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 June 30, 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 June 30, 1998 was
2,910,438.
1
WHITEWING LABS, INC.
FORM 10-QSB FOR QUARTER ENDED JUNE 30, 1998
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Balance Sheets at December 31, 1997 and June 30, 1998 3
Statements of Operations for the Quarter and Six Months
Ended June 30, 1997 and 1998 5
Statements of Cash Flows for the Six Months Ended
June 30, 1997 and 1998 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 12
Item 6. Exhibits and Reports on Form 8-K
SIGNATURE PAGE 14
2
<TABLE>
Whitewing Labs, Inc.
Balance Sheets
December 31, 1997 and June 30, 1998
<CAPTION>
ASSETS
December 31, June 30,
1997 1998
------------ -----------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,593,779 $ 1,432,659
Inventories 124,484 91,136
Prepaid advertising 274,555 224,701
Other prepaid expenses 30,079 157,708
Other receivables 62,150 49,220
Deferred taxes - 50,000
----------- -----------
Total current assets 2,135,047 2,005,424
----------- -----------
EQUIPMENT:
Furniture and fixtures 135,957 137,405
Less--accumulated depreciation (63,856) (75,705)
----------- -----------
72,101 61,700
----------- -----------
OTHER ASSETS:
8,245 23,111
----------- -----------
8,245 23,111
----------- -----------
TOTAL ASSETS $ 2,215,393 $ 2,090,234
=========== ===========
</TABLE>
See accompanying notes
3
<TABLE>
Whitewing Labs, Inc.
Balance Sheets
December 31, 1997 and June 30, 1998
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
December 31, June 30,
1997 1998
------------ ------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 17,729 $ 41,809
Accrued liabilities 12,259 11,229
------------ ------------
Total current liabilities 29,988 53,038
------------ ------------
SHAREHOLDERS' EQUITY:
Common stock, $.001 par value:
Authorized, 10,000,000 shares
Issued and outstanding,
2,906,388 shares at December 31,1997
and 2,910,438 shares at June 30, 1998 2,906 2,951
Paid-in capital 6,320,292 6,324,296
Accumulated deficit (4,060,887) (4,213,145)
Less--
Treasury stock, 41,450 shares at cost
(76,906) (76,906)
------------ ------------
Shareholders' equity 2,185,405 2,037,196
------------ ------------
$ 2,215,393 $ 2,090,234
============ ============
</TABLE>
See accompanying notes
4
<TABLE>
Whitewing Labs, Inc.
Statements of Operations
(Unaudited)
<CAPTION>
Quarter ended June 30, Six months ended June 30,
1997 1998 1997 1998
-------- --------- ---------- -----------
<S> <C> <C> <C> <C>
NET SALES $ 610,891 $ 1,102,113 $ 1,269,409 $ 2,728,425
COST OF GOODS SOLD 102,753 204,443 186,958 438,878
----------- ----------- ----------- -----------
Gross profit 508,138 897,670 1,082,451 2,289,547
OPERATING EXPENSES
Advertising 235,863 497,522 876,907 1,323,721
Selling 259,667 380,057 659,981 803,092
General and administrative 165,686 169,245 374,480 356,915
----------- --------- ----------- -----------
661,216 1,046,824 1,884,369 2,481,728
----------- ----------- ----------- -----------
Loss from operations (153,078) (149,154) (801,918) (199,181)
OTHER INCOME 21,264 20,452 44,814 46,840
----------- ----------- ----------- -----------
Loss before provision
for income taxes (131,814) (128,702) (757,104) (152,341)
PROVISION FOR INCOME TAXES - - - -
----------- ----------- ----------- -----------
NET LOSS (131,814) (128,702) (757,104) (152,341)
PREFERRED STOCK DIVIDENDS
EARNED AND ACCRUED $ - $ - $ - $ -
----------- ----------- ----------- -----------
Net loss attributable
to common stockholders $ (131,814) $ (128,702) $ (757,104) $ (152,341)
=========== ========== =========== ===========
LOSS PER COMMON SHARE $ (0.05) $ (0.04) $ (0.26) $ (0.05)
=========== ========== =========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 2,865,138 2,910,438 2,870,744 2,910,438
=========== ========== =========== ===========
</TABLE>
See accompanying notes
5
<TABLE>
Whitewing Labs, Inc.
Statements of Cash Flows
For the Six Months Ended June 30, 1997 and 1998
(Unaudited)
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (757,104) $ (152,341)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 11,928 11,849
Changes in assets and liabilities:
Inventories (31,773) 33,348
Prepaid advertising 54,167 49,854
Other prepaid expenses 2,911 (127,629)
Other receivables (30,561) 12,930
Deferred advertising (182,061) -
Other deposits (1,997) (14,866)
Accounts payable (275,168) (6,611)
Accrued liabilities (16,467) 29,661
----------- ----------
Net cash used in operating activities (737,335) (163,805)
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of furniture and fixtures (10,411) (1,448)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Deferred offering costs 174,261 -
Payments to shareholder (114,247) -
Net proceeds from issuance of common
stock upon exercise of options 1,330 4,049
Repurchase of common stock (31,487) -
----------- ----------
Net cash provided by (used in) financing
activities (30,157) (4,049)
----------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (777,903) (161,121)
CASH AND CASH EQUIVALENTS, beginning of year 2,524,391 1,593,779
----------- ----------
CASH AND CASH EQUIVALENTS, end of period $ 1,746,488 $1,432,658
=========== ==========
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
June 30, 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
Prepaid advertising includes entirely of $224,701 costs related to the
development of electronic in-home delivery of product advertising which the
Company began test airing in February 1997. The Company is obligated to
pay related talent costs of 4 percent of gross profits from sales generated
in 1998 after the test airing is completed. It is management's intention
to expense the costs related to the development of electronic in-home
delivery of product advertising beginning in 1997 and over a period not to
exceed the lesser of the revenue earning stream directly related to the
electronic in-home delivery of product advertising or one year, which ever
comes first. The Company expenses all other costs of non-print media as
incurred.
c. Reclassifications
Certain reclassifications have been made to the accompanying condensed
financial statements to conform them with the current period presentation.
d. 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.
e. Concentration of Risk
Production, order taking and order fulfillment are outsourced to an outside
company and three 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.
8
2. Loss per Common Share
For the six month periods ended June 30, 1997 and 1998 respectively, 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 $20,000 and $10,000 at December 31, 1997 and June 30,
1998, respectively.
4. Litigation
None
5. Advertising
The Company has commitments for magazine placements of $2,440 at June 30,
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 by 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 second 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 $1,637,000
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(. The Company has made several substantial investments by
both expanding its product line to 27 products and increasing the customer base
from 98,000 in March of 1997 to over 179,000 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 June 30, 1998, the Company had an accumulated deficit of $4,213,145. 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 six months ended June 30, 1998
were $2,731,297, an increase of approximately 115% over net sales of $1,269,409
during the six months ended June 30, 1997. At June 30, 1998 the Company's
customer base had grown to approximately 179,000, up from approximately 98,000
at June 30, 1997. As the Company responded to increasing response rates in
certain segments of its mail order operations and reduced certain of its
advertising and direct mail programs, compared to the first six months of 1997,
sales generated from these segments correspondingly declined. The Company
focused its primary efforts in 1998 on generating additional revenues from
existing customers while continuing to grow the customer base.
The average orders from new and existing customers were approximately $64 and
$83 respectively, for the six months ended June 30, 1998, compared to average
orders of approximately $61 from new customers and $78 from existing customers
respectively for the first six months of the prior year.
Sales of the Company's Prostsafe( accounted for approximately 46.5% of the
Company's sales for the six months ended June 30, 1998, and for approximately
73% of net sales for the six months ended June 30, 1997. The Company
anticipates that sales of Prostsafe( will continue to contribute a substantial
but continually decreasing percentage of total revenues to subsequent periods,
as quantities sold 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 marketshare.
Gross Profit. Cost of goods sold for the Company's products represented 16.07%
and 14.7% of net sales for the six months ended June 30, 1998 and 1997
respectively. During the six months ended June 30, 1998 and 1997, the Company
recognized gross profits of $2,544,339 and $1,082,451, or 93.2% and 85.3% of
net sales, respectively.
11
Advertising Expense. During the six months ended June 30, 1998, advertising
expense increased to $1,323,721, compared to $876,907 for the same period last
year. The increase reflects the expanded electronic in-home delivery of
product advertising. Advertising increased in absolute dollars during the six
months ended June 30, 1998,while it decreased as a percentage of net sales to
48.5% compared to 69% of net sales for the same period last year.
Selling Expense. During the six months ended June 30, 1998, selling expenses
increased to $803,092, compared to $659,981 for the same period in 1997, and
decreased as a percentage of net sales to 29.4%, compared to 52% of net sales
for the six months ended June 30, 1997. The decrease is primarily due to more
selective use of direct mail programs in the first six months of 1998 compared
to 1997.
General and Administrative Expense. General and administrative expenses
decreased in absolute dollars to $356,915 for the first six months of 1998,
from $347,480 for the first six months of 1997, due to an decrease in direct
office expenses. For the six months ended June 30, 1998, general and
administrative expenses represented 13% of net sales, decreasing as a
percentage of net sales from 29.5% for the six months ended June 30, 1997.
Loss From Operations. The Company incurred losses from operations for the six
months ended June 30, 1998 of $152,341, compared to losses from operations of
$757,104 during the six months ended June 30, 1997. Losses during the first
six months of 1997 were mainly attributable to increases in advertising and
selling costs in excess of revenues as the Company sought to aggressively
expand its customer base, which trend continued into 1998. In the second
quarter of 1998, the Company reacted to declining response rates from certain
direct response programs targeted at new customers, by modifying its marketing
strategy. The Company significantly reduced advertising and selling
expenditures to attract additional customers and focused on efforts to generate
additional revenue from existing customers with the result that losses incurred
for the six months ended June 1998 were significantly smaller than losses
incurred for the six months ended June 30, 1997.
Interest Expense. There was no interest expense for the six months ended June
30, 1998. The amounts remaining due and payable to Acacia Research
Corporation, including interest expense of $4,259, were paid out of the net
proceeds to the Company from the public offering during the first quarter of
1996. For the six months ended June 30, 1996, interest expense represented 0.2%
of sales.
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: July 27, 1998 /s/ Cynthia Kolke
------------------------------
Cynthia Kolke,
President, Assistant Secretary
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 June 30, 1997 and 1998, and is
qualified in its entirety by reference to such financial statements.
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-END> JUN-30-1997 JUN-30-1998
<CASH> 1,746,488 1,432,659
<SECURITIES> 0 0
<RECEIVABLES> 16,043 49,220
<ALLOWANCES> 0 0
<INVENTORY> 111,746 91,136
<CURRENT-ASSETS> 2,235,200 2,005,424
<PP&E> 129,854 137,405
<DEPRECIATION> (50,759) (75,705)
<TOTAL-ASSETS> 2,551,360 2,090,234
<CURRENT-LIABILITIES> 179,407 53,038
<BONDS> 0 0
0 0
0 0
<COMMON> 2,906 2,951
<OTHER-SE> 6,320,292 6,327,247
<TOTAL-LIABILITY-AND-EQUITY> 2,551,360 2,090,234
<SALES> 1,269,409 2,731,297
<TOTAL-REVENUES> 1,314,223 2,775,265
<CGS> 186,958 438,878
<TOTAL-COSTS> 2,071,327 2,922,606
<OTHER-EXPENSES> 347,480 356,915
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (757,104) (152,341)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (757,104) (152,341)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (757,104) (152,341)
<EPS-PRIMARY> (0.26) (0.05)
<EPS-DILUTED> (0.26) (0.05)
</TABLE>
