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, 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 October 18, 2000 was
2,925,443.
1
WHITEWING LABS, INC.
FORM 10-QSB FOR QUARTER ENDED SEPTEMBER 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 September 30, 2000 4
Statements of Operations for the Three and Nine Months Ended
September 30, 1999 and 2000 6
Statements of Cash Flows for the Six Months Ended
September 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 condensed balance sheet of Whitewing Labs,
Inc., as of September 30, 2000, and the related condensed statements of
operations and cash flows for the three and nine month periods then ended.
These financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. 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 operations, 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 condensed 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
October 26, 2000
3
<TABLE>
WHITEWING LABS, INC.
BALANCE SHEETS
DECEMBER 31, 1999 AND SEPTEMBER 30, 2000
<CAPTION>
ASSETS
December 31, September 30,
1999 2000
___________ ___________
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 79,220 $ 69,633
Short-term investments 834,065 657,846
Inventories 88,012 73,756
Prepaid advertising 30,433 57,848
Other prepaid expenses 55,405 23,670
Other receivables 22,135 22,678
Deferred taxes 25,000 25,000
___________ ___________
Total current assets 1,134,270 930,431
EQUIPMENT:
Furniture and fixtures 161,379 167,512
Less--accumulated depreciation (124,288) (143,667)
___________ ___________
37,091 23,845
___________ ___________
OTHER ASSETS:
Trademarks 44,213 50,266
Other 7,702 4,373
___________ ___________
51,915 54,639
___________ ___________
TOTAL ASSETS $ 1,223,276 $ 1,008,915
___________ ___________
----------- -----------
</TABLE>
See accompanying notes
4
<TABLE>
WHITEWING LABS, INC.
BALANCE SHEETS
DECEMBER 31, 1999 AND SEPTEMBER 30, 2000
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
December 31, September 30,
1999 2000
___________ ___________
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 15,671 $ 29,060
Accrued liabilities 5,000 -
___________ ___________
Total current liabilities 20,671 29,060
___________ ___________
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) (5,271,822)
___________ ___________
Shareholders' equity 1,202,605 979,855
___________ ___________
$ 1,223,276 $ 1,008,915
___________ ___________
----------- -----------
</TABLE>
See accompanying notes
5
<TABLE>
WHITEWING LABS, INC.
STATEMENTS OF OPERATIONS
FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000
(UNAUDITED)
<CAPTION>
Quarter ended September 30, Nine months ended September 30,
1999 2000 1999 2000
_________ _________ __________ __________
<S> <C> <C> <C> <C>
NET SALES $ 371,023 $ 187,375 $ 1,333,947 $ 649,874
COST OF GOODS SOLD 65,534 35,009 217,498 119,471
_________ _________ __________ __________
Gross profit 305,489 152,366 1,116,449 530,403
OPERATING EXPENSES
Advertising 205,819 43,225 533,772 99,166
Selling 205,479 87,879 726,641 289,475
General and
administrative 144,042 131,873 458,744 416,553
_________ _________ __________ __________
555,340 262,977 1,719,157 805,194
_________ _________ __________ __________
(249,851) (110,611) (602,708) (274,791)
OTHER INCOME 17,374 19,75 354,804 52,041
_________ _________ __________ __________
Loss before income
taxes (232,477) (90,858) (547,904) (222,750)
PROVISION FOR INCOME TAXES - - - -
_________ _________ __________ __________
NET LOSS $ (232,477)$ (90,858) $ (547,904) $ (222,750)
_________ _________ __________ __________
--------- --------- ---------- ----------
BASIC AND DILUTED
LOSS PER COMMON
SHARE $ (0.08)$ (0.03) $ (0.19) $ (0.08)
_________ _________ __________ __________
--------- --------- ---------- ----------
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES
OUTSTANDING 2,925,442 2,925,443 2,925,439 2,925,443
_________ _________ __________ __________
--------- --------- ---------- ----------
</TABLE>
See accompanying notes
6
<TABLE>
WHITEWING LABS, INC.
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000
(UNAUDITED)
<CAPTION>
1999 2000
___________ __________
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (547,904) $ (222,750)
Adjustments to reconcile net loss to net cash
flows from operating activities
Depreciation and amortization 23,810 19,379
Changes in assets and liabilities:
Inventories (13,346) 14,256
Prepaid advertising 98,169 (27,415)
Other prepaid expenses 61,899 31,735
Other receivables (1,920) (543)
Other assets 94 (2,724)
Accounts payable 13,995 13,389
Accrued liabilities 237 (5,000)
___________ __________
Net cash used by operating activities (364,966) (179,673)
___________ __________
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of furniture and fixtures (10,461) (6,133)
Sale of short-term investments 353,976 176,219
___________ __________
Net cash provided (used) by investing activities 343,515 170,086
___________ __________
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock
upon exercise of options 6 -
___________ __________
NET DECREASE IN CASH AND CASH EQUIVALENTS (21,445) (9,587)
CASH AND CASH EQUIVALENTS, beginning of period 93,521 79,220
___________ __________
CASH AND CASH EQUIVALENTS, end of period $ 72,076 $ 69,633
___________ __________
----------- ----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
CASH PAID FOR:
Income taxes $ - $ -
___________ __________
----------- ----------
Interest $ - $ -
___________ __________
----------- ----------
</TABLE>
See accompanying notes
7
WHITEWING LABS, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(Unaudited)
1. Summary of Significant Accounting Policies
a. Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with the instructions to Form 10-QSB. The balance sheet,
statement of operations and cash flows at and for the periods ended
September 30, 2000, have been reviewed by the Company's independent
auditors in accordance with the professional standards and procedures as
set forth in Statement of Auditing Standards No. 71 (SAS 71). SAS 71
procedures for conducting a review of interim financial information
generally are limited to inquiries and analytical procedures concerning
significant accounting matters relating to the financial information to be
reported. They do not include all information and footnotes necessary for
a fair presentation of financial position and results of operations and
cash flows in conformity with generally accepted accounting principles.
These consolidated financial statements should be read in conjunction with
the consolidated financial statements and related notes contained in the
Company's Annual Report on Form 10-KSB for the year ended December 31,
1999. In the opinion of management, all adjustments considered necessary
for a fair presentation have been included in the interim period.
Operating results for the nine months ended September 30, 2000 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 2000.
b. Prepaid and Deferred Advertising
Prepaid advertising includes $25,807 of costs related to the development of
electronic in-home delivery of product advertising and Journal of Natural
Health (TM) costs totaling $32,041. The Company expenses other costs of
non-print media as incurred.
2. Loss Per Common Share
For the nine month periods ended September 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 December 31, 1999.
4. Advertising
The Company had no commitments for magazine placements at September 30,
2000.
8
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 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 194,000 at September 30,
1999 to approximately 205,000 at September 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 Prostsafe (R) accounted for approximately 52.1% of the Company's
sales for the nine months ended September 30, 2000, compared to approximately
51% of net sales for the nine months ended September 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 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
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.
9
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, 1999.
Results of Operations
Net Sales. Net sales during the nine months ended September 30, 2000 were
$649,874, a decrease of 51.3% over net sales of $1,333,947 during the nine
months ended September 30, 1999. At September 30, 2000, the Company's customer
base had grown to approximately 205,000, up from approximately 194,000 at
September 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 nine months of
1999, sales generated from these segments correspondingly declined. The
Company focused its primary efforts in the first nine months of 2000 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 $96 and $99 respectively, for the nine months ended
September 30, 2000, compared to average orders of approximately $68 from new
customers and $84 from existing customers for the nine months ended September
30, 1999. Total sales orders in the third quarter decreased primarily due to a
reduction in advertising dollars spent. Losses during the first nine months of
2000 were mainly attributable to reduced revenue as the Company continued to
experience increased competitive activity from large nutritional companies.
Whitewing continued to reduce advertising activities with the least contribution
to profitability.
Gross Profit. Gross Profit was 81.6% and 83.7% of net sales for the nine
months ended September 30, 2000 and 1999, respectively.
Advertising Expense. During the nine months ended September 30, 2000,
advertising expense decreased to $99,166 compared to $533,772 for the same
period last year. The decrease reflects decreased direct response TV
advertising in the first nine months of 2000. Advertising expense decreased as
a percentage of net sales to 15.3% compared to 40.0% of net sales for the same
period last year.
Selling Expense. During the nine months ended September 30, 2000, selling
expenses decreased to $289,475, compared to $726,641 for the same period in
1999, and increased as a percentage of net sales to 44.5%, compared to 54.5% of
net sales for the nine months ended September 30, 1999. The percentage
decrease was primarily due to a selective use of testing of Electronic In-House
Marketing in the first nine months of 2000 compared to 1999.
10
General and Administrative Expense. Primarily as a result of cost-cutting
measures, general and administrative expenses decreased in absolute dollars to
$416,553 for the first nine months of 2000, from $458,744 for the first nine
months of 1999. For the nine months ended September 30, 2000, general and
administrative expenses represented 64.1% of net sales, increasing from 34.4%
for the nine months ended September 30, 1999. 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, 2000 of $222,750, compared to losses from operations
of $547,904 during the nine months ended September 30, 1999. Losses during the
first nine months of 2000 were mainly attributable to reduced revenue as the
Company continued to experience increased competitive activity from large
nutritional companies. Whitewing continued to reduce advertising expenditures
with the least contribution to profitability.
During the first nine months of 2000, the Company significantly reduced
advertising and selling expenditures and focused on efforts to generate
additional revenue from existing customers.
We still are experiencing a softness in the marketplace as reflected in the
lower sales and the increased operating loss in the third quarter of 2000 which
have continued into the fourth quarter of 2000. In an effort to address this
problem we are concentrating on gaining new distribution channels for our
products. A major element of this strategy will be to launch new and
innovative products. We also plan to initiate a new advertising campaign to
launch these products. Our ability to successfully introduce new products will
be subject to numerous factors, many of which are beyond our control, and
therefore cannot be assured.
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, 2000, the Company had cash and short-term investments on hand
of $727,479 down $185,806 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 expected.
The Company believes that the remaining proceeds from the offering will finance
the Company's operating 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.
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 10, 2000
12
