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, 1999
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, 1999 was
2,925,438.
1
WHITEWING LABS, INC.
FORM 10-QSB FOR QUARTER ENDED MARCH 31, 1999
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Balance Sheets at December 31, 1998 and March 31, 1999 3
Statements of Operations for the Three Months Ended
March 31, 1998 and 1999 5
Statements of Cash Flows for the Three Months Ended
March 31, 1998 and 1999 6
Notes to the Financial Statements 7
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 9
SIGNATURE PAGE 11
Exhibit 27 Financial Data Schedule 12
2
<TABLE>
WHITEWING LABS, INC.
BALANCE SHEETS
DECEMBER 31, 1998 AND MARCH 31, 1999
<CAPTION>
ASSETS
December 31, March 31,
1998 1999
____________ ___________
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 93,521 $ 73,895
Short-term investments 1,289,025 1,188,235
Inventories 79,681 155,372
Prepaid advertising 245,117 276,476
Other prepaid expenses 70,181 82,383
Other receivables 17,998 33,368
Deferred taxes 50,000 50,000
____________ ___________
Total current assets 1,845,523 1,859,729
EQUIPMENT:
Furniture and fixtures 150,918 161,379
Less--accumulated depreciation (92,378) (99,928)
____________ ___________
58,540 61,451
____________ ___________
OTHER ASSETS:
48,286 48,799
____________ ___________
TOTAL ASSETS $ 1,952,349 $ 1,969,979
=========== ===========
</TABLE>
See accompanying notes
3
<TABLE>
WHITEWING LABS, INC.
BALANCE SHEETS
DECEMBER 31, 1998 AND MARCH 31, 1999
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
December 31, March 31,
1998 1999
____________ ___________
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 29,985 $ 160,227
Accrued liabilities 5,519 5,000
____________ ____________
Total current liabilities 35,504 165,227
____________ ____________
SHAREHOLDERS' EQUITY:
Common stock, $.001 par value:
10,000,000 shares authorized;
2,925,438 shares
issued and outstanding 2,925 2,925
Paid-in capital 6,248,746 6,248,746
Accumulated deficit (4,334,826) (4,446,919)
____________ ____________
Shareholders' equity 1,916,845 1,804,752
____________ ____________
$ 1,952,349 $ 1,969,979
============ ============
</TABLE>
See accompanying notes
4
<TABLE>
WHITEWING LABS, INC.
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999
(UNAUDITED)
<CAPTION>
1998 1999
____________ ____________
<S> <C> <C>
NET SALES $ 1,621,312 $ 457,372
COST OF GOODS SOLD 234,435 71,349
____________ ____________
Gross profit 1,386,877 386,023
OPERATING EXPENSES
Advertising 791,274 139,662
Selling 457,961 223,449
General and administrative 187,670 152,771
____________ ____________
1,436,905 515,882
____________ ____________
(50,028) (129,859)
OTHER INCOME 26,388 17,766
____________ ____________
Loss before income taxes (23,640) (112,093)
PROVISION FOR INCOME TAXES - -
____________ ____________
NET LOSS $ (23,640) $ (112,093)
============ ============
BASIC AND DILUTED
LOSS PER COMMON SHARE $ (0.01) $ (0.04)
============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 2,864,938 2,925,438
============ ============
</TABLE>
See accompanying notes
5
<TABLE>
WHITEWING LABS, INC.
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999
(UNAUDITED)
<CAPTION>
1998 1999
____________ ____________
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (23,640) $ (112,093)
Adjustments to reconcile net loss
to net cash flows from operating
activities
Depreciation and amortization 7,105 7,549
Changes in assets and liabilities:
Inventories 30,594 (75,691)
Prepaid advertising 88,777 (31,359)
Other prepaid expenses (65,310) (12,202)
Other receivables (5,992) (15,370)
Deferred advertising - -
Other deposits (8,233) (513)
Accounts payable 25,603 130,242
Accrued liabilities (3,168) (519)
____________ ____________
Net cash provided (used) by
operating activities 45,776 (109,956)
____________ ____________
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of furniture and fixtures (595) (10,461)
Sale (purchase) of short-term investment, net (8,588) 100,790
____________ ____________
Net cash provided (used) by
investing activities (9,183) 90,330
____________ ____________
NET INCREASE (DECREASE)
IN CASH AND CASH EQUIVALENTS 36,593 (19,621)
CASH AND CASH EQUIVALENTS, beginning of period 372,539 93,521
____________ ____________
CASH AND CASH EQUIVALENTS, end of period $ 409,132 $ 73,895
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for income taxes $ - $ -
============ ============
Cash paid for interest $ - $ -
============ ============
</TABLE>
See accompanying notes
6
WHITEWING LABS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1999
(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, 1998.
b. Prepaid and Deferred Advertising
Prepaid advertising includes $139,959 of costs related to the development of
electronic in-home delivery of product advertising and journal costs
totaling $136,517. The Company is obligated to pay related talent costs of
4 percent of gross profits from sales generated in 1999 for just the
products covered by the ads. It is management's intention to expense the
costs related to the development of electronic in-home delivery of product
advertising 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. The Company expenses all other costs of non-print
media as incurred.
2. Loss Per Common Share
For the three month periods ended March 31, 1998 and 1999, loss per common
share was based on the historical weighted average number of shares
outstanding. The diluted loss per share is not presented because the effect
is anti-dilutive.
3. Product Return Reserve
An accrual for estimated sales returns is included in accrued liabilities in
the amount of $5,000 at March 31, 1998 and 1999.
4. Advertising
The Company had no commitments for magazine placements at March 31, 1999.
7
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 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.
The Company's strategy for the development of its business is to stress growth
of its 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. The Company has made several substantial investments including
expansion of its product line to 27 products and increased advertising,
resulting in an increase in the customer base from 160,000 at March 31, 1998 to
over 183,000 at March 31, 1999. 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 Company's flagship
product, Prostsafe (R).
Sales of the Company's Prostsafe (R) accounted for approximately 50% of the
Company's sales for the three months ended March 31, 1999, compared to
approximately 53% of net sales for the three months ended March 31, 1998. The
Company anticipates that sales of Prostsafe (R) will continue to contribute a
substantial but continually decreasing percentage of total revenues in
subsequent periods as the Company increases its emphasis on other products.
Despite this fact, 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 the Company's
changing customer demand, short product life cycles, and frequent new product
introductions. The Company's performance will depend in a large part on its
ability to develop and market new products that will gain customer acceptance
and loyalty, as well as its ability to adapt its product offerings 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.
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
8
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, could be substantially
diminished.
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, 30 day money-back guarantee. Although product returns over the
last three years have been approximately 3% of sales, which is substantially
less than 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.
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 10KSB for the year ended December 31, 1998.
Results of Operations
Net Sales. The Company's net sales during the three months ended March 31, 1999
were $457,372, a decrease of approximately 71.8% over net sales of $1,621,312
during the three months ended March 31, 1998. At March 31, 1999, the Company's
customer base had grown to approximately 183,000, up from approximately 160,000
at March 31, 1998. As the Company responded to declining response rates in
certain segments of its mail order operations and reduced certain of its
advertising and direct mail programs, compared to the first three months of
1998, sales generated from these segments correspondingly declined. The Company
focused its primary efforts in the first quarter of 1999 on generating
additional revenues from existing customers while continuing to grow the
customer base. The average orders from new and existing customers were
approximately $68 and $91 respectively, for the three months ended March 31,
1999, compared to average orders of approximately $68 from new customers and $84
from existing customers for the three months ended March 31, 1998. Total sales
orders in the first quarter decreased primarily due to a reduction in
advertising dollars spent. Losses during the first three months of 1999 were
mainly attributable to reduced revenue as the Company granted the marketing
rights for television to an international marketing firm for 90 days. The firm
failed to perform any services under the agreement and, accordingly, we
terminated the relationship March 31, 1999.
Gross Profit. Gross Profit was 84.5% and 85.6% net sales for the three months
ended March 31, 1999 and 1998, respectively. The increase was due to an
increase in wholesale orders and the Company's licensing of the "Bounce Back
Chair", which has a lower profit margin than other products.
Advertising Expense. During the three months ended March 31, 1999, advertising
expense decreased to $139,662 compared to $791,274 for the same period last
year. The decrease reflects decreased direct response TV advertising in the
first three months of 1999. Advertising expense decreased as a percentage of
net sales to 30.5% compared to 48.8% of net sales for the same period last year.
Selling Expense. During the three months ended March 31, 1999, selling expenses
decreased to $223,449, compared to $457,961 for the same period in 1998, but
increased as a percentage of net sales to 48.9%, compared to 28.2% of net sales
9
for the three months ended March 31, 1998. The percentage increase was
primarily due to a selective use of testing of Electronic In-House Marketing in
the first three months of 1999 compared to 1998.
General and Administrative Expense. General and administrative expenses
decreased in absolute dollars to $152,771 for the first three months of 1999,
from $187,670 for the first three months of 1998. For the three months ended
March 31, 1999, general and administrative expenses represented 33.4% of net
sales, increasing from 11.6% for the three months ended March 31, 1998. This
increase was due to reduced revenue.
Loss From Operations. The Company incurred losses from operations for the three
months ended March 31, 1999 of $112,093, compared to losses from operations of
$23,640 during the three months ended March 31, 1998. Losses during the first
three months of 1999 were mainly attributable to reduced revenue as the Company
granted the marketing rights for television to an international marketing firm
for 90 days. The firm failed to perform any services under the agreement and,
accordingly, we terminated the relationship March 31, 1999.
The Company significantly reduced advertising and selling expenditures and
focused on efforts to generate additional revenue from existing customers.
Liquidity and Capital Resources
In its initial public offering in February 1996, the Company raised net proceeds
of approximately $4.3 million after deduction of underwriting discounts and
other expenses of the offering of $1.1 million. 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.
At March 31, 1999, the Company had cash and short-term investments on hand of
$1,262,130 down $120,416 from the December 31, 1998 amount of $1,382,546. The
decrease was primarily the result of some expenses coming due earlier in the
year than previously. Also the new label law required us to increase inventory
on hand, temporarily, while new product labels were being printed.
The Company believes that the remaining proceeds from the offering will finance
the Company's deficit 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.
Other Matters
Management has reviewed its internal software and hardware components and
believes that the Company's systems are Year 2000 compliant. Management has
also made inquiries of its primary vendors as to the capabilities of their
systems with respect to the Year 2000. At this time, it has not been
conclusively determined that the systems of these vendors are Year 2000
compliant, however, based on recent discussions with the vendors, management
believes the vendors will be fully capable of meeting the needs of the Company
beyond the year 1999.
10
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.
By: s/o/f Cynthia Kolke
___________________________________________
Cynthia Kolke
President, Assistant Secretary and Director
Dated: May 13, 1999
11
<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, 1998 and 1999, 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-31-1998 MAR-31-1999
<CASH> 1,638,960 1,262,130
<SECURITIES> 0 0
<RECEIVABLES> 68,142 33,368
<ALLOWANCES> 0 0
<INVENTORY> 93,890 155,372
<CURRENT-ASSETS> 2,132,159 1,859,729
<PP&E> 136,552 161,379
<DEPRECIATION> 70,961 99,928
<TOTAL-ASSETS> 2,214,228 1,969,979
<CURRENT-LIABILITIES> 52,463 165,227
<BONDS> 0 0
0 0
0 0
<COMMON> 2,906 2,925
<OTHER-SE> 6,243,386 6,248,746
<TOTAL-LIABILITY-AND-EQUITY> 2,214,228 1,969,979
<SALES> 1,621,312 457,372
<TOTAL-REVENUES> 1,621,312 457,372
<CGS> 234,435 71,349
<TOTAL-COSTS> 1,483,670 434,460
<OTHER-EXPENSES> 187,670 152,771
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (23,640) (712,093)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (23,640) (712,093)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (23,640) (712,093)
<EPS-PRIMARY> (0.01) (0.04)
<EPS-DILUTED> (0.01) (0.04)
</TABLE>
