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, 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 June 18, 1999 was
2,925,438.
1
WHITEWING LABS, INC.
FORM 10-QSB FOR QUARTER ENDED JUNE 30, 1999
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Balance Sheets at December 31, 1998 and June 30, 1999 3
Statements of Operations for the Six Months Ended
June 30, 1998 and 1999 5
Statements of Cash Flows for the Six Months Ended
June 30, 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 JUNE 30, 1999
<CAPTION>
ASSETS
December 31, June 30,
1998 1999
____________ ___________
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 93,521 $ 102,782
Short-term investments 1,289,025 1,066,065
Inventories 79,681 84,970
Prepaid advertising 245,117 177,055
Other prepaid expenses 70,181 62,918
Other receivables 17,998 31,900
Deferred taxes 50,000 50,000
____________ ___________
Total current assets 1,845,523 1,575,690
EQUIPMENT:
Furniture and fixtures 150,918 161,379
Less--accumulated depreciation (92,378) (108,058)
____________ ___________
58,540 53,321
____________ ___________
OTHER ASSETS:
48,286 49,298
____________ ___________
TOTAL ASSETS $ 1,952,349 $ 1,678,309
=========== ===========
</TABLE>
See accompanying notes
3
<TABLE>
WHITEWING LABS, INC.
BALANCE SHEETS
DECEMBER 31, 1998 AND JUNE 30, 1999
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
December 31, June 30,
1998 1999
____________ ____________
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 29,985 $ 70,931
Accrued liabilities 5,519 5,961
____________ ____________
Total current liabilities 35,504 76,892
____________ ____________
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) (4,650,254)
____________ ____________
Shareholders' equity 1,916,845 1,601,417
____________ ____________
$ 1,952,349 $ 1,678,309
=========== ===========
</TABLE>
See accompanying notes
4
<TABLE>
WHITEWING LABS, INC.
STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999
(UNAUDITED)
<CAPTION>
Quarter ended June 30, Six months ended June 30,
1998 1999 1998 1999
___________ _________ ___________ __________
<S> <C> <C> <C> <C>
NET SALES $ 1,102,113 $ 504,803 $ 2,728,425 $ 962,175
COST OF GOODS SOLD 204,443 80,615 438,878 151,965
___________ _________ ___________ __________
Gross profit 897,670 424,188 2,289,547 810,210
OPERATING EXPENSES
Advertising 532,447 188,291 1,323,721 327,953
Selling 345,131 297,714 803,092 521,162
General and administrative 169,245 161,931 361,915 314,702
___________ _________ ___________ __________
1,046,823 647,936 2,488,728 1,163,817
___________ _________ ___________ __________
(149,153) (223,748) (199,181) (353,607)
OTHER INCOME 20,452 20,413 46,840 38,179
___________ _________ ___________ __________
Loss before income taxes (128,701) (203,335) (152,341) (315,428)
PROVISION FOR INCOME TAXES - - - -
___________ _________ ___________ __________
NET LOSS $ (128,701) $(203,335) $ (152,341) $ (315,428)
========== ========= ========== ==========
BASIC AND DILUTED
LOSS PER COMMON SHARE $ (0.04) $ (0.07) $ (0.05) $ (0.11)
========== ========= ========== ==========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 2,890,438 2,925,438 2,877,758 2,925,438
========== ========= ========== ==========
</TABLE>
See accompanying notes
5
<TABLE>
WHITEWING LABS, INC.
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999
(UNAUDITED)
<CAPTION>
1998 1999
__________ __________
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(152,341) $ (315,428)
Adjustments to reconcile net loss to net cash
flows from operating activities
Depreciation and amortization 12,266 15,680
Changes in assets and liabilities:
Inventories 33,348 (5,289)
Prepaid advertising (55,262) 68,062
Other prepaid expenses (22,513) 7,263
Other receivables 12,930 (13,902)
Other assets (15,283) (1,012)
Accounts payable 24,080 40,946
Accrued liabilities (948) 442
___________ __________
Net cash used by operating activities (163,723) (203,238)
___________ __________
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of furniture and fixtures (1,448) (10,461)
Sale of short-term investments - 222,960
___________ __________
Net cash provided (used) by investing activities (1,448) 212,499
___________ __________
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock
upon exercise of options 4,050 -
___________ __________
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (161,121) 9,261
CASH AND CASH EQUIVALENTS, beginning of period 1,593,779 93,521
___________ __________
CASH AND CASH EQUIVALENTS, end of period $ 1,432,658 $ 102,782
============ ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
CASH PAID FOR:
Income taxes $ - $ -
============ ==========
Interest $ - $ -
============ ==========
</TABLE>
See accompanying notes
6
WHITEWING LABS, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 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 $109,589 of costs related to the development
of electronic in-home delivery of product advertising and journal costs
totaling $67,466. 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 six month periods ended June 30, 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 June 30, 1998 and 1999.
4. Advertising
The Company had no commitments for magazine placements at June 30, 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 179,000 at June 30, 1998 to
over 200,000 at June 30, 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 50.4% of the
Company's sales for the six months ended June 30, 1999, compared to
approximately 47% of net sales for the six months ended June 30, 1998. The
Company anticipates that sales of Prostsafe"R" will continue to contribute a
substantial but 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 market share.
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
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 six months ended June 30, 1999
were $962,175, a decrease of 64.7% over net sales of $2,728,425 during the six
months ended June 30, 1998. At June 30, 1999, the Company's customer base had
grown to approximately 200,000, up from approximately 179,000 at June 30, 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 six months of 1998, sales generated from these
segments correspondingly declined. The Company focused its primary efforts in
the first six months 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 $82 respectively, for the
six months ended June 30, 1999, compared to average orders of approximately $64
from new customers and $83 from existing customers for the six months ended
June 30, 1998. Total sales orders in the second quarter decreased primarily
due to a reduction in advertising dollars spent. Losses during the first six
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 84.2% and 83.9% of net sales for the six months
ended June 30, 1999 and 1998, respectively.
Advertising Expense. During the six months ended June 30, 1999, advertising
expense decreased to $327,953 compared to $1,323,721 for the same period last
year. The decrease reflects decreased direct response TV advertising in the
first six months of 1999. Advertising expense decreased as a percentage of net
sales to 34.1% compared to 48.5% of net sales for the same period last year.
Selling Expense. During the six months ended June 30, 1999, selling expenses
decreased to $521,162, compared to $803,092 for the same period in 1998, and
increased as a percentage of net sales to 54.2%, compared to 29.4% of net sales
for the six months ended June 30, 1998. The percentage increase was primarily
due to a selective use of testing of Electronic In-House Marketing in the first
six months of 1999 compared to 1998.
9
General and Administrative Expense. General and administrative expenses
decreased in absolute dollars to $314,702 for the first six months of 1999,
from $361,915 for the first six months of 1998. For the six months ended June
30, 1999, general and administrative expenses represented 32.7% of net sales,
increasing from 13.3% for the six months ended June 30, 1998. The percentage
increase was due primarily to reduced revenue.
Loss From Operations. The Company incurred losses from operations for the six
months ended June 30, 1999 of $353,607, compared to losses from operations of
$199,181 during the six months ended June 30, 1998. Losses during the first
six 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 June 30, 1999, the Company had cash and short-term investments on hand of
$1,168,847 down $213,699 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.
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: August 12, 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 June 31, 1998 and 1999, 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-30-1998 JUN-30-1999
<CASH> 1,432,658 102,782
<SECURITIES> 0 1,066,065
<RECEIVABLES> 49,220 31,900
<ALLOWANCES> 0 0
<INVENTORY> 91,136 84,970
<CURRENT-ASSETS> 2,005,424 1,575,690
<PP&E> 137,405 161,379
<DEPRECIATION> 75,705 108,058
<TOTAL-ASSETS> 2,090,234 1,678,309
<CURRENT-LIABILITIES> 53,122 76,892
<BONDS> 0 0
0 0
0 0
<COMMON> 2,910 2,925
<OTHER-SE> 6,247,431 6,248,746
<TOTAL-LIABILITY-AND-EQUITY> 2,090,234 1,678,309
<SALES> 2,728,425 962,175
<TOTAL-REVENUES> 2,728,425 962,175
<CGS> 438,878 151,965
<TOTAL-COSTS> 2,565,691 1,001,080
<OTHER-EXPENSES> 361,915 314,702
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (152,341) (315,428)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (152,341) (315,428)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (152,341) (315,428)
<EPS-BASIC> (0.05) (0.11)
<EPS-DILUTED> (0.05) (0.11)
</TABLE>
