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, 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 June 18, 2000 was
2,925,438.
1
WHITEWING LABS, INC.
FORM 10-QSB FOR QUARTER ENDED JUNE 30, 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 June 30, 2000 4
Statements of Operations for the Three and Six Months Ended
June 30, 1999 and 2000 6
Statements of Cash Flows for the Six Months Ended
June 30, 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
June 30, 2000, and the related statements of operations and cash flows for the
three and six month periods 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
July 17, 2000
3
<TABLE>
WHITEWING LABS, INC.
BALANCE SHEETS
DECEMBER 31, 1999 AND JUNE 30, 2000
<CAPTION>
ASSETS
December 31, June 30,
1999 2000
___________ ___________
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 79,220 $ 64,234
Short-term investments 834,065 748,232
Inventories 88,012 76,287
Prepaid advertising 30,433 60,105
Other prepaid expenses 55,405 31,129
Other receivables 22,135 11,468
Deferred taxes 25,000 25,000
___________ ___________
Total current assets 1,845,523 1,016,455
EQUIPMENT:
Furniture and fixtures 161,379 166,562
Less--accumulated depreciation (124,288) (138,431)
___________ ___________
37,091 28,131
___________ ___________
OTHER ASSETS:
Trademarks 44,213 49,369
Other 7,702 4,623
___________ ___________
51,915 53,992
___________ ___________
TOTAL ASSETS $ 1,223,276 $ 1,098,578
___________ ___________
----------- -----------
</TABLE>
See accompanying notes
4
<TABLE>
WHITEWING LABS, INC.
BALANCE SHEETS
DECEMBER 31, 1999 AND JUNE 30, 2000
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
December 31, June 30,
1999 2000
___________ ___________
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 15,671 $ 27,865
Accrued liabilities 5,000 -
___________ ___________
Total current liabilities 20,671 27,865
___________ ___________
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) (5,180,964)
___________ ___________
Shareholders' equity 1,202,605 1,070,713
___________ ___________
$ 1,223,276 $ 1,098,578
___________ ___________
----------- -----------
</TABLE>
See accompanying notes
5
<TABLE>
WHITEWING LABS, INC.
STATEMENTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 2000
(UNAUDITED)
<CAPTION>
Quarter ended June 30, Six months ended June 30,
1999 2000 1999 2000
_________ __________ __________ __________
<S> <C> <C> <C> <C>
NET SALES $ 504,803 $ 239,748 $ 962,175 $ 462,499
COST OF GOODS SOLD 80,615 58,324 151,965 84,462
_________ __________ __________ __________
Gross profit 424,188 181,424 810,210 378,037
OPERATING EXPENSES
Advertising 188,291 31,759 327,953 55,941
Selling 297,714 123,882 521,162 201,596
General and administrative 161,931 142,669 314,702 284,680
_________ __________ __________ __________
647,936 298,310 1,163,817 542,217
_________ __________ __________ __________
(223,748) (116,886) (353,607) (164,180)
OTHER INCOME 20,413 19,371 38,179 32,288
_________ __________ __________ __________
Loss before income taxes (203,335) (97,515) (315,428) (131,892)
PROVISION FOR INCOME TAXES - - - -
_________ __________ __________ __________
NET LOSS $ (203,335) $ (97,515) $ (315,428) $ (131,892)
_________ __________ __________ __________
BASIC AND DILUTED
LOSS PER COMMON SHARE $ (0.07) $ (0.04) $ (0.11) $ (0.05)
_________ __________ __________ __________
--------- ---------- ---------- ----------
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 2,925,438 2,925,443 2,925,438 2,925,438
_________ __________ __________ __________
--------- ---------- ---------- ----------
</TABLE>
See accompanying notes
6
<TABLE>
WHITEWING LABS, INC.
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND 2000
(UNAUDITED)
<CAPTION>
1 999 2000
___________ __________
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (315,428) $ (131,892)
Adjustments to reconcile net loss to net cash
flows from operating activities
Depreciation and amortization 15,680 14,143
Changes in assets and liabilities:
Inventories (5,289) 11,725
Prepaid advertising 68,062 (29,672)
Other prepaid expenses 7,263 24,276
Other receivables (13,902) 10,667
Other assets (1,012) 3,079
Accounts payable 40,946 12,194
Accrued liabilities 442 (5,000)
___________ __________
Net cash used by operating activities (203,238) (90,480)
___________ __________
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of furniture and fixtures (10,461) (5,183)
Sale of short-term investments 222,960 85,833
___________ __________
Net cash provided by investing activities 212,499 75,494
___________ __________
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 9,261 (14,986)
CASH AND CASH EQUIVALENTS, beginning of period 93,521 79,220
___________ __________
CASH AND CASH EQUIVALENTS, end of period $ 102,782 $ 64,234
___________ __________
----------- ----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
CASH PAID FOR:
Income taxes $ - $ -
___________ __________
----------- ----------
Interest $ - $ -
___________ __________
----------- ----------
</TABLE>
See accompanying notes
7
WHITEWING LABS, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 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,
1999.
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 six month periods ended June 30, 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 June 30, 1999 and 2000.
4. Advertising
The Company had no commitments for magazine placements at June 30, 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 27 products and increased advertising,
resulting in an increase in the customer base from 187,000 at June 30, 1999 to
over 201,500 at June 30, 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 52% of the
Company's sales for the six months ended June 30, 2000, compared to
approximately 50.4% of net sales for the six months ended June 30, 1999. 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 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
9
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, 1999.
Results of Operations
Net Sales. The Company's net sales during the six months ended June 30, 2000
were $462,499, a decrease of approximately 52% over net sales of $962,175
during the six months ended June 30, 1999. At June 30, 2000, the Company's
customer base had grown to approximately 201,500, up from approximately 187,000
at June 30, 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 six months of 1999,
sales generated from these segments correspondingly declined. The Company
focused its primary efforts in the second 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 $66 and $90 respectively, for the six months ended June 30, 2000,
compared to average orders of approximately $68 from new customers and $82 from
existing customers for the six months ended June 30, 1999. Total sales orders
in the second quarter decreased primarily due to a reduction in advertising
dollars spent.
Gross Profit. Gross Profit was 81.7% and 84.2% of net sales for the six months
ended June 30, 2000 and 1999, respectively.
Advertising Expense. During the six months ended June 30, 2000, advertising
expense decreased to $55,941 compared to $327,953 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 12.1% compared to 34.1% of net sales for the same period last year.
Selling Expense. During the six months ended June 30, 2000, selling expenses
decreased to $201,596, compared to $521,162 for the same period in 1999, and
decreased as a percentage of net sales to 43.6%, compared to 54.2% of net sales
for the six months ended June 30, 1999. The decrease was a result of reduced
advertising expenditures.
General and Administrative Expense. General and administrative expenses
decreased in absolute dollars to $284,680 for the first six months of 2000,
from $314,702 for the first six months of 1999. For the six months ended June
10
30, 2000, general and administrative expenses represented 61.6% of net sales,
increasing from 32.7% for the six months ended June 30, 1999. 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, 2000 of $164,180, compared to losses from operations of
$353,607 during the six months ended June 30, 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 June 30, 2000, the Company had cash and short-term investments on hand of
$812,466 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.
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 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: August 14, 2000
12
