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 September 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 September 30, 1998
was 2,910,438.
1
WHITEWING LABS, INC.
FORM 10-QSB FOR QUARTER ENDED SEPTEMBER 30, 1998
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Balance Sheets at December 31, 1997 and
September 30, 1998 .........................................3-4
Statements of Operations for the Quarters and Nine Months
Ended September 30, 1997 and 1998...........................5
Statements of Cash Flows for the Nine Months Ended
September 30, 1997 and 1998.................................6
Notes to the Financial Statements.............................7-8
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition......................9-11
PART II. OTHER INFORMATION................................................12
SIGNATURE PAGE ............................................................13
2
<TABLE>
Whitewing Labs, Inc.
Balance Sheets
December 31, 1997 and September 30, 1998
<CAPTION>
ASSETS
December 31, September 30,
1997 1998
------------ ------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,593,779 $ 1,397,207
Inventories 124,484 78,452
Prepaid advertising 274,555 251,796
Other prepaid expenses 30,079 40,792
Other receivables 62,150 51,668
Deferred taxes 50,000 50,000
----------- -----------
Total current assets 2,135,047 1,869,915
----------- -----------
EQUIPMENT:
Furniture and fixtures 135,957 147,742
Less--accumulated depreciation (63,856) (85,296)
----------- -----------
72,101 62,446
----------- -----------
OTHER ASSETS:
8,245 24,715
----------- -----------
TOTAL ASSETS $ 2,215,393 $ 1,957,076
=========== ===========
</TABLE>
See accompanying notes
3
<TABLE>
Whitewing Labs, Inc.
Balance Sheets
December 31, 1997 and September 30, 1998
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, September 30,
1997 1998
------------ ------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 17,729 $ 21,247
Accrued liabilities 12,259 5,350
------------- ----------
Total current liabilities 29,988 26,597
------------- ----------
STOCKHOLDERS' 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 September 30, 1998 2,906 2,910
Paid-in capital 6,243,386 6,247,431
Accumulated deficit (4,060,887) (4,319,862)
------------ ------------
Stockholders' equity 2,185,405 1,930,479
------------ ------------
$ 2,215,393 $ 1,957,076
============ ============
</TABLE>
See accompanying notes
4
<TABLE>
Whitewing Labs, Inc.
Statements of Operations
(Unaudited)
<CAPTION>
Quarter ended Nine months ended
September 30, September 30,
1997 1998 1997 1998
-------- --------- ---------- ----------
<S> <C> <C> <C> <C>
NET SALES $987,518 $ 629,481 $ 2,256,927 $ 3,355,778
COST OF GOODS SOLD 130,978 93,323 317,936 532,201
-------- --------- ---------- -----------
Gross profit 856,540 536,158 1,938,991 2,823,577
OPERATING EXPENSES
Advertising 567,356 236,441 1,459,594 1,510,419
Selling 294,070 260,639 938,721 1,113,475
General and
administrative 151,224 171,098 500,337 530,886
--------- --------- --------- -----------
1,012,650 668,179 2,898,652 3,154,780
--------- --------- --------- -----------
Loss from operations (156,110) (132,021) (959,661) (331,203)
OTHER INCOME 19,838 25,388 66,286 72,228
-------- --------- --------- -----------
Loss before provision
for income taxes (136,272) (106,633) (893,375) (258,975)
PROVISION FOR INCOME TAXES 0 0 0 0
-------- --------- --------- -----------
Net loss attributable
to common stockholders $(136,272) (106,633) (893,375) (258,975)
========= ========== ========== ===========
LOSS PER SHARE $ (0.05) $ (0.04) $ (0.31) $ (0.09)
========= ========= ========== ===========
WEIGHTED AVERAGE NUMBER
OF COMMON BASIC
SHARES OUTSTANDING 2,864,938 2,910,438 2,864,603 2,888,771
========= ========= ========= ============
</TABLE>
See accompanying notes
5
<TABLE>
Whitewing Labs, Inc.
Statements of Cash Flows
For the Nine Months Ended September 30, 1997 and 1998
(Unaudited)
<CAPTION>
1997 1998
----------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(893,375) $ (258,975)
Adjustments to reconcile net loss to
net cash used in operating activities
Depreciation and amortization 85,368 21,440
Changes in assets and liabilities:
Inventories 44,809 46,032
Prepaid advertising 308,718 (2,905)
Other prepaid expenses 7,628 12,128
Other receivables 35,153 10,482
Deferred advertising (98,555) 0
Other assets (3,761) (13,647)
Accounts payable (270,420) 3,517
Accrued liabilities (15,239) (6,909)
---------- ----------
Net cash used by operating activities (799,674) (188,837)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of furniture and fixtures (12,666) (11,785)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common
stock upon exercise of options 1,330 4,050
Repurchase of common stock (31,487) 0
---------- ----------
Net cash provided (used) by
financing activities (30,157) 4,050
---------- ----------
NET DECREASE OF CASH AND
CASH EQUIVALENTS (842,497) (196,572)
CASH AND CASH EQUIVALENTS, beginning of period 2,524,391 1,593,779
---------- ----------
CASH AND CASH EQUIVALENTS, end of period $1,681,894 $1,397,207
========== ==========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid for income taxes $ 0 $ 0
========== ==========
Cash paid for interest $ 0 $ 0
========== ==========
</TABLE>
see accompanying notes
6
WHITEWING LABS, INC.
NOTES TO FINANCIAL STATEMENTS
September 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 Advertising
Prepaid advertising includes $193,715 of costs related to the development of
electronic in-home delivery of product advertising and journal costs totaling
$51,408. 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 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.
2. Loss per Common Share
For the nine month periods ended September 30, 1997 and 1998 respectively,
loss per common share is 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 $10,000 at December 31, 1997 and $5,000 at September 30,
1998.
5. Advertising
The Company has commitments for magazine placements of $655 at September
30, 1998.
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 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. The Company has made several substantial investments by both
expanding its product line to 27 products and increasing the customer base
from 122,000 in September of 1997 to over 185,000 currently. 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"R".
Sales of the Company's Prostsafe"R" accounted for approximately 44% of the
Company's sales for the nine months ended September 30, 1998, and for
approximately 65% of net sales for the nine months ended September 30, 1997.
The Company anticipates that sales of Prostsafe"R" will continue to contribute
a substantial but continually decreasing percentage of total revenues to
subsequent periods. 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.
8
As of September 30, 1998, the Company had an accumulated deficit of
$4,319,862. 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, 30 day 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, 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,
1997.
Results of Operations.
Net Sales. The Company's net sales during the nine months ended September
30,1998 were $3,355,778, a increase of approximately 49% over net sales
of$2,256,927 during the nine months ended September 30, 1997. At September
30,1998, the Company's customer base had grown to approximately 185,000, up
from approximately 122,000 at September 30, 1997. 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 nine 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 nine months ended September
30,1998, compared to average orders of approximately $63 from new customers
and $76 from existing customers respectively for the nine months ended
September 30, 1997. Total sales orders in the third quarter decreased due to
a reduction in advertising dollars spent
Gross Profit. Cost of goods sold for the Company's products represented 15.9%
and 14.1% of net sales for the nine months ended September 30, 1998 and 1997
respectively. The increase in the cost of goods as a percentage of net sales
was due to an increase in wholesale orders. During the nine months ended
September 30, 1998 and 1997,the Company recognized gross profits of $2,823,577
and $1,938,991, or 84.1% and 85.9% of net sales, respectively.
9
Advertising Expense. During the nine months ended September 30,
1998,advertising expense increased to $1,510,419, compared to $1,459,594 for
the same period last year. The increase reflects increased direct response TV
advertising in the first nine months of 1998. Advertising expense increased
in absolute dollars during the nine months ended September 30, 1998, but
decreased as a percentage of net sales to 45% compared to 64.7% of net sales
for the same period last year.
Selling Expense. During the nine months ended September 30, 1998, selling
expenses increased to $1,113,475, compared to $938,721 for the same period in
1997, and decreased as a percentage of net sales to 33.2%, compared to 41.6%of
net sales for the nine months ended September 30, 1997. The dollar increase
is primarily due to a selective use of testing of Electronic In-House
Marketing in the first nine months of 1998 compared to 1997. Also included in
selling expense is amortization of production costs of $61,925 in 1998 and
$71,907 in 1997
General and Administrative Expense. General and administrative expenses
increased in absolute dollars to $530,886 for the first nine months of
1998,from $500,337 for the first nine months of 1997, due to an increase in
accounting and stockholder relations costs. For the nine months ended
September 30, 1998, general and administrative expenses represented 15.8% of
net sales, decreasing from 22.2% for the nine months ended September 30, 1997.
Loss From Operations. The Company incurred losses from operations for the
nine months ended September 30, 1998 of $258,975, compared to losses from
operations of $893,375 during the nine months ended September 30, 1997. Losses
during the first nine 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 three months ended September 30, 1998 were smaller
than losses incurred for the three months ended September 30, 1997.
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 ofits 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.
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 September 30, 1998, the Company had cash on hand of $1,397,207 down $196,775
from the December 31, 1997 amount of $1,593,819. The decrease was primarily the
result of an increase in expenditures relating mainly to the development and
testing of electronic in-home delivery of product advertising.
10
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.
11
PART II OTHER INFORMATION
Submission of matters to a vote of security holders
The Company held its 1998 Annual Meeting of Stockholders on July 28, 1998 in Los
Angeles, California. One item was submitted to a vote of the stockholders:
The election of two directors to hold office for two year terms and until their
respective successors are elected and have qualified. Both nominees were
recommended by the Board of Directors, and both were elected. Set forth below
are the results of the voting, for each director.
For Withheld
--- --------
Cynthia A. Kolke 1,377,037 1,000
R. Bruce Stewart 1,377,037 1,000
Item 3. Exhibits and reports on Form 8-K
Exhibit 27, Financial Data Schedule Page 14
12
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: November 12, 1998 /s/ Cynthia Kolke
---------------------------
Cynthia Kolke,
President, Assistant Secretary
and Director
13
<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 September 30, 1997 and 1998, and is
qualified in its entirety by reference to such financial statements.
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-END> SEP-30-1997 SEP-30-1998
<CASH> 1,681,934 1,397,207
<SECURITIES> 0 0
<RECEIVABLES> 11,451 51,668
<ALLOWANCES> 0 0
<INVENTORY> 98,710 78,452
<CURRENT-ASSETS> 2,107,480 1,869,915
<PP&E> 132,109 147,742
<DEPRECIATION> (57,173) (85,296)
<TOTAL-ASSETS> 2,421,105 1,957,076
<CURRENT-LIABILITIES> 185,383 26,597
<BONDS> 0 0
0 0
0 0
<COMMON> 2,906 2,910
<OTHER-SE> 6,302,292 6,247,431
<TOTAL-LIABILITY-AND-EQUITY> 2,421,105 1,957,076
<SALES> 2,256,927 3,355,778
<TOTAL-REVENUES> 2,256,927 3,355,778
<CGS> 317,936 532,201
<TOTAL-COSTS> 2,716,251 3,156,095
<OTHER-EXPENSES> 500,337 530,886
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (893,375) (258,975)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (893,375) (258,975)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (893,375) (258,975)
<EPS-PRIMARY> (0.31) (0.09)
<EPS-DILUTED> (0.31) (0.09)
</TABLE>
