SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from___________ to __________
Commission File No._____________
WHITEWING LABS, INC.
(Exact name of small business registrant as specified in its charter)
Delaware 95-4437350
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
15455 San Fernando Mission Blvd., #105, Mission Hills, CA 91345
(Address of principal executive office) (Zip Code)
Registrant's Telephone Number: (818) 898-2167
Check whether the issuer (1) filed all reports required to be filed by
Section 12 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
The number of shares of Common Stock outstanding as of April 30, 1996,
was 2,853,873
1
WHITEWING LABS, INC.
FORM 10-QSB FOR QUARTER ENDED MARCH 31, 1996
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Balance Sheets at December 31, 1995 and March 31, 1996.....3
Statements of Operations for the Three Months Ended
March 31, 1995 and 1996.................................5
Statements of Cash Flows for the Three Months Ended
March 31, 1995 and 1996................................6
Notes to the Financial Statements.............................8
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition.......................9
PART II. OTHER INFORMATION..............................................14
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Stockholders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(b) Reports on Form 8-K
SIGNATURE PAGE...........................................................15
2
<TABLE>
Whitewing Labs, Inc.
Balance Sheets
December 31, 1995 and March 31, 1996
<CAPTION>
ASSETS
Proforma
December 31, December 31, March 31,
1995 1995 1996
----------- ---------- ----------
(See Note 2) (Unaudited)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 423,622 $4,323,622 $4,471,065
Accounts receivable - other 17,115 17,115 15,612
Inventories 193,234 193,234 250,490
Prepaid advertising 355,932 355,932 455,533
Prepaid legal retainer 12,369 12,369 8,933
Prepaid other expenses 18,568 18,568 65,316
Deferred taxes 11,000 11,000 11,000
---------- ---------- ----------
Total current assets 1,031,840 4,931,840 5,277,949
---------- ---------- ----------
EQUIPMENT:
Furniture and fixtures 112,748 112,748 117,899
Less - accumulated depreciation (18,848) (18,848) (22,712)
---------- ---------- ----------
93,900 93,900 95,187
---------- ---------- ----------
OTHER ASSETS:
Deferred advertising 190,396 190,396 154,363
Deferred offering costs 152,071 0 0
Investment in related-party
partnership, at cost 100,000 100,000 100,000
Organization costs, net of
accumulated amortization 1,435 1,435 1,296
Deferred taxes 209,000 209,000 209,000
Deposits 4,777 4,777 10,020
---------- ---------- ----------
657,679 505,608 474,679
---------- ---------- ----------
TOTAL ASSETS $1,783,419 $5,531,348 $5,847,815
========== ========== ==========
</TABLE>
See accompanying notes
3
<TABLE>
Whitewing Labs, Inc.
Balance Sheets
December 31, 1995 and March 31, 1996
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
Proforma
December 31, December 31, March 31,
1995 1995 1996
---------- ---------- ----------
(See Note 2) (Unaudited)
<S> <C> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 97,134 $ 97,134 $ 58,630
Accrued liabilities 64,531 64,531 36,789
Dividends payable 22,688 22,688 0
Accrued interest payable 43,051 43,051 0
Deferred taxes 220,000 220,000 220,000
Due to shareholder 114,247 114,247 0
---------- ---------- ----------
Total current liabilities 561,651 561,651 315,419
---------- ---------- ----------
COMMITMENTS AND CONTINGENCIES:
SHAREHOLDERS' EQUITY:
Cumulative convertible preferred
stock, $.001 par value:
Authorized, 500,000 shares
Issued and outstanding, 272,500
at December 31, 1995 and none
at Proforma December 31, 1995
and March 31, 1996 32,149 0 0
Common stock, $.001 par value:
Authorized, 10,000,000 shares
Issued and outstanding, 1,125,000
shares at December 31, 1995,
2,606,876 at Proforma December
31, 1995 and 2,828,873 shares
at March 31, 1996 1,434 2,607 2,828
Paid-in capital 1,177,358 5,656,263 6,353,309
Deficit (689,173) (689,173) (823,741)
---------- ---------- ----------
Shareholders' equity 1,221,768 4,969,697 5,532,396
---------- ---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $1,783,419 $5,531,348 $5,847,815
========== ========== ==========
</TABLE>
See accompanying notes
4
<TABLE>
Whitewing Labs, Inc.
Statements of Operations
For the Three Months Ended March 31, 1995 and 1996
(Unaudited)
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
NET SALES $ 571,325 $ 996,028
COST OF GOODS SOLD 75,386 130,164
---------- ----------
Gross profit 495,939 865,864
OPERATING EXPENSES
Advertising 140,286 550,312
Selling 213,827 222,139
General and administrative 147,355 233,818
---------- ----------
501,468 1,006,269
---------- ----------
Loss from operations (5,529) (116,630
OTHER INCOME 6,910 23,775
INTEREST EXPENSE 11,285 4,259
---------- -----------
loss before provision
for income Taxes (9,904) (120,889)
PROVISION FOR INCOME TAXES 0 3,605
---------- ----------
NET LOSS (9,904) (124,494)
PREFERRED STOCK DIVIDENDS
PAID AND ACCRUED $ 22,688 $ 10,073
========== ==========
PROFORMA LOSS PER COMMON SHARE $ (0.01)
==========
LOSS PER COMMON SHARE $ (0.06)
==========
PROFORMA WEIGHTED AVERAGE NUMBER
OF COMMON SHARES OUTSTANDING 1,412,577
=========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 2,070,878
=========
</TABLE>
See accompanying notes
5
<TABLE>
Whitewing Labs, Inc.
Statements of Cash Flows
For the Three Months Ended March 31, 1995 and 1996
(Unaudited)
<CAPTION>
1995 1996
--------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $ (9,904) $ (124,494)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 1,824 4,002
Changes in assets and liabilities:
Accounts receivable - other (4,476) 1,503
Inventories (63,066) (57,256)
Prepaid advertising (16,747) (99,601)
Prepaid legal retainers (5,000) 3,436
Other prepaid expenses (34,795) (46,744)
Deferred advertising (35,372) 36,033
Deposits (529) (5,243)
Accounts payable 64,830 (48,745)
Accrued liabilities 0 (17,502)
Accrued interest payable 1,285 (43,051)
---------- ----------
Net cash used in operating activities (101,950) (397,662)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of furniture and fixtures (21,581) (5,150)
Investment in related-party partnership 0
---------- ----------
Net cash used in investing activities (21,581) (5,150)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Deferred offering costs (10,000) 152,071
Net proceeds from issuance of common stock 801,000 4,130,039
Net proceeds from issuance of common stock warrants 0 180,090
Net proceeds from issuance of common
stock upon exercise of options 0 135,063
Proceeds from convertible note payable 0 0
Payments to shareholder 0 (114,247)
Payment of cash dividends (22,184) (32,761)
---------- ----------
Net cash provided by financing activities 768,816 4,450,255
---------- ----------
NET INCREASE IN CASH
AND CASH EQUIVALENTS 645,285 4,047,443
CASH AND CASH EQUIVALENTS, beginning of year 639,369 423,622
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $1,284,654 $4,471,065
========== ==========
See accompanying notes
6
1995 1996
---------- ----------
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid for income taxes $ 1,664 $ 3,605
========== ==========
Cash paid for interest $ 10,000 $ 4,259
========== ==========
SUPPLEMENTAL DISCLOSURES OF
NONCASH FINANCING ACTIVITIES:
Preferred dividends declared $ 22,688 $ 0
========== ==========
Cumulative convertible preferred stock
converted to common stock $ 0 $ 732,149
========== ==========
</TABLE>
See accompanying notes
7
WHITEWING LABS, INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 1996
(Unaudited)
1. Basis of Presentation and Summary of Significant Accounting Policies
In the opinion of management and subject to year-end audit, the
accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments considered necessary for a fair presentation
have been included. The results of operations for the periods presented
are not necessarily indicative of the results to be expected for the full
year. These condensed financial statements should be read in conjunction
with the financial statements and footnotes thereto contained in the
Company's Annual Report on Form 10-KSB for the year ended December 31,
1995.
Certain reclassifications have been made to the accompanying condensed
financial statements to conform them with the current period presentation.
2. Reincorporation in Delaware
On February 9, 1996, Whitewing Labs, which had been incorporated under the
laws of California, merged with and into Whitewing Labs, Inc., its
wholly-owned subsidiary in order to reincorporate the Company in the State
of Delaware (the "Reincorporation"). Following the Reincorporation, the
business and operations of the Company have been conducted by the Company
as a Delaware corporation rather than as a California corporation. The
accompanying condensed financial statements give retroactive effect to the
Reincorporation.
3. Proforma Loss per Common Share
Proforma loss per common share for the three month period ending March 31,
1995, is based upon the proforma weighted average number of common shares
outstanding assuming the public offering of shares of the Company's common
stock in February, 1996, had been completed as of January 1, 1995. For
the three month period ended March 31, 1996, loss per common share is
based on the historical weighted average number of shares outstanding.
8
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
General. The Company continued its plan of expanding its customer database
during the first quarter of 1996 by increasing its magazine advertisement
placements and developing a direct mail campaign which both tests new mailing
lists and identifies new names on lists used in the past.
The Company's net sales for the three months ended March 31, 1995, were
$571,325. Net sales for the three months ended March 31, 1996, were
$996,028, a 74% increase over the same period in 1995.
The Company's stated reason for the recent public offering was to generate
adequate funds to allow for quicker growth of the Company's sales and database
than would be achieved if the Company relied only on internally generated
funds. Payments for advertising increased by over $880,000 for the first
three months of 1996 compared to the same period last year. Advertising
expense for the three months ended March 31, 1995, was $140,286, or 24.6% of
net sales, while for the three months ended March 31, 1996, it increased to
$550,312, or 55.3% of net sales.
Orders from magazine advertisements and direct mailings happen over a
period of time after the magazines containing the advertisements go on sale
or the direct mail pieces are delivered to the Post Office. The funds from
the public offering were available as of February 20,1996, which allowed for
the expanded advertising placements to be made but not enough time to realize
additional revenues in the first quarter. These timing differences were a
primary cause of the net loss for the first quarter of 1996, which increased
to $124,494, compared to a net loss of $9,904 for the same period last year.
The Company's business plans continue to stress growth of the customer
database over short-term profits; the Company's management believes net
earnings will be driven by continued growth of the customer database.
As of March 31, 1996, the Company had an accumulated deficit of $823,741.
It can be expected that future operating results will continue to be subject
to many of the problems, expenses, delays and risks inherent in the
establishment of a new business enterprise, many of which the Company cannot
control. There can be no assurance, therefore, that the Company will be able
to achieve or sustain profitability. Even if the Company's operations prove
to be marginally profitable, the value of the Company's common stock, and the
potential return to investors, could be substantially diminished.
Consequently, an investment in the Company is highly speculative and no
assurance can be given that purchasers of the shares of common stock will
realize any return on their investment or that purchasers will not lose their
entire investment.
The Company has formulated its business plans and strategies based on
certain assumptions of the Company's management regarding the size of the
market for nutritional supplements, the products which the Company will be
able to offer to the over age forty market, the Company's anticipated share of
the market, and the estimated prices for and acceptance of the Company's
products. The Company continues to believe its business plans and the
9
assumptions upon which they are based are valid. Although these plans and
assumptions are based on the best estimates of management, there can be no
assurance that these assessments will prove to be correct. No independent
marketing studies have been conducted on behalf of or otherwise obtained by
the Company, nor are any such studies planned. Any future success that the
Company might enjoy will depend upon many factors, including factors which may
be beyond the control of the Company or which cannot be predicted at this
time. These factors may include product obsolescence, increased levels of
competition, including the entry of additional competitors and increased
success by existing competitors, changes in general economic conditions,
increases in operating costs including costs of supplies, personnel and
equipment, reduced margins caused by competitive pressures and other factors,
and changes in governmental regulation imposed under federal, state or local
laws.
Like other distributors of consumer products, the Company encounters the
risk of product returns from its customers. The Company's products are sold
with an unconditional, money-back guarantee. Any customer who is not
satisfied with a Company product for any reason may return it or any unused
portion for a full refund of the purchase price. Although product returns to
date have been approximately 3% of sales, which is substantially less than the
national average of 5%, there can be no assurance that actual levels of
returns will not significantly exceed amounts anticipated by the Company.
The Company's operating results may vary significantly due to a variety of
factors including changing customer profiles, the availability and cost of raw
materials, the introduction of new products by the Company or its competitors,
the timing of the Company's advertising and promotional campaigns, pricing
pressures, general economic and industry conditions that affect customer
demand, and other factors.
Results of Operations.
Net Sales. The Company realized net sales during the three months ended March
31, 1995 and 1996, of $571,325 and $996,028, respectively. At March 31,
1996, the Company's customer base had grown to approximately 59,000, up from
approximately 17,000 customers at March 31, 1995.
The average orders from new and existing customers were $55.31 and
$82.19, respectively, for the three months ended March 31, 1996, compared to
average orders of $62.21 from new customers and $76.60 from existing customers
for the first three months of the prior year.
Sales of the Company's Prostsafe[R] accounted for substantially all
of the Company's sales for the three months ended March 31, 1995, and for
approximately 81.3% of net sales for the three months ended March 31,
1996. The Company anticipates that sales of Prostsafe TM will continue to
contribute a substantial but continually decreasing portion of total revenues
to subsequent periods. A decline in the demand for this product, whether as a
result of competition or other factors, could have a material adverse effect
on the Company's results of operations and financial condition. The markets
for the Company's products are characterized by changing customer demand,
short product life cycles, and frequent new product introductions. The
10
performance of the Company will depend on the ability of the Company to
develop and market new products that will gain customer acceptance and
loyalty, as well as its ability to adapt its product offering to meet changing
pricing considerations and other market factors. The Company's operating
performance would be adversely affected if the Company were to incur delays in
developing new products or if such products did not gain market acceptance.
Therefore, there can be no assurance that the Company's existing or future
products will be sufficiently successful to enable the Company to effectively
compete in its prospective markets or, should the Company's product offerings
meet with significant customer acceptance, that one or more current or future
competitors will not introduce products which render the Company's products
noncompetitive.
Gross Profit. Cost of goods sold for the Company's products represents a
small percentage of net sales. During the three months ended March 31, 1995
and 1996, the Company recognized gross profits of $195,939 and $865,864, or
86.8% and 86.9%, respectively.
Advertising Expense. The costs of advertising in magazines, weekly
publications and newspapers are paid in advance and generally are initially
reflected as assets of the Company's balance sheet as prepaid advertising,
consisting of amounts paid for advertisements that will appear in future
issues of a particular magazine. Prepaid advertising costs are expensed as
and when the magazines containing the Company's advertisements are actually
published. In the month that the magazines go on sales, the Company begins
amortizing the cost for recognition as expense on the Company's statements of
operations over a period of three or four months to approximate the timing of
sales in response to the advertisements, based upon management estimates
derived from the Company's customer database which includes customer
indications of specific advertisements that gave rise to particular purchases.
The unamortized portion of the costs for magazine advertisements that went on
sale in the current month or previous months is reflected as deferred
advertising. As of March 31, 1995 and 1996, The Company's balance sheets
reflected approximately $138,026 and $609,896, respectively, in prepaid and
deferred advertising.
During the three months ended March 31, 1996, advertising expense
increased to $550,312, compared to $140,286 for the same period last year.
Not only did advertising increase in absolute dollars during the three months
ended March 31, 1996, it increased as a percentage of net sales to 55.3
compared to 24.6% of net sales for the same period last year. The Company's
management believes its commitment to aggressively expanding its advertising
budget will result in more rapid growth and profitability than if advertising
expenses were maintained at approximately the same percentage of net sales as
in the past. For the year ended December 31, 1995, advertising expense was
37.5% of net sales. If the Company had limited advertising to this same
percentage of net sales for the three months ended March 31, 1996, advertising
expense would have been approximately $245,023 and net income for the first
three months of 1996 would have been approximately $180,795.
11
Selling Expense. During the three months ended March 31, 1996, selling
expenses increased to $222,139, compared to $213,827 for the same period in
1995, but decreased as a percentage of net sales to 22.3%, compared to 37.4%
of net sales for the three months ended March 31, 1995.
General and Administrative Expense. General and administrative expenses have
increased as a function of the increasing volume of sales, as the Company has
been required to expand its office facilities, purchase additional computers
and other office equipment, and pay for increased postage and supplies. In
August, 1995, The Company developed a Customer Service Department which is
staffed with the Company's own employees located in its offices. This
function did not exist during the first quarter of 1995. Also included in
general and administrative expenses are legal expenses relating to trademark
research on new products and review of the quarterly Journal of Natural
Health[TM]. For the three months ended March 31, 1995, general and
administrative expenses represented 25.8% of net sales, decreasing as a
percentage of net sales to 23.5% for the three months ended March 31, 1996.
Loss From Operations. The Company incurred losses from operations for the
three months ended March 31, 1995, of $5,529, compared to $140,405 during the
three months ended March 31, 1996. Most of these losses during the first
quarter of 1996 were attributable to increases in advertising and to legal
costs incurred primarily after the first quarter of 1995 and continuing into
1996.
Interest Expense. For the three months ended March 31, 1995, interest expense
related to loans from Acacia Research Corporation, a principal investor in the
Company, and a convertible note payable was $11,285, or 1.9% of sales.
The amounts remaining due and payable to Acacia Research Corporation were
paid out of the net proceeds to the Company from the public offering,
including interest expense during the first quarter of 1996 of $4,259, or 0.4%
of sales.
Liquidity and Capital Resources
During the first three months of 1995, the Company privately sold an
aggregate of 135,750 shares of its Common Stock to a total of seven "accredited
investors" (as the term is defined in the rules and regulations of the
Securities and Exchange Commission under the Securities Act of 1933, as
amended), raising gross proceeds totaling $856,500.
On March 31, 1995, the Company had on hand approximately $1,284,654.
However, from inception through March 31, 1995, the Company had operated at a
loss, as its efforts had been focused on the development of a customer base.
Management anticipated that additional capital would be required by the end of
the year to finance the Company's operations at an increased level.
On February 20 and March 18, 1996, the Company closed its stock offering of
1,035,000 shares of common stock, raising net proceeds of approximately
$4,129,000. Additional net proceeds of approximately $180,000 were also raised
12
from the sale of stock warrants during this offering. The proceeds are being
used to finance accelerated marketing, advertising and promotional
activities, and the increased levels of inventories necessary to fulfill
orders generated by the increased promotional activity.
At March 31, 1996, the Company had on hand approximately $4,471,065. The
loan balance of $114,247 due to a major stockholder of the Company was repaid
with accrued interest of approximately $47,310 on February 21, 1996, from
proceeds of the offering. The Company believes that expected cash flow plus
the proceeds of the offering will finance the Company's operations at currently
anticipated levels for a period of at least 12 months. However, there can be
no assurance that the Company will not encounter unforeseen difficulties that
may deplete its capital resources more rapidly than anticipated.
13
PART II OTHER INFORMATION
Item 1. Legal proceedings
In February, 1995, a lawsuit was filed against the Company alleging
infringement, unfair competition and other claims. On January 19, 1996,
the parties entered into a mutual general release and settlement
agreement pursuant to which the Company agree that future advertisements
for Prostsafe(R) would not employ certain wording and format used in
advertisements by the plaintiff for its competing products, and the
lawsuit was dismissed with prejudice with each party paying all of its own
costs and expenses.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of matters to a vote of security holders
None
Item 5. Other information
None
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits
Exhibit 27, Financial Data Schedule Page 16
(b) Reports on Form 8-K
None
14
SIGNATURE PAGE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized
WHITEWING LABS, INC.
Date: /s/ Cynthia Kolke
---------------------------
Cynthia Kolke,
President
/s/ Robert P. Mason, Jr.
---------------------------
Robert P. Mason, Jr.
Chief Financial Officer
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Financial Data Schedule
This schedule contains summary financial information extracted from the
Company's unaudited financial statements at March 31, 1995 and 1996, and is
qualified in its entirety by reference to such financial statements.
<S> <C> <C>
<PERIOD-TYPE> 3-MOs 3-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-END> MAR-31-1995 MAR-31-1996
<CASH> 1,284,654 4,471,065
<SECURITIES> 0 0
<RECEIVABLES> 17,548 15,612
<ALLOWANCES> 0 0
<INVENTORY> 91,363 250,490
<CURRENT-ASSETS> 1,557,156 5,202,367
<PP&E> 43,445 117,899
<DEPRECIATION> 6,455 22,712
<TOTAL-ASSETS> 1,650,406 5,847,815
<CURRENT-LIABILITIES> 668,964 315,419
<BONDS> 0 0
0 0
732,149 0
<COMMON> 1,329 2,828
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 1,650,406 5,847,815
<SALES> 571,325 996,028
<TOTAL-REVENUES> 578,235 1,019,803
<CGS> 75,386 130,164
<TOTAL-COSTS> 576,854 1,136,433
<OTHER-EXPENSES> 147,335 233,818
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 11,285 4,259
<INCOME-PRETAX> (9,904) (120,889)
<INCOME-TAX> 0 3,605
<INCOME-CONTINUING> (9,904) (124,494)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (9,904) (124,494)
<EPS-PRIMARY> (0.01) (0.06)
<EPS-DILUTED> (0.01) (0.06)
</TABLE>
