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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from____N/A_____ to ___N/A_____
Commission File No. 0-27420
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, 1998 was
2,864,938.
1
WHITEWING LABS, INC.
FORM 10-QSB FOR QUARTER ENDED MARCH 31, 1998
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Balance Sheets at December 31, 1997
and March 31, 1998 3
Statements of Operations for the Three Months Ended
March 31, 1997 and 1998 5
Statements of Cash Flows for the Three Months Ended
March 31, 1997 and 1998 6
Notes to the Financial Statements 8
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 10
PART II. OTHER INFORMATION 13
Item 3. Exhibits and Reports on Form 8-K
SIGNATURE PAGE 14
2
<TABLE>
Whitewing Labs, Inc.
Balance Sheets
December 31, 1997 and March 31, 1998
<CAPTION>
ASSETS
December 31, March 31,
1997 1998
------------ -----------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,593,779 $ 1,638,960
Inventories 124,484 93,890
Prepaid advertising 274,555 185,778
Other prepaid expenses 30,079 95,389
Other receivables 62,150 68,142
Deferred taxes 50,000 50,000
----------- -----------
Total current assets 2,135,047 2,132,159
EQUIPMENT:
Furniture and fixtures 135,957 136,552
Less--accumulated depreciation (63,856) (70,961)
----------- ----------
72,101 65,591
----------- -----------
OTHER ASSETS:
8,245 16,478
----------- -----------
8,245 16,478
----------- -----------
TOTAL ASSETS $ 2,215,393 $ 2,214,228
=========== ===========
</TABLE>
See accompanying notes
3
<TABLE>
Whitewing Labs, Inc.
Balance Sheets
December 31, 1997 and March 31, 1998
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
December 31, March 31,
1997 1998
------------ ----------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 17,729 $ 43,372
Accrued liabilities 12,259 9,091
------------- ----------
Total current liabilities 29,988 52,463
------------- ----------
SHAREHOLDERS' EQUITY:
Common stock, $.001 par value:
Authorized, 10,000,000 shares
Issued and outstanding,
2,906,388 shares 2,906 2,906
Paid-in capital 6,320,292 6,320,292
Accumulated deficit (4,060,887) (4,084,527)
Less--
Treasury stock, 41,450 shares at cost
(76,906) (76,906)
------------ ------------
Shareholders' equity 2,185,405 2,161,765
------------ ------------
$ 2,215,393 $ 2,214,228
============ ============
</TABLE>
See accompanying notes
4
<TABLE>
Whitewing Labs, Inc.
Statements of Operations
For the Three Months Ended March 31, 1997 and 1998
(Unaudited)
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
NET SALES $ 658,518 $ 1,621,312
COST OF GOODS SOLD 84,206 234,435
---------- ----------
Gross profit 574,312 1,386,877
OPERATING EXPENSES
Advertising 521,770 791,274
Selling 494,836 457,961
General and administrative 206,546 187,670
---------- -----------
1,223,152 1,436,905
---------- -----------
Loss from operations (648,840) (50,028)
OTHER INCOME 23,550 26,388
---------- -----------
Loss before provision
for income taxes (625,290) (23,640)
PROVISION FOR INCOME TAXES - -
---------- -----------
NET LOSS (625,290) (23,640)
PREFERRED STOCK DIVIDENDS
EARNED AND ACCRUED $ - -
---------- -----------
Net loss attributable
to common stockholders $ (625,290) $ (23,640)
========== ===========
BASIC AND DILUTED
LOSS PER COMMON SHARE $ (0.22) $ (0.01)
========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 2,864,310 2,864,938
========== ===========
</TABLE>
See accompanying notes
5
<TABLE>
Whitewing Labs, Inc.
Statements of Cash Flows
For the Three Months Ended March 31, 1997 and 1998
(Unaudited)
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(625,290) $ (23,640)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 5,772 7,105
Changes in assets and liabilities:
Inventories (15,323) 30,594
Prepaid advertising 14,826 88,777
Other prepaid expenses (13,404) (65,310)
Other receivables 16,257 (5,992)
Deferred advertising 52,920 -
Other deposits (184) (8,233)
Accounts payable (236,205) 25,603
Accrued liabilities (15,673) (3,168)
---------- ----------
Net cash provided in operating activities (816,304) 45,776
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of furniture and fixtures - (595)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of common stock (29,987) -
---------- ----------
Net cash provided by financing activities (29,987) -
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (846,291) 45,181
CASH AND CASH EQUIVALENTS, beginning of period 2,524,391 1,593,779
---------- ----------
CASH AND CASH EQUIVALENTS, end of period $1,678,100 $1,638,960
========== ==========
See accompanying notes
6
1997 1998
---------- ----------
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid for income taxes $ - $ -
========== ==========
Cash paid for interest $ - $ -
========== ==========
</TABLE>
See accompanying notes
7
WHITEWING LABS, INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 1998
(Unaudited)
1. Summary of Significant Accounting Policies
a. Basis of presentation
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,
1997.
b. Prepaid and Deferred Advertising
Television infomercials, and direct mailings including magazine postcard
inserts, tear sheets, holiday special mailers and the Journal of Natural
Health "TM" comprise the main components of the Company's direct-response
marketing efforts. Payments to vendors in advance of the run date are
included in prepaid advertising. Respondents are logged into a customer
database which indicates the source of each customer's response to the
specific advertisement. The Company's accounting policy for amortizing the
costs of prepaid and deferred print advertising placements and mailings is
based upon management's estimates over the periods in which the related
direct responses are received. The Company evaluates the realizability of
its direct-response advertising by comparing the carrying amount of prepaid
and deferred advertising at each balance sheet date on a cost-pool-by-cost-
pool basis to the probable remaining future net revenues expected to result
from such advertising. Any excess carrying amount over probable remaining
future revenues is reported as advertising expense in the current period.
Newspaper and weekly publications are expensed in the month of issue.
Magazines and direct mailings which are available prior to the middle of
the month preceding the issue date are amortized over a three month period.
Magazines which are available subsequent to the middle of the month
preceding the issue date are amortized over a four month period. Costs to
develop, edit, and reproduce infomercials for airing at local television
stations nationwide are amortized over a period of twelve months or the
estimated revenue earning stream, whichever is less. For the three months
ended March 31, 1997 and 1998 respectively, advertising expense was
$521,770 and $791,274 respectively.
c. Revenue Recognition
Revenue is recorded at the time of shipment.
d. Reclassifications
Certain reclassifications have been made to the accompanying condensed
financial statements to conform them with the current period presentation.
8
e. Estimates Used by Management
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from those
estimates.
f. Concentration of Risk
Production, order taking and order fulfillment are outsourced to an outside
company and two independent contractors, respectively, which potentially
subjects the Company to a concentration of supplier risk. In addition,
substantially all printing is handled by an outside company and
substantially all advertising placement, including purchase of mailing
lists for direct mail programs, is handled by an outside service agency.
Although these services are currently concentrated with a few key
suppliers, management believes that other suppliers could provide similar
services and comparable terms. A change in suppliers however could cause
delay in manufacturing, shipping, advertising placements and implementation
of direct mail programs and a possible loss of sales which could affect
operating results adversely.
2. Loss per Common Share
For the three month periods ended March 31, 1997 and 1998 respectively,
basic loss per common share is based on the historical weighted average
number of shares outstanding.
3. Product Return Reserve
An accrual for estimated sales returns is included in accrued liabilities
in the amounts of $10,000 and $5,000 at December 31, 1997 and March 31,
1998, respectively.
4. Stock Repurchase
During the three months ended March 31, 1997, the Company acquired 21,850
shares of its common stock for approximately $29,900 in connection with a
stock repurchase program in which up to 200,000 shares or 7% of outstanding
shares of the Company's common stock may be acquired in the open market.
5. Litigation
None
6. Advertising
The Company has commitments for magazine placements of $5,107 at March 31,
1998.
9
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition
General
The Company 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. 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.
The Company's stated strategy for the development of its business is to stress
growth of the customer base over short-term profits; management believes that,
in the long run, potential net earnings will be driven by continued growth of
the customer base. During the first quarter of 1997, utilizing a portion of
the net proceeds from its February 1996 public offering, the Company continued
its efforts to expand the customer base by investing approximately $1,100,000
in a combination of marketing and selling activities, including magazine
advertising placements, direct mail which both tests new mailing lists and
identifies new names on lists used in the past, and testing of electronic in-
home delivery of product advertising. While losses were anticipated in
building the customer base, they have been greater than expected. This was in
part due to steadily increasing competition over the last year for the flagship
product, Prostsafe "R". The Company has made several substantial investments
by both expanding its product line to 27 products and increasing the customer
base from 89,000 in March of 1997 to over 160,000 currently. In view of the
expanded customer base, the Company has now modified its marketing strategy for
the short term by significantly reducing advertising and certain selling
expenditures related to attracting additional customers, as it focuses on
efforts to generate additional revenue from existing customers.
As of March 31, 1998, the Company had an accumulated deficit of $4,084,527. 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.
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 over the last three
years have been approximately 3% of sales, versus the national average of 6%,
there can be no assurance that actual levels of returns will not significantly
exceed amounts which have occurred in the past.
10
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.
Statements contained herein that are not purely historical are forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934, including but not limited
to statements regarding the Company's expectations, hopes, beliefs, intentions
or strategies regarding the future. Actual results could differ materially
from those projected in any forward-looking statements as a result of a number
of factors, including those detailed in this Management's Discussion and
Analysis of Results of Operations and Financial Condition, as well as those set
forth elsewhere herein. The forward-looking statements are made as of the date
of these financial statements and the Company assumes no obligation to update
the forward-looking statements, or to update the reasons why actual results
could differ materially from those projected in the forward-looking statements.
See the Company's annual 10K for the year ended December 31, 1997.
Results of Operations.
Net Sales. The Company's net sales during the quarter ended March 31, 1998
were $1,621,312, a increase of approximately 246% over net sales of $658,518
during the quarter ended March 31, 1997. At March 31, 1998, the Company's
customer base had grown to approximately 160,000, up from approximately 89,000
at March 31, 1997.
The average orders from new and existing customers were approximately $68 and
$84 respectively, for the quarter March 31, 1998, compared to average orders of
approximately $61 from new customers and $76 from existing customers
respectively for the first quarter of the prior year.
Sales of the Company's Prostsafe "R" accounted for 53% of the Company's sales
for the quarter ended March 31, 1998, and for approximately 68.2% of net sales
for the quarter ended March 31, 1997. The Company anticipates that sales of
Prostsafe "R" will continue to contribute a substantial but continually
decreasing percentage of total revenues to subsequent periods, as sales of the
Company's other products increase. 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
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 adversely affect the Company's product market
share.
Gross Profit. Cost of goods sold for the Company's products represented 14.5%
and 12.8% of net sales for the three months ended March 31, 1998 and 1997
respectively. During the quarters ended March 31, 1998 and 1997, the Company
recognized gross profits of $1,386,877 and $574,312 or 85.5% and 87.2% of net
sales, respectively.
11
Advertising Expense. During the three months ended March 31, 1998, advertising
expense increased to $791,274, compared to $521,770 for the same period last
year. The increase reflects the Company's concentration on electronic in-home
delivery of product advertising.
Selling Expense. During the three months ended March 31, 1998, selling
expenses decreased to $457,961, compared to $494,836 for the same period in
1997, and decreased as a percentage of net sales to 28.3%, compared to 75.1% of
net sales for the three months ended March 31, 1997. The Company expects to
benefit in future periods from the conversion of leads obtained from electronic
in-home delivery of product advertising to customers.
General and Administrative Expense. General and administrative expenses
decreased in absolute dollars to $187,670 for the first three months of 1998,
from $206,546 for the first three months of 1997, primarily due to a decrease
in accounting costs. For the quarter ended March 31, 1998, general and
administrative expenses represented 11.6% of net sales, decreasing as a
percentage of net sales from 31.4% for the three months ended March 31, 1997.
Loss From Operations. The Company incurred losses from operations for the
three months ended March 31, 1998 of $23,640, compared to losses from
operations of $625,290 during the three months ended March 31, 1997. Losses
during the first quarter of 1998 and 1997 were mainly attributable to increases
in selling costs as the Company sought to aggressively expand its customer
base. Anticipated revenues for the first quarter of 1998 from mailings to
existing customers, magazine placements and the airing of electronic in-home
delivery of product advertising, have resulted in a substantial decrease in
loss for the first quarter of 1998.
Liquidity and Capital Resources
In its initial public offering in February 1996, the Company raised net
proceeds, after deduction of underwriting discounts and other expenses of the
offering amounting to $1,111,752, of approximately $4,270,000. The Company's
public offering was to generate adequate funds to allow for growth of the
Company's sales and database than might be achieved if the Company relied only
upon revenues generated from sales. A large portion of the net proceeds to the
Company, was earmarked to finance expanded advertising, marketing and sales
activities, with the balance available for use for other general corporate
purposes to support the Company's ongoing operations, including general
administrative costs and expenses.
The Company initiated an open market stock repurchase program in July 1996 in
which up to 200,000 shares or 7% of outstanding shares of the Company's common
stock may be acquired in the open market. The Company acquired 21,850 shares
of its common stock for approximately $29,900 during the first three months of
1997 bringing the total shares acquired to date to 39,450. The Company has
authorized a repurchase of up to an additional 10,150 shares and may or may not
make future repurchases.
The Company believes that expected cash flow plus the remaining proceeds from
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.
12
PART II OTHER INFORMATION
Item 3. Exhibits and Reports on Form 8-K
Exhibit 27, Financial Data Schedule Page 15
13
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: May 13, 1998 /s/ Cynthia Kolke
------------------------------
Cynthia Kolke,
President, Assistant Secretary
and Director
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Exhibit 27 Financial Data Schedule
This schedule contains summary financial information extracted from the
Company's unaudited financial statements at March 31, 1997 and 1998, 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-31-1997 DEC-31-1998
<PERIOD-END> MAR-31-1997 MAR-31-1998
<CASH> 1,678,100 1,638,960
<SECURITIES> 0 0
<RECEIVABLES> 30,347 68,142
<ALLOWANCES> 0 0
<INVENTORY> 158,842 93,890
<CURRENT-ASSETS> 2,283,868 2,132,159
<PP&E> 119,443 136,552
<DEPRECIATION> 44,880 70,961
<TOTAL-ASSETS> 2,793,101 2,214,228
<CURRENT-LIABILITIES> 289,164 52,463
<BONDS> 0 0
0 0
0 0
<COMMON> 2,891 2,906
<OTHER-SE> 6,243,571 6,243,386
<TOTAL-LIABILITY-AND-EQUITY> 2,793,101 2,214,228
<SALES> 658,518 1,621,312
<TOTAL-REVENUES> 658,518 1,621,312
<CGS> 84,206 234,435
<TOTAL-COSTS> 1,100,812 1,483,670
<OTHER-EXPENSES> 206,546 187,670
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (625,290) (23,640)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (625,290) (23,640)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (625,290) (23,640)
<EPS-PRIMARY> (0.22) (0.01)
<EPS-DILUTED> (0.22) (0.01)
</TABLE>
