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, 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 October 18, 1999 was
2,925,439.
1
WHITEWING LABS, INC.
FORM 10-QSB FOR QUARTER ENDED SEPTEMBER 30, 1999
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Balance Sheets at December 31, 1998 and September 30, 1999 3
Statements of Operations for the Quarter and Nine Months Ended
September 30, 1998 and 1999 5
Statements of Cash Flows for the Nine Months Ended
September 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 SEPTEMBER 30, 1999
<CAPTION>
ASSETS
December 31, September 30,
1998 1999
____________ ____________
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 93,521 $ 72,076
Short-term investments 1,289,025 935,049
Inventories 79,681 93,027
Prepaid advertising 245,117 146,948
Other prepaid expenses 70,181 8,282
Other receivables 17,998 19,918
Deferred taxes 50,000 50,000
____________ ___________
Total current assets 1,845,523 1,325,300
EQUIPMENT:
Furniture and fixtures 150,918 161,379
Less--accumulated depreciation (92,378) (116,188)
____________ ___________
58,540 45,191
____________ ___________
OTHER ASSETS 48,286 48,192
____________ ___________
TOTAL ASSETS $ 1,952,349 $ 1,418,683
=========== ===========
</TABLE>
See accompanying notes
3
<TABLE>
WHITEWING LABS, INC.
BALANCE SHEETS
DECEMBER 31, 1998 AND SEPTEMBER 30, 1999
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
December 31, September 30,
1998 1999
____________ _____________
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 29,985 $ 43,980
Accrued liabilities 5,519 5,756
____________ ____________
Total current liabilities 35,504 49,736
____________ ____________
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 6,248,752
Accumulated deficit (4,334,826) (4,882,730)
____________ ____________
Shareholders' equity 1,916,845 1,368,947
____________ ____________
$ 1,952,349 $ 1,418,683
=========== ===========
</TABLE>
See accompanying notes
4
<TABLE>
WHITEWING LABS, INC.
STATEMENTS OF OPERATIONS
FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
(UNAUDITED)
<CAPTION>
Quarter ended Nine months ended
September 30, September 30,
1998 1999 1998 1999
___________ _________ ___________ __________
<S> <C> <C> <C> <C>
NET SALES $ 629,481 $ 371,023 $ 3,355,778 $1,333,947
COST OF GOODS SOLD 93,323 65,534 532,201 217,498
___________ _________ ___________ __________
Gross profit 536,158 305,489 2,823,577 1,116,449
OPERATING EXPENSES
Advertising 236,441 205,819 1,510,419 533,772
Selling 260,639 205,479 1,113,475 726,641
General and administrative 171,098 144,042 530,886 458,744
___________ _________ ___________ __________
668,179 555,340 3,154,780 1,719,157
___________ _________ ___________ __________
(132,021) (249,851) (331,203) (602,708)
OTHER INCOME 25,388 17,374 72,228 54,804
___________ _________ ___________ __________
Loss before income taxes (106,633) (232,477) (258,975) (547,904)
PROVISION FOR INCOME TAXES - - - -
___________ _________ ___________ __________
NET LOSS $ (106,633) $(232,477) $ (258,975) $ (547,904)
========== ========= ========== ==========
BASIC AND DILUTED
LOSS PER COMMON SHARE $ (0.04) $ (0.08) $ (0.09) $ (0.19)
========== ========= ========== ==========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 2,910,438 2,925,442 2,888,771 2,925,439
========== ========= ========== ==========
</TABLE>
See accompanying notes
5
<TABLE>
WHITEWING LABS, INC.
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
(UNAUDITED)
<CAPTION>
1998 1999
__________ __________
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (258,975) $ (547,904)
Adjustments to reconcile net loss to net cash
flows from operating activities
Depreciation and amortization 21,440 23,810
Changes in assets and liabilities:
Inventories 46,032 (13,346)
Prepaid advertising (2,905) 98,169
Other prepaid expenses 12,128 61,899
Other receivables 10,482 (1,920)
Other assets (13,647) 94
Accounts payable 3,517 13,995
Accrued liabilities (6,909) 237
___________ __________
Net cash used by operating activities (188,837) (364,966)
___________ __________
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of furniture and fixtures (11,785) (10,461)
Sale of short-term investments - 353,976
___________ __________
Net cash provided (used) by investing activities (11,785) 343,515
___________ __________
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock
upon exercise of options 4,050 6
___________ __________
NET DECREASE IN CASH AND CASH EQUIVALENTS (196,572) (21,445)
CASH AND CASH EQUIVALENTS, beginning of period 1,593,779 93,521
___________ __________
CASH AND CASH EQUIVALENTS, end of period $ 1,397,207 $ 72,076
============ ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
CASH PAID FOR:
Income taxes $ - $ -
============ ==========
Interest $ - $ -
============ ==========
</TABLE>
See accompanying notes
6
WHITEWING LABS, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 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 $36,000 of costs related to the development of
electronic in-home delivery of product advertising and journal costs
totaling $47,990. The Company was obligated to pay related talent costs of
4 percent of gross profits from sales generated in 1999 for just the
products covered by that ad. A new set of product development is underway.
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.
The original product advertising development cost will be completely
expensed by the end of calendar year 1999.
2. Loss Per Common Share
For the nine month periods ended September 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 September 30, 1998 and 1999.
4. Advertising
The Company had no commitments for magazine placements at September 30,
1999.
7
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
General
The Company formulates 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 30 products and more targeted advertising,
resulting in an increase in the customer base from 185,000 at September 30,
1998 to approximately 194,000 at September 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 51.2% of the
Company's sales for the nine months ended September 30, 1999, compared to
approximately 44% of net sales for the nine months ended September 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 10-KSB for the year ended December 31,
1998.
Results of Operations
Net Sales. The Company's net sales during the nine months ended September 30,
1999 were $1,333,947, a decrease of 60.3% over net sales of $3,355,778 during
the nine months ended September 30, 1998. At September 30, 1999, the Company's
customer base had grown to approximately 194,000, up from approximately 185,000
at September 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 nine months of
1998, sales generated from these segments correspondingly declined. The
Company focused its primary efforts in the first nine months of 1999 on
generating additional revenues from existing customers, with less emphasis on
growing the customer base. The average orders from new and existing customers
were approximately $68 and $84 respectively, for the nine months ended
September 30, 1999, compared to average orders of approximately $64 from new
customers and $83 from existing customers for the nine months ended September
30, 1998. Total sales orders in the third quarter decreased primarily due to a
reduction in advertising dollars spent. Losses during the first nine months of
1999 were mainly attributable to reduced revenue as the Company started to
experience increased competitive activity from large nutritional companies.
Whitewing continued to decrease advertising with the least profitability.
Gross Profit. Gross Profit was 83.7% and 84.1% of net sales for the nine
months ended September 30, 1999 and 1998, respectively.
Advertising Expense. During the nine months ended September 30, 1999,
advertising expense decreased to $533,772 compared to $1,510,419 for the same
period last year. The decrease reflects decreased direct response TV
advertising in the first nine months of 1999. Advertising expense decreased
as a percentage of net sales to 40.0% compared to 45.0% of net sales for the
same period last year.
Selling Expense. During the nine months ended September 30, 1999, selling
expenses decreased to $726,641, compared to $1,113,475 for the same period in
1998, and increased as a percentage of net sales to 54.5%, compared to 33.2% of
net sales for the nine months ended September 30, 1998. The percentage
increase was primarily due to a selective use of testing of Electronic In-House
Marketing in the first nine months of 1999 compared to 1998.
9
General and Administrative Expense. General and administrative expenses
decreased in absolute dollars to $458,744, the primary reason was cost cutting,
for the first nine months of 1999, from $530,886 for the first nine months of
1998. For the nine months ended September 30, 1999, general and administrative
expenses represented 34.4% of net sales, increasing from 15.8% for the nine
months ended September 30, 1998. The percentage increase was due primarily to
reduced revenue.
Loss From Operations. The Company incurred losses from operations for the nine
months ended September 30, 1999 of $547,904, compared to losses from operations
of $258,975 during the nine months ended September 30, 1998. Losses during the
first nine months of 1999 were mainly attributable to reduced revenue as the
Company started to experience increased competitive activity from large
nutritional companies. Whitewing continued to decrease advertising with the
least profitability.
The Company significantly reduced advertising and selling expenditures and
focused on efforts to generate additional revenue from existing customers.
We still are witnessing a softness in the marketplace as reflected in the lower
sales and the increased operating loss in the third quarter of 1999 which have
continued into the fourth quarter of 1999. To meet this problem we are
concentrating on gaining new distribution of our products. A major element
will be to launch new and innovative products. Also, we are initiating a new
advertising campaign to launch these products.
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, 1999, the Company had cash and short-term investments on hand
of $1,007,125 down $375,421 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: November 10, 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 September 30, 1998 and 1999, 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-30-1998 SEP-30-1999
<CASH> 1,397,207 1,007,125
<SECURITIES> 0 0
<RECEIVABLES> 51,668 19,918
<ALLOWANCES> 0 0
<INVENTORY> 78,452 93,027
<CURRENT-ASSETS> 1,869,915 1,325,300
<PP&E> 147,742 161,379
<DEPRECIATION> 85,296 116,188
<TOTAL-ASSETS> 1,957,076 1,418,683
<CURRENT-LIABILITIES> 26,597 49,736
<BONDS> 0 0
0 0
0 0
<COMMON> 2,910 2,925
<OTHER-SE> 6,247,431 6,248,752
<TOTAL-LIABILITY-AND-EQUITY> 1,957,076 1,418,683
<SALES> 3,355,778 1,333,947
<TOTAL-REVENUES> 3,355,778 1,333,947
<CGS> 532,201 217,498
<TOTAL-COSTS> 3,156,095 1,477,911
<OTHER-EXPENSES> 530,886 458,745
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (258,975) (547,904)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (258,975) (547,904)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (258,975) (547,904)
<EPS-BASIC> (0.09) (0.19)
<EPS-DILUTED> (0.09) (0.19)
</TABLE>
