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, 2000
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, 2000 was
2,925,438.
1
WHITEWING LABS, INC.
FORM 10-QSB FOR QUARTER ENDED MARCH 31, 2000
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Independent Accountants' Report 3
Balance Sheets at December 31, 1999 and March 31, 2000 4
Statements of Operations for the Three Months Ended
March 31, 1999 and 2000 6
Statements of Cash Flows for the Three Months Ended
March 31, 1999 and 2000 7
Notes to the Financial Statements 8
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 10
SIGNATURE PAGE 12
Exhibit 27 Financial Data Schedule 13
2
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Shareholders
Whitewing Labs, Inc.
We have reviewed the accompanying balance sheet of Whitewing Labs, Inc., as of
March 31, 2000, and the related statements of operations and cash flows for the
three-month period then ended. We conducted our review in accordance with
standards established by the American Institute of Certified Public
Accountants. These financial statements are the responsibility of the
Company's management.
A review of interim financial information consists principally of applying
analytical procedures to financial data and making inquiries of persons
responsible for financial and accounting matters. It is substantially less in
scope than an audit conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our review, we are not aware of any material modifications that should
be made to the financial statements referred to above in order for them to be
in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the balance sheet of Whitewing Labs, Inc. as of December 31, 1999,
and the related statements of income, shareholders' equity and cash flows for
the year then ended not presented herein; and in our report dated February 8,
2000, we expressed an unqualified opinion on those financial statements. In
our opinion, the information set forth in the accompanying balance sheet as of
December 31, 1999, is fairly presented, in all material respects, in relation
to the balance sheet from which it has been derived.
/s/ Moss Adams LLP
MOSS ADAMS LLP
Los Angeles, California
April 18, 2000
3
<TABLE>
WHITEWING LABS, INC.
BALANCE SHEETS
DECEMBER 31, 1999 AND MARCH 31, 2000
<CAPTION>
ASSETS
December 31, March 31,
1999 2000
___________ ___________
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 79,220 $ 34,971
Short-term investments 834,065 846,556
Inventories 88,012 81,872
Prepaid advertising 30,433 60,020
Other prepaid expenses 55,405 43,594
Other receivables 22,135 11,761
Deferred taxes 25,000 25,000
___________ ___________
Total current assets 1,134,270 1,103,774
EQUIPMENT:
Furniture and fixtures 161,379 161,379
Less--accumulated depreciation (124,288) (131,674)
___________ ___________
37,091 29,705
___________ ___________
OTHER ASSETS:
Trademarks 44,213 49,301
Other 7,702 9,702
___________ ___________
51,915 59,003
___________ ___________
TOTAL ASSETS $ 1,223,276 $ 1,192,482
___________ ___________
----------- -----------
</TABLE>
See accompanying notes
4
<TABLE>
WHITEWING LABS, INC.
BALANCE SHEETS
DECEMBER 31, 1999 AND MARCH 31, 2000
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
December 31, March 31,
1999 2000
___________ ___________
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 15,671 $ 19,254
Accrued liabilities 5,000 5,000
___________ ___________
Total current liabilities 20,671 24,254
___________ ___________
SHAREHOLDERS' EQUITY:
Preferred stock, $.001 par value:
10% cumulative, 500,000 shares authorized;
no shares issued and outstanding - -
Common stock, $.001 par value:
10,000,000 shares authorized; 2,925,443 shares
issued and outstanding 2,925 2,925
Paid-in capital 6,248,752 6,248,752
Accumulated deficit (5,049,072) (5,083,449)
___________ ___________
Shareholders' equity 1,202,605 1,168,228
___________ ___________
$ 1,223,276 $ 1,192,482
___________ ___________
----------- -----------
</TABLE>
See accompanying notes
5
<TABLE>
WHITEWING LABS, INC.
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000
(UNAUDITED)
<CAPTION>
1999 2000
___________ ___________
<S> <C> <C>
NET SALES $ 457,372 $ 222,751
COST OF GOODS SOLD 71,349 26,138
___________ ___________
Gross profit 386,023 196,613
OPERATING EXPENSES
Advertising 139,662 24,182
Selling 223,449 77,714
General and administrative 152,771 142,011
___________ ___________
515,882 243,907
___________ ___________
(129,859) (47,294)
OTHER INCOME 17,766 12,917
___________ ___________
Loss before income taxes (112,093) (34,377)
PROVISION FOR INCOME TAXES - -
___________ ___________
NET LOSS $ (112,093) $ (34,377)
___________ ___________
----------- -----------
BASIC AND DILUTED
LOSS PER COMMON SHARE $ (0.04) $ (0.01)
___________ ___________
----------- -----------
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 2,925,438 2,925,438
___________ ___________
----------- -----------
</TABLE>
See accompanying notes
6
<TABLE>
WHITEWING LABS, INC.
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000
(UNAUDITED)
<CAPTION>
1999 2000
___________ ___________
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (112,093) $ (34,377)
Adjustments to reconcile net loss to net cash
flows from operating activities
Depreciation and amortization 7,549 7,386
Changes in assets and liabilities:
Inventories (75,691) 6,140
Prepaid advertising (31,359) (29,587)
Other prepaid expenses (12,202) 11,811
Other receivables (15,370) 10,374
Other deposits (513) (2,000)
Accounts payable 130,242 3,583
Accrued liabilities (519) -
___________ ___________
Net cash provided (used) by operating activities (109,956) (26,670)
___________ ___________
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of furniture and fixtures (10,460) -
Sale (purchase) of short-term investment, net 100,790 (12,491)
Development of trademarks - (5,088)
___________ ___________
Net cash provided (used) by investing activities 90,330 (17,579)
___________ ___________
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (19,626) (44,249)
CASH AND CASH EQUIVALENTS, beginning of period 93,521 79,220
___________ ___________
CASH AND CASH EQUIVALENTS, end of period $ 73,895 $ 34,971
___________ ___________
----------- -----------
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, 2000
(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,
2000.
b. Prepaid and Deferred Advertising
Prepaid advertising includes $20,676 of costs related to the development
of electronic in-home delivery of product advertising, and journal costs
totaling $39,344. The Company expenses other costs of non-print media as
incurred.
2. Loss Per Common Share
For the three month periods ended March 31, 1999 and 2000, 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, 1999 and 2000.
4. Advertising
The Company had no commitments for magazine placements at March 31, 2000.
8
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 33 products and increased advertising,
resulting in an increase in the customer base from 183,000 at March 31, 1999 to
over 199,000 at March 31, 2000. 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 54% of the
Company's sales for the three months ended March 31, 2000, compared to
approximately 50% of net sales for the three months ended March 31, 1999. 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.
9
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, 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, 1999.
Results of Operations
Net Sales. The Company's net sales during the three months ended March 31,
2000 were $222,751, a decrease of approximately 51.3% over net sales of
$457,372 during the three months ended March 31, 1999. At March 31, 2000,
the Company's customer base had grown to approximately 199,000, up from
approximately 183,000 at March 31, 1999. 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 1999, sales generated from these segments correspondingly
declined. The Company focused its primary efforts in the first quarter of 2000
on generating additional revenues from existing customers while continuing to
grow the customer base. The average orders from new and existing customers
were approximately $58 and $92 respectively, for the three months ended March
31, 2000, compared to average orders of approximately $68 from new customers
and $91 from existing customers for the three months ended March 31, 1999.
Total sales orders in the first quarter decreased primarily due to a reduction
in advertising dollars spent.
Gross Profit. Gross Profit was 88.3% and 84.5% of net sales for the three
months ended March 31, 2000 and 1999, respectively. The increase was due to
better management of shipping and handling expenses of the orders shipped.
Advertising Expense. During the three months ended March 31, 2000, advertising
expense decreased to $24,182 compared to $139,662 for the same period last
year. The decrease reflects decreased direct response TV advertising in the
first three months of 2000. Advertising expense decreased as a percentage of
net sales to 10.9% compared to 30.5% of net sales for the same period last
year.
Selling Expense. During the three months ended March 31, 2000, selling
expenses decreased to $77,714, compared to $223,449 for the same period in
1999, and decreased as a percentage of net sales to 34.9%, compared to 48.9% of
net sales for the three months ended March 31, 1999. The decrease was a result
of reduced advertising expenditures.
10
General and Administrative Expense. General and administrative expenses
decreased in absolute dollars to $142,011 for the first three months of 2000,
from $152,771 for the first three months of 1999. For the three months ended
March 31, 2000, general and administrative expenses represented 63.8% of net
sales, increasing from 33.4% for the three months ended March 31, 1999. This
increase was due to reduced revenue.
Loss From Operations. The Company incurred losses from operations for the
three months ended March 31, 2000 of $34,377, compared to losses from
operations of $112,093 during the three months ended March 31, 1999. Losses
during the first three months of 2000 were mainly attributable to reduced
revenue as 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, 2000, the Company had cash and short-term investments on hand of
$881,527, down from the December 31, 1999 amount of $913,285. The decrease was
primarily the result of some expenses coming due earlier in the year than
previously. Also the new label law required the Company 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 previously reviewed its internal software and hardware
components and believes that the Company's systems are Year 2000 compliant.
Management also made inquiries of its primary vendors as to the capabilities of
their systems with respect to the Year 2000. Although it has not been
conclusively determined that the systems of the Company's vendors are Year 2000
compliant, 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 2000. To date, the Company has not experienced any adverse
consequences due to Year 2000 compliance.
11
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 10, 2000
12
<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, 1999 and 2000, 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-31-1998 DEC-31-1999
<PERIOD-END> MAR-21-1999 MAR-31-2000
<CASH> 1,262,130 881,527
<SECURITIES> 0 0
<RECEIVABLES> 33,368 11,761
<ALLOWANCES> 0 0
<INVENTORY> 155,372 81,872
<CURRENT-ASSETS> 1,859,729 1,103,774
<PP&E> 161,379 161,379
<DEPRECIATION> 99,928 131,674
<TOTAL-ASSETS> 1,969,979 1,192,482
<CURRENT-LIABILITIES> 165,227 24,254
<BONDS> 0 0
0 0
0 0
<COMMON> 2,925 2,925
<OTHER-SE> 6,248,746 6,248,752
<TOTAL-LIABILITY-AND-EQUITY> 1,969,979 1,192,482
<SALES> 457,372 222,751
<TOTAL-REVENUES> 457,372 222,751
<CGS> 71,349 26,138
<TOTAL-COSTS> 434,460 128,034
<OTHER-EXPENSES> 152,771 142,011
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (712,093) (34,377)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (712,093) (34,377)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (712,093) (34,377)
<EPS-BASIC> (0.04) (0.01)
<EPS-DILUTED> (0.04) (0.01)
</TABLE>
