Helios,
Zicam sold well domestically this cold season relative to the cough and cold category. It was in the top 2% of sales in December and January, but the cold season ended early due to warm weather all over the United States. Based on my research, sales of all brands of cough and cold products peaked in January so I don't think there is an issue with Zicam in particular. Retailers have told Gum Tech that they are very pleased with sales of Zicam.
What does chewing tobacco have to do with nicotine gum? There are two distinct markets for nicotine gum: smoking cessation (competes with Nicorette) and nicotine delivery for people that want a safer delivery system for nicotine than smoking. It is my belief that the Gum Tech/Swedish Match joint venture will go after both markets. The market for smoking cessation products was valued at about $450 million last year, and approximately $46 billion was spent on tobacco products in the US alone in 1998. The smoking cessation market is expected to grow to $1.5 billion within six years, and I believe that Gum Tech/Swedish Match will get a good part of that market.
I agree with your comment that account receivables increased relative to sales in 1999, but I think that there is a reasonable explanation for it. One way to look at account receivables is to divide them by the trailing twelve months sales and compare the ratio to the same period in the prior years to remove any seasonality. This is called the torpedo ratio, and one can also calcuate it for inventory. If you calculate this, you will find that prior to the launch of Zicam, Gum Tech's torpedo ratio for receivables was fairly constant starting in Q3 1997. The most likely reason for the increase in 1999 relative to 1998 is that Gum Tech gave retailers more favorable collection periods during the launch of Zicam. I would ignore the data in Q1 and Q2 1997 because this was before the new management team came in and changed the company's strategy from building their own brand names to focusing on contract manufacturing. This was a significant change in the business plan, so I don't think that it is unusual for the collection period to change. As long as the ratio declines towards 20% to 25% next year, I don't think it is anything to be concerned about. Here is the data:
1997 1998 1999
Q1: 13.7% 20.1% 30.6%
Q2: 13.7% 20.2% 25.3%
Q3: 24.6% 25.5% 33.9%
Q4: 28.6% 27.7%
Regarding your comment about interest expense, Gum Tech recently redeemed Citadel's debt and paid off all their other remaining debt. They will have zero interest expense in the first quarter 2000 and every quarter going forward unless they borrow again. They also received several million dollars from the exercise of options and warrants in the last few months. I don't have the figures handy, but I would guess that they received at least $5 million in cash. They made a profit last quarter (~$1 million), and I definitely disagree with your comment that they could run out of money early next year. Their Q4 99 cash flow statement, which should be out by March 31, will look much different than previous quarters.
Regards,
Dan |
