilities 6,417,495 12,884,764
------------ ------------
Long-Term Debt, net of current portion above:
Financial institutions and other 10,343,807 10,177,525
Less current portion above (5,004,329) (4,923,882)
------------ ------------
Total Long-Term Debt 5,339,478 5,253,643
------------ ------------
Minority interest in consolidated affiliate -- --
------------ ------------
Stockholders' Equity:
Preferred stock: no par value, 1,000,000 shares authorized:
Series A preferred stock, $1,000 stated value, 2,000 shares
authorized, none issued and outstanding -- --
Common stock: no par value, 20,000,000 shares authorized,
9,432,251 shares issued 33,120,651 33,120,651
Additional paid in capital 2,374,744 2,374,744
Accumulated deficit (10,145,095) (11,073,960)
------------ ------------
25,350,300 24,421,435
Less common stock held in treasury, at cost (9,600 and 8,100 shares) (61,856) (52,436)
------------ ------------
Total Stockholders' Equity 25,288,444 24,368,999
------------ ------------
Total Liabilities and Stockholders' Equity $ 37,045,417 $ 42,507,406
------------ ------------
The accompanying notes are an integral part of these
condensed consolidated financial statements.
2
GUM TECH INTERNATIONAL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended March 31,
----------------------------
2002 2001
----------- -----------
Net sales $ 5,067,511 $ 6,472,190
Cost of sales 1,247,236 1,613,320
----------- -----------
Gross Profit 3,820,275 4,858,870
Operating expenses 2,881,049 4,465,096
Research and development 26,545 51,602
----------- -----------
Income From Operations 912,681 342,172
----------- -----------
Other Income (Expense):
Interest and other income 113,693 27,983
Interest expense (182,213) (25,512)
----------- -----------
Total Other Income (Expense) (68,520) 2,471
----------- -----------
Income Before Provision For Income Taxes
and Minority Interest 844,161 344,643
Provision (benefit) for income taxes (84,702) --
Minority interest in earnings (loss) of
consolidated affiliate -- 242,545
----------- -----------
Net Income From Continuing Operations 928,863 102,098
----------- -----------
Gain (Loss) From Discontinued Operations -- 243,955
----------- -----------
Net Income $ 928,863 $ 346,053
=========== ===========
Net Income Per Share of Common Stock:
Basic:
Weighted Average Number of Common Shares Outstanding 9,422,684 9,094,359
Net Income Per Share of Common Stock:
Continuing operations $ 0.10 $ 0.01
Discontinued operations -- 0.03
----------- -----------
Net Income $ 0.10 $ 0.04
----------- -----------
Diluted:
Weighted Average Number of Common Shares Outstanding 9,424,128 9,201,249
Net Income Per Share of Common Stock:
Continuing operations $ 0.10 $ 0.01
Discontinued operations -- 0.03
----------- -----------
Net Income $ 0.10 $ 0.04
----------- -----------
The accompanying notes are an integral part of these
condensed consolidated financial statements.
3
GUM TECH INTERNATIONAL, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended March 31,
----------------------------
2002 2001
------------ ------------
Cash Flows From Operating Activities:
Net income $ 928,863 $ 346,053
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 6,380 110,781
Amortization 16,770 --
Amortization of imputed interest on note payable 166,282 --
Compensation from issuance of warrants -- 25,830
Minority interest in earnings of consolidated affiliate -- 242,545
Loss on disposal of property and equipment 17,391 --
Changes in assets and liabilities:
Restricted cash 1,503,150 1,166,179
Accounts receivable 2,904,880 1,689,569
Interest receivable (11,383) --
Employee receivable -- (3,199)
Inventories 310,960 902,270
Prepaid expenses and other 356,102 47,037
Accounts payable and accrued expenses (4,936,496) (1,883,755)
Sales returns and allowances (611,218) (196,477)
Customer deposits -- 69,593
Deferred Revenue -- (936,141)
------------ ------------
Net Cash Provided By Operating Activities 651,681 1,580,285
------------ ------------
Cash Flows From Investing Activities:
Maturity of marketable securities 10,656,380 --
Notes payable (1,000,000) --
Capital expenditures (150,581) (663,782)
Deposits and other (31,486) (162,439)
------------ ------------
Net Cash Provided (Used) By Investing Activities 9,474,313 (826,221)
------------ ------------
Cash Flows From Financing Activities:
Principal payments on notes payable -- (2,955)
Issuance of common stock upon exercise of options and warrants -- 854,863
Purchase of treasury stock (9,420) --
------------ ------------
Net Cash Provided (Used) By Financing Activities (9,420) 851,908
------------ ------------
Net Increase in Cash and Cash Equivalents 10,116,574 1,605,972
Cash and Cash Equivalents at Beginning of Period 7,342,985 3,485,204
------------ ------------
Cash and Cash Equivalents at End of Period $ 17,459,559 $ 5,091,176
============ ============
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ 15,931 $ 68,612
Income taxes -- --
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
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 three months
ended March 31, 2002 are not necessarily indicative of results of
operations that may be expected for the year ending December 31, 2002. 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, 2001 previously filed with the Securities and
Exchange Commission.
2. As of December 31, 1997, Gum Tech adopted Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings Per Share", which specifies the method
of computation, presentation and disclosure of earnings per share. SFAS No.
128 requires the presentation of two earnings per share amounts, basic and
diluted. Basic earnings per share is calculated using the average number of
common shares outstanding. Diluted earnings per share is computed on the
basis of the average number of common shares outstanding plus the dilutive
effect of outstanding stock options using the "treasury stock" method.
The schedule below summarizes the elements included in the calculation of
basic and diluted net income per common share for the three months ended
March 31, 2002 and 2001. Options, warrants and other incremental shares to
purchase 632,960 and 744,246 shares of common stock at March 31, 2002 and
2001, respectively, were not included in the computation of diluted earning
per share because their effect would be anti-dilutive.
Three Months Ended March 31,
----------------------------
2002 2001
---------- ----------
Net income applicable to common
shareholders $ 928,863 $ 346,053
========== ==========
Weighted average common shares outstanding:
Weighted average common shares
outstanding - Basic 9,422,684 9,094,359
Dilutive securities 1,444 106,890
---------- ----------
Weighted average common shares
outstanding - Diluted 9,424,128 9,201,249
========== ==========
Net income per common share:
Basic $ 0.10 $ 0.04
Diluted $ 0.10 $ 0.04
5
3. Inventories consisted of the following at March 31, 2002:
Raw materials and packaging $ 335,384
Finished goods 1,021,433
Less reserve for obsolescence (86,865)
----------
Total $1,269,952
==========
4. Recently Issued Accounting Standards
In June 2001, the Financial Accounting Standard Board ("FASB") issued SFAS
No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other
Intangible Assets". SFAS No. 141 requires business combinations initiated
after June 30, 2001 to be accounted for using the purchase method of
accounting. It also specifies the types of acquired intangible assets that
are required to be recognized and reported separately from goodwill. SFAS
No. 142 will require that goodwill and certain intangibles no longer be
amortized, but instead tested for impairment at least annually. SFAS No.
142 is required to be applied starting with fiscal years beginning after
December 15, 2001, with early application permitted in certain
circumstances. The Company adopted SFAS No. 142 on January 1, 2002 which
did not result in any impairment of goodwill or other intangible assets
upon adoption.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS No. 143 establishes accounting standards for
recognition and measurement of a liability for the costs of asset
retirement obligations. Under SFAS No. 143, the costs of retiring an asset
will be recorded as a liability when the retirement obligation arises, and
will be amortized to expense over the life of the asset. The Company
adopted SFAS No. 143 on January 1, 2002 which did not result in any impact
on the Company's financial statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets and discontinued operations. The Company adopted SFAS
No. 144 on January 1, 2002 which did not result in any impact on the
Company's financial statements.
5. Recent Developments
On April 9, 2002, Gum Tech announced plans to reincorporate in Delaware and
change its name to "Matrixx Initiatives, Inc.". The reincorporation and
name change, to be effectuated through a merger of Gum Tech with and into a
wholly-owned Delaware subsidiary, is subject to receipt of approval of Gum
Tech's shareholders, which Gum Tech will seek to obtain at the Company's
June 18, 2002 annual meeting of shareholders.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
In Fiscal 2001 we undertook a significant change in our strategic plan and
related business operations by exiting the chewing gum business and refocusing
on the development, production and sale of healthcare products utilizing
innovative delivery systems for bioactive compounds, including our two Zicam
products. In July 2001, we sold substantially all of our assets and business
related to our chewing gum operations to the Wm. Wrigley Jr. Company. In
December 2001, we acquired the remaining 40% of Gel Tech, L.L.C., making Gel
Tech a wholly-owned subsidiary of Gum Tech. Our financial results reflect our
former chewing gum operations as discontinued operations, and consequently these
operations are not reflected in the following discussion and analysis. We owned
60% of Gel Tech prior to December 5, 2001 and 100% on and subsequent to that
date, and report Gel Tech's financial results on a consolidated basis.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THE
THREE MONTHS ENDED MARCH 31, 2001
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 MARCH 31,
---------------------------------------
2002 2001
------------------ ------------------
Net sales $5,067,511 100% $6,472,190 100%
Cost of sales 1,247,236 25 1,613,320 25
---------- ---- ---------- ----
Gross profit 3,820,275 75 4,858,870 75
Operating expenses 2,881,049 57 4,465,096 69
Research and development 26,545 0 51,602 1
---------- ---- ---------- ----
Income from operations 912,681 18 342,172 5
Interest and other income 113,693 2 27,983 --
Interest expense 182,213 3 25,512 --
---------- ---- ---------- ----
Income before income taxes
and minority interest $ 844,161 17% $ 344,643 5%
========== ==== ========== ====
NET SALES. Net Zicam sales for the three months ended March 31, 2002
decreased to approximately $5.1 million or 22% below the same period of the
previous year. Approximately 70% of the sales in each period related to Zicam
Cold Remedy and the remainder to Zicam Allergy Relief. Decreases in sales for
both products contributed to the decline in sales for the two periods. The
decline in sales for our products primarily resulted from a very weak cold
season industry-wide during the first quarter of 2002 compared to a relatively
strong cold season for the same period in the prior year. In response to the
weak market, we adjusted our advertising strategy for 2002 to reduce our
expenditures in the first quarter to conserve resources for later in the year.
7
The decrease in advertising support further contributed to the decline in sales
of both products during the first quarter of 2002.
COST OF SALES. Cost of sales decreased $366,000 or 22.6% in the first
quarter of 2002 compared with the same period in 2001. Cost of sales as a
percentage of sales remained virtually unchanged as between the two periods.
GROSS PROFIT. Gross profit on the sale of Zicam products decreased
approximately $1.0 million or 21.4% in the first quarter of 2002 compared to the
same period in 2001, reflecting the decrease in sales of Zicam, but remained
constant as a percentage of sales.
OPERATING EXPENSES. Operating expenses for the first quarter of 2002
decreased 35.5% to approximately $2.9 million from $4.5 million in the same
period of the prior year, primarily due to a decrease in advertising expenses of
approximately $2 million, offset in part by a charge of approximately $296,000
in the first quarter of 2002 for a royalty payment made to The Quigley
Corporation. Gum Tech's royalty obligations to The Quigley Corporation ceased in
the first quarter of 2002. We expect that operating expenses in future periods
will vary consistent with the level of advertising expenditures.
INTEREST AND OTHER INCOME. Interest and other income for the first quarter
of 2002 increased by approximately 306% to $113,693 from $27,983 in the same
period of the prior year due to the higher level of invested cash in 2002
resulting from the sale of our chewing gum business and related assets to
Wrigley in July 2001.
INTEREST EXPENSE. Interest expense for the first quarter of 2002 increased
$156,701 or 614% compared with the same quarter in 2001 due to imputed interest
of $166,000 accrued under the note issued by Gum Tech to Zensano, Inc. in
connection with our acquisition of Zensano's 40% interest in Gel Tech in
December 2001. The note requires four payments of $2.75 million each from June
2002 to November 2003.
INCOME BEFORE INCOME TAX AND MINORITY INTEREST. Income in the first quarter
of 2002 increased by approximately $500,000 or 145% to $844,000 compared to the
prior year, primarily due to the decrease in advertising expenses, which was
offset in part by the decrease in sales for the period. We expect that our
earnings in future periods will continue to be significantly impacted by the
seasonality of our sales, revenues and expenses associated with new product
introductions and the timing and amount of advertising.
LIQUIDITY AND CAPITAL RESOURCES
Gum Tech's working capital increased 5.9% from approximately $13.4 million
at December 31, 2001 to approximately $14.2 million at March 31, 2002. During
the three-month period ended March 31, 2002, Gum Tech experienced an increase in
cash from operating activities of approximately $652,000, due primarily to net
income of $929,000 and decreases in restricted cash of approximately $1.5
million and accounts receivable of $2.9 million, offset by decreases in accounts
payable of $4.9 million and in sales returns and allowances of approximately
$611,000.
8
Investing activities provided cash of approximately $9.5 million due
largely to the maturity of marketable securities that were reinvested in cash
equivalents, offset by the complete repayment of our bank loan of $1.0 million.
We intend to replace our existing credit facility, which expires in May 2002,
with a new facility with a higher credit limit and improved borrowing terms,
assuming such new facility is available on terms acceptable to Gum Tech.
We believe that our existing capital resources will be sufficient to fund
our operations and capital requirements for the next twelve months.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS AND RISK FACTORS
FORWARD-LOOKING STATEMENTS
This Report on Form 10-Q, including documents incorporated herein by
reference, contains forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. The words "believe", "expect",
"estimate", "anticipate", "intend", "may", "might", "will", "would", "could",
"project" and "predict", or similar words and phrases generally identify
forward-looking statements. Forward looking statements contained herein and in
document incorporated by reference herein include, but are not limited to
statements regarding:
* our plan to reincorporate in Delaware and change our name to "Matrixx
Initiatives, Inc.", subject to the receipt of shareholder approval;
* our expectations regarding future sales and costs thereof, operating
expenses and income, including interest income;
* our expectations regarding the impact on our earnings of the
seasonality of sales, revenues and expenses;
* our intention to secure a new credit facility with a higher credit
limit and improved borrowing terms over our present credit facility;
and
* our belief that our existing capital resources will be sufficient to
fund our operations and capital requirements for the next twelve
months.
We may make additional written or oral forward-looking statements from time
to time in filings with the Securities and Exchange Commission or in public news
releases. Such additional statements may include, but not be limited to,
projections of revenues, income or loss, capital expenditures, acquisitions,
plans for future operations, financing needs or plans, the impact of inflation
and plans relating to our products or services, as well as assumptions relating
to the foregoing. Forward-looking statements are inherently subject to risks and
uncertainties, some of which cannot be predicted or quantified. Future events
and actual results could differ materially from those set forth in, contemplated
by, or underlying our forward-looking statements.
9
Statements in this Form 10-Q, including those set forth below under the
subheading below entitled "Risk Factors", describe factors that could contribute
to or cause actual results to differ materially from our expectations. Other
such factors include (i) fluctuations in seasonal demand for our Zicam products,
(ii) lack of market acceptance for or uncertainties concerning the efficacy of
the Zicam products, (iii) difficulties in increasing production to meet
unexpectedly high demand in the short term, (iv) financial difficulties
encountered by one or more of our principal customers, (v) difficulties in
obtaining additional capital for marketing, research and development, and other
expenses, (vi) oversupply of product inventory to retailers resulting in unsold
product returns, and (vii) material litigation involving patent and contractual
claims, product liabilities and consumer issues.
Forward-looking statements contained in this Form 10-Q speak only as of the
date of this Form 10-Q or, in the case of any document incorporated by
reference, the date of that document. We do not undertake, and we specifically
disclaim any obligation, to publicly update or revise any forward-looking
statement contained in this Form 10-Q or in any document incorporated herein by
reference to reflect changed assumptions, the occurrence of unanticipated events
or changes to future operating results over time.
RISK FACTORS
OUR NEW BUSINESS FOCUS MEANS WE HAVE A LIMITED OPERATING HISTORY ON WHICH TO
ASSESS OUR CURRENT AND PROSPECTIVE PERFORMANCE
Although we have been in operations for a number of years, the significant
change of direction and focus in our business that we made in 2001 by exiting
the chewing gum business and refocusing on the development, production and sale
of healthcare products utilizing innovative delivery systems presents a limited
operating history upon which you may evaluate our current and prospective
performance. The possibility of our future success must be considered relative
to the problems, challenges, complications and delays frequently encountered in
connection with the development and operation of a new business, and the
development and marketing of relatively new healthcare products such as Zicam
Cold Remedy and Zicam Allergy Relief.
WE INCURRED SIGNIFICANT LOSSES IN PREVIOUS YEARS AND MAY NOT BECOME PROFITABLE
We have recorded losses (excluding the income recorded in connection with
the sale in July 2001 of substantially all of our chewing gum assets to Wrigley)
in each of the last several years. While a significant portion of these losses
were attributable to our former chewing gum operations that we sold to Wrigley,
we cannot be certain that the change in our business focus in 2001 to healthcare
products will result in our becoming profitable in the foreseeable future or
over the longer term. Our need for continued expenditures for product research
and development and marketing, among other things, will make it difficult for us
to reduce our operating expenses in order to deal with lack of sales growth or
unanticipated reductions in existing sales. Our failure to balance expenditures
in any period with sales could have an adverse effect on our results of
operations.
10
IF ZICAM COLD REMEDY AND ZICAM ALLERGY RELIEF DO NOT GAIN WIDESPREAD MARKET
ACCEPTANCE, OUR ANTICIPATED SALES AND RESULTS OF OPERATIONS WILL SUFFER
Although studies have indicated that Zicam Cold Remedy can significantly
reduce the duration and severity of the common cold, we cannot be certain that
the product will achieve widespread acceptance by the market. To date, Zicam
Allergy Relief has not achieved the market success presently enjoyed by Zicam
Cold Remedy. While we are working to increase Zicam Allergy Relief's market
presence, we cannot be certain that demand for the product will grow. If any
unanticipated problem arises concerning the efficacy of Zicam Cold Remedy or
Zicam Allergy Relief, or either product fails to achieve widespread market
acceptance for any other reason, our operating results and prospects would be
materially adversely affected.
UNANTICIPATED PROBLEMS ASSOCIATED WITH PRODUCT DEVELOPMENT AND COMMERCIALIZATION
COULD ADVERSELY AFFECT OUR OPERATING RESULTS
Our successful development of existing and new products is subject to the
risks of failure and delay inherent in the development and commercialization of
products based on innovative technologies. These risks include the possibilities
that:
* we may experience unanticipated or otherwise negative research and
development results;
* existing or proposed products may be found to be ineffective or
unsafe, or may otherwise fail to receive required regulatory
clearances or approvals;
* we may find that existing or proposed products, while effective, are
uneconomical to commercialize or market;
* existing or proposed products do not achieve broad market acceptance;
or
* proprietary rights held by third parties preclude us from developing
or marketing existing or proposed products.
OUR INABILITY TO DEVELOP AND COMMERCIALIZE OUR EXISTING PRODUCTS OR ANY NEW
PRODUCTS ON A TIMELY BASIS AND WITHIN OUR FINANCIAL BUDGETS COULD HAVE A
MATERIAL ADVERSE EFFECT ON OUR OPERATING RESULTS AND FUTURE PROSPECTS.
Our inability to provide scientific proof for product claims may adversely
affect our sales. The marketing of our Zicam products involves claims that these
products assist in reducing the duration of the common cold (in the case of
Zicam Cold Remedy) and controlling allergy symptoms (in the case of Zicam
Allergy Relief). 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 neither provided nor been requested to provide any scientific data to the
FDA in support of claims regarding our Zicam products, we have obtained
scientific data for all of our products. We cannot be certain, however, 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
11
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 and regulations
affecting our business. Our Zicam 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 require us to 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 affected products.
WE MAY FAIL TO COMPETE EFFECTIVELY, PARTICULARLY AGAINST LARGER, MORE
ESTABLISHED PHARMACEUTICAL AND HEALTH PRODUCTS COMPANIES, CAUSING OUR BUSINESS
AND OPERATING RESULTS TO SUFFER
The consumer health products industry is highly competitive. We compete
with companies in the United States and abroad that are engaged in the
development of both traditional and innovative healthcare products. Many of
these companies have much greater financial and technical resources and
production and marketing capabilities than we do. As well, many of these
companies have already achieved significant product acceptance and brand
recognition with respect to products that compete directly with our Zicam
products. Our competitors may successfully develop and market superior or less
expensive products which could render our Zicam and other future products less
valuable or unmarketable.
IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY OR IF WE INFRINGE THE
INTELLECTUAL PROPERTY OF OTHERS, OUR FINANCIAL CONDITION AND FUTURE PROSPECTS
COULD BE MATERIALLY HARMED
We rely significantly on the protections afforded by patent and trademark
registrations that we routinely seek from the U.S. Patent and Trademark Office
and from similar agencies in foreign countries. We cannot be certain that any
patent or trademark application that we file will be approved by the USPTO or
other foreign agencies. In addition, we cannot be certain that we will be able
to successfully defend any trademark, trade name or patent that we hold against
claims from, or use by, competitors or other third parties. No consistent policy
has emerged from the USPTO or the courts regarding the breadth of claims allowed
or the degree of protection afforded under biotechnology and similar patents.
Our future success will depend on our ability to prevent others from infringing
on our proprietary rights, as well as our ability to operate without infringing
upon the proprietary rights of others. We may be required at times to take legal
action to protect our proprietary rights and, despite our best efforts, we may
be sued for infringing on the patent rights of others. Patent litigation is
costly and, even if we prevail, the cost of such litigation could adversely
affect our financial condition. If we do not prevail, in addition to any damages
we might have to pay, we could be required to stop the infringing activity or
obtain a license. We cannot be certain that any required license would be
12
available to us on acceptable terms, or at all. If we fail to obtain a license,
our business might be materially adversely affected. In addition to seeking
patent protection, we rely upon a combination of non-disclosure agreements,
other contractual restrictions and trade secrecy laws to protect 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 technology or trade secrets that competes with
our proprietary information.
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. A product liability claim, even
one without merit or for which we have substantial coverage, could result in
significant legal defense costs, thereby increasing our expenses and lowering
our earnings. Such a claim, whether or not proven to be valid, could have a
material adverse effect on our product branding and goodwill, resulting in
reduced market acceptance of our products. This in turn could materially
adversely affect our results of operations and financial condition.
WE DO NOT HAVE MANUFACTURING CAPABILITIES OF OUR OWN
We currently do not have the physical or human resources to independently
manufacture our Zicam products or any other products that we may develop. We
currently outsource all of our product manufacturing and packaging operations
and intend to continue this outsourcing for the foreseeable future. If we are
unable to enter into suitable arrangements for manufacturing of our Zicam
products or any other products, or if our third party contractors fail to
adequately perform their manufacturing operations, our sales and related
financial results could be materially adversely affected. If, in the future, we
decide to establish our own manufacturing facilities, we will require
substantial additional funds and significant additional personnel to undertake
such operations. We cannot be certain that such funding or a sufficient number
of such qualified persons will be available for such an undertaking.
THE LARGE NUMBER OF SHARES ELIGIBLE FOR IMMEDIATE AND FUTURE SALES MAY DEPRESS
THE PRICE OF OUR STOCK
Sales of substantial amounts of our common stock in the open market or the
availability of a large number of additional shares for sale could adversely
affect the market price of our 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 of 1933,
as amended. Therefore, all of these shares may be immediately sold by the
holders. A substantial increase in sales of our common 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, which is quoted for trading on the
Nasdaq National Market, has been highly volatile and may continue to be volatile
in the future. Any or a combination of the following factors could cause the
13
market value of our common stock to decline quickly: Operating results that
differ from market expectations, negative or other unanticipated results of
clinical trials or other testing, delays in product development, technological
innovations or commercial product introductions by our competitors, changes in
government regulations, developments concerning proprietary rights, including
pending or threatened patent litigation, public concerns regarding the safety of
any of our products and general economic and stock market conditions. Since the
Spring of 2000, the stock market has experienced, and it may continue to
experience, significant price and volume fluctuations. These fluctuations have
particularly affected the market prices of equity securities of many small
capitalization companies, like Gum Tech, that are not yet profitable or that
experience low or inconsistent earnings. Often, the effect on the price of such
securities is disproportionate to the operating performance of such companies.
In our case, such broad market fluctuations may adversely our stockholders'
ability to dispose of their shares of Gum Tech at a price equal to or above the
price at which they purchased such shares.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary market risk exposure throughout 2001 and the first quarter of
2002 related to our variable rate revolving credit facility with Comerica Bank.
As of the fiscal year ended December 31, 2001, we had an outstanding balance of
$1.0 million against the facility. During fiscal 2001, the average outstanding
balance on a daily basis was approximately $1.0 million. During the first
quarter of 2002 we repaid this outstanding balance. While we do not foresee
making further draws on the credit facility before its termination in May 2002,
we intend to make draws from time to time on the new credit facility that we
expect to obtain in May 2002, assuming such facility is available on terms
acceptable to Gum Tech. Assuming that borrowings under the new credit facility
are consistent with our average borrowings in 2001 of $1.0 million, a
hypothetical interest rate change of 1% would increase our interest expense
approximately $10,000 per year from the expense levels that we experienced in
2001. Consequently, we believe that moderate interest rate increases will not
have a material adverse impact on our results of operations or financial
position in the foreseeable future.
As of both December 31, 2001 and March 31, 2002, we did not participate in
any market risk-sensitive commodity instruments for which fair value disclosure
would be required under Statement of Financial Accounting Standards No. 107. We
presently hold approximately $15.0 million in short-term U.S. treasury
securities which are not subject to material risk. We believe that we are not
subject in any material way to other forms of market risk, such as foreign
currency exchange risk or foreign customer purchases (of which there were none
in 2001 or in the quarter ended March 31, 2002) or commodity price risk.
14
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
Exhibit No. Title
----------- -----
3.01 Articles of Incorporation and Amendments thereto of the
Registrant(1)
3.02 Bylaws of the Registrant(1)
10.01 *Amended and Restated Gum Tech International, Inc. 2001
Long-Term Incentive Plan
- ----------
* Indicates management compensatory contract, plan or arrangement.
(1) Incorporated by reference to the Registrant's Registration Statement on
Form SB-2 declared effective by the Commission on April 24, 1996, file
number 333-870.
B. REPORTS ON FORM 8-K
On February 12, 2002, Gum Tech filed a Report on Form 8-K/A which amended
the Form 8-K that Gum Tech filed on December 14, 2001 by including as
exhibits thereto the financial statements required to be filed in
connection with Gum Tech's acquisition of the 40% interest in Gel Tech,
L.L.C.
15
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/ Carl Johnson
---------------------------------
Carl Johnson
President and
Chief Executive Officer
/s/ William J. Hemelt
---------------------------------
William J. Hemelt
Executive Vice President and
Chief Financial Officer
May 1, 2002