SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________
FORM 10-Q
(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, 2001
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____________________to______________________
Commission File Number: 000-23329
Charles & Colvard, Ltd.
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(Exact name of Registrant as specified in its charter)
North Carolina 56-1928817
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3800 Gateway Boulevard, Suite 310, Morrisville, N.C. 27560
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(Address of principal executive offices)
919-468-0399
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(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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__
--
As of April 30, 2001 there were 13,447,714 shares of the Registrant's Common
Stock, no par value per share, outstanding.
1
Charles & Colvard, Ltd.
Index
Part I. Financial Information
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Item 1. Financial Statements
Condensed Consolidated Statements of Operations - Three Months
Ended March 31, 2001 And 2000
Condensed Consolidated Balance Sheets - March 31, 2001 And
December 31, 2000
Condensed Consolidated Statements Of Cash Flows - Three Months
Ended March 31, 2001 And 2000
Notes To Condensed Consolidated Financial Statements
Item 2. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations
Item 3. Quantitative And Qualitative Disclosures About Market Risk
Part II. Other Information
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Item 6. Exhibits And Reports On Form 8-K
Signatures
2
Part I. Financial Information
Item 1. Financial Statements
Charles & Colvard, Ltd.
Condensed Consolidated Statements Of Operations
(Unaudited)
Three Months Ended March 31,
-----------------------------------------
2001 2000
------------------ ------------------
Net sales $ 2,899,984 $ 3,011,250
Cost of goods sold 1,262,699 1,376,748
------------------ ------------------
Gross profit 1,637,285 1,634,502
Operating expenses:
Marketing and sales 713,582 2,456,176
General and administrative 699,246 989,329
Research and development 1,033 439,632
Other expense 46,071 ---
------------------ ------------------
Total operating expenses 1,459,932 3,885,137
Operating income (loss) 177,353 (2,250,635)
Interest income, net 69,821 140,474
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Net income (loss) $ 247,174 $(2,110,161)
================== ==================
Net income (loss) per share:
Basic $ 0.03 $ (0.30)
================= ==================
Diluted $ 0.03 $ (0.30)
================== ==================
Weighted-average common shares:
Basic 9,838,489 7,109,304
================== ==================
Diluted 9,860,216 7,109,304
================== ==================
See Notes to Condensed Consolidated Financial Statements.
3
Charles & Colvard, Ltd.
Condensed Consolidated Balance Sheets
March 31, 2001 December 31, 2000
---------------- -------------------
Assets (Unaudited)
Current Assets:
Cash and equivalents $ 9,070,288 $ 3,826,402
Accounts receivable 1,566,616 1,468,041
Interest receivable 34,375 18,890
Inventory, net 22,418,669 23,071,416
Prepaid expenses and other assets 226,036 301,267
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Total current assets 33,315,984 28,686,016
Equipment, net 473,354 552,272
Patent and license rights, net 365,041 369,706
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Total assets $ 34,154,379 $ 29,607,994
============ ============
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable:
Cree, Inc. $ --- $ 1,147,718
Other 439,165 847,428
Accrued expenses and other liabilities 486,261 640,068
Deferred revenue 85,783 112,996
------------ ------------
Total current liabilities 1,011,209 2,748,210
Commitments
Shareholders' Equity:
Common stock 55,258,692 49,226,697
Additional paid-in capital - stock options 1,930,961 1,926,744
Accumulated deficit (24,046,483) (24,293,657)
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Total shareholders' equity 33,143,170 26,859,784
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$ 34,154,379 $ 29,607,994
============ ============
See Notes to Condensed Consolidated Financial Statements
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Charles & Colvard, Ltd.
Condensed Consolidated Statements Of Cash Flows
(Unaudited)
Three Months Ended March 31,
--------------------------------------
2001 2000
------------ ------------
Operating Activities:
Net income (loss) $ 247,174 $ (2,110,161)
Adjustments:
Depreciation and amortization 48,879 256,831
Stock option compensation 4,217 52,666
Loss on disposal of long-term assets 46,071 835
Change in provision for uncollectible accounts 100,000 145,000
Change in operating assets and liabilities:
Net change in assets 513,918 (2,412,898)
Net change in liabilities (1,737,001) (1,713,356)
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Net cash used in operating activities (776,742) (5,781,083)
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Investing Activities:
Purchase of equipment (10,221) (5,127)
Patent and license rights costs (1,146) (22,769)
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Net cash used in investing activities (11,367) (27,896)
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Financing Activities:
Stock options exercised --- 98,894
Proceeds from stock rights offering, net 6,031,995 ---
------------ ------------
Net cash provided by financing activities 6,031,995 98,894
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Net change in cash and equivalents 5,243,886 (5,710,085)
Cash and equivalents, beginning of period 3,826,402 13,161,665
------------ ------------
Cash and equivalents, end of period $ 9,070,288 $ 7,451,580
============ ============
See Notes to Condensed Consolidated Financial Statements.
5
Charles & Colvard, Ltd.
Notes To Condensed Consolidated Financial Statements
(Unaudited)
1. Basis Of Presentation
The accompanying unaudited financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America
for interim financial information. However, certain information or footnote
disclosures normally included in complete financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been condensed, or omitted, pursuant to the rules and regulations
of the Securities and Exchange Commission. In the opinion of management, the
financial statements include all normal recurring adjustments which are
necessary for the fair presentation of the results of the interim periods
presented. Interim results are not necessarily indicative of results for the
year. Certain reclassifications have been made to prior year's financial
statements to conform to the classifications used in fiscal 2001. These
financial statements should be read in conjunction with the Company's audited
financial statements for the year ended December 31, 2000, as set forth in the
Company's Form 10-K, filed with the Securities and Exchange Commission on March
29, 2001.
In preparing financial statements that conform with accounting principles
generally accepted in the United States of America, management must make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements and amounts of revenues and expenses reflected during the
reporting period. Actual results could differ from those estimates.
In October 2000, the Company established a wholly-owned subsidiary in Hong Kong,
Charles & Colvard HK Ltd., for the purpose of gaining better access to the
important Far Eastern markets. All inter-company accounts have been eliminated.
The Company does not anticipate establishing additional subsidiaries in the near
future.
All the Company's activities are within a single business segment. Export sales
aggregated approximately $700,000 and $1,300,000 for the three months ended
March 31, 2001 and 2000, respectively.
2. Inventories
Inventories are stated at the lower of cost or market determined on a first in,
first out basis. Finished goods are shown net of a reserve for excess jewelry
inventory of $285,000 and $270,000 respectively. Test instruments are shown net
of a reserve for excess inventory of $465,000 and $500,000 respectively.
December 31
----------------------------------------------------
2001 2000
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Moissanite
Raw materials $ 916,926 $ 1,482,969
Work-in-process 1,571,510 3,105,096
Finished goods 19,865,252 18,411,563
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22,353,688 22,999,628
Test instruments 64,981 71,788
------------------------ -----------------------
Total Inventory $ 22,418,669 $ 23,071,416
======================== =======================
3. Common Stock
On February 21, 2001, the Company completed a Rights Offering to its
shareholders. The Company issued an aggregate of 6,246,735 shares of common
stock at $1 per share. Net proceeds from the offering, after expenses, were
$6,031,995. These proceeds will be used for working capital purposes.
6
4. Stock Based Compensation
During the quarter ended March 31, 2001, in accordance with Accounting
Principles Board Opinion No. 25 and Statement of Financial Accounting Standards
(FAS) No. 123, the Company recorded compensation expense of $4,217 relating to
stock options. Compensation expense related to stock options for the quarter
ended March 31, 2000 was $52,666. This compensation expense is recorded in
general and administrative expense in the statements of operations.
5. Newly Adopted Accounting Pronouncements
In June 1998, FAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, was issued. This statement establishes standards for valuing and
reporting at fair value all derivative instruments as either assets or
liabilities. FAS 133, as amended by FAS 137, was effective January 1, 2001.
The adoption of FAS 133 did not have a material effect on the Company's
consolidated financial statements.
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Item 2: Management's Discussion And Analysis Of Financial Condition And Results
of Operations
This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. These forward-looking statements represent our
judgment on future events. Our business is subject to business and economic
risks and uncertainties that could cause our actual performance and results to
differ materially from those expressed or implied by any of the forward-looking
statements included herein. These risks and uncertainties are described under
the heading "Business Risks" in our Form 10-K for the year ended December 31,
2000, which was filed with the Securities and Exchange Commission on March 29,
2001.
Overview
We manufacture, market and distribute Charles & Colvard created moissanite
jewels (also called moissanite or moissanite jewels) for sale in the worldwide
jewelry market. Moissanite, also known by its chemical name, silicon carbide
(SiC), is a rare, naturally occurring mineral found primarily in meteorites. As
the sole manufacturer of scientifically-made moissanite jewels, our strategy is
to create a unique brand image which positions moissanite as a jewel in its own
right, distinct from all other jewels based on its fire, brilliance, luster,
durability and rarity.
From our inception in June 1995 through June 30, 1998, we were a development
stage enterprise, devoting our resources to fund research and development of
colorless, scientifically made moissanite jewels. At the same time, we
assembled a management team, conducted market research and developed our
strategic business plans. We began shipping moissanite to authorized retail
jewelers in Atlanta and Miami/Ft. Lauderdale during the second quarter of 1998.
At that time, we launched limited consumer-focused advertising and promotion
activities in those areas. In addition, we entered into exclusive distribution
agreements with a number of international distributors.
Through the first half of 1999, we limited our efforts to expand the
distribution of moissanite jewels as a result of limited product availability
and our lack of confidence in the quality of the SiC crystals we were receiving.
Late in the second quarter of 1999, we began to receive indications that the
quality of the SiC crystals was improving rapidly. The rate of improvement in
the quality of the SiC crystals continued to accelerate through the end of 1999,
far exceeding our expectations. At the same time, we experienced a decline in
shipments of moissanite jewels during the third quarter of 1999 as a result of
the following:
. a slow growth in the addition of domestic retailers;
. lack of targeted retailer-driven marketing programs abroad; and
. poor overall jewelry market performance in certain international markets.
The improved supply of SiC crystals along with the decrease in sales led to a
significant increase in inventories of moissanite jewels. In December 1999, we
agreed with Cree to reschedule approximately 50% of the expected shipments of
SiC crystals from the first half of 2000 to the second half of 2000.
With the improvements in the supply of saleable moissanite jewels, we launched
our strategic global marketing program in the fourth quarter of 1999 to spur
consumer awareness of moissanite jewels. During 2001, this program is being
refocused to emphasize use of public relations activities to increase consumer
brand awareness while reducing higher cost print and media advertising. In
addition, in March 2000, we entered into distribution agreements with Stuller
Settings, Inc. and Rio Grande, two of the largest suppliers of jewelry-related
products to the jewelry industry, for the North American distribution of
moissanite. We have also entered into several agreements with domestic jewelry
manufacturers. Through these agreements with Stuller, Rio Grande and jewelry
manufacturers and the brand awareness created by our marketing program, our goal
is to rapidly increase the introduction of moissanite into the domestic jewelry
market while maintaining average selling prices. However, because of the early
stage of development of these strategic efforts, we have no assurance that these
efforts will be successful.
We made significant investments in our branding program and in developing our
manufacturing and operational infrastructures during the fourth quarter of 1999
and through 2000, all in anticipation of future significant and rapid growth.
During the third and fourth quarters of 2000, we restructured our operations to
reduce our overall general and administrative expense levels in order to
conserve cash and attempt to position the Company to achieve
8
profitability in the future. Additionally, research and development expenses
under the Development Agreement with Cree were suspended effective as of January
2001.
Our strategy for 2001 is to remain profitable and conserve cash by achieving
modest growth in sales while maintaining our lower marketing and advertising
costs, maintaining our lower general and administrative expense levels,
continuing to curtail research and development expenses and reducing
inventories. We believe that our sales can increase as the distribution of
moissanite jewels expands domestically and internationally. We believe that our
current infrastructure and stage of product development can support a
significant growth in sales. Although we attained our goal to achieve
profitability in the first quarter of 2001, we cannot be sure that we will ever
be able to achieve increased sales or sustain profitability.
As discussed below, the shift in our domestic distribution strategy may affect
our historical relationships between revenues and expenses as well as our
liquidity and capital requirements.
Results Of Operations
Three Months ended March 31, 2001 compared with Three Months ended March 31,
2000.
Net sales were $2,899,984 for the three months ended March 31, 2001 compared to
$3,011,250 for the three months ended March 31, 2000, a decrease of $111,266 or
3.7%. Shipments of moissanite jewels increased in the first quarter of 2001 to
approximately 15,400 carats from 15,300 carats in the first quarter of 2000.
This marginal increase in shipments of moissanite jewels was offset by a
reduction in the average selling price due to volume purchase discounts offered
to our new domestic distribution and manufacturing partners. Our new partners
began their distribution efforts during the second quarter of 2000. Our
distribution goal is to increase carat shipments to these distributors
significantly over time while keeping average selling prices stable with any
variation dependant upon the mix of sizes sold.
Although there was a small decrease in sales, domestic sales increased to
approximately $2,200,000 for the three months ended March 31, 2001 compared to
approximately $1,700,000 for the three months ended March 31, 2000. This
increase was offset by a decrease in international sales. International sales
were approximately $700,000 for the three months ended March 31, 2001 compared
to approximately $1,300,000 for the three months ended March 31, 2000. The
decrease in international sales can be attributed to the strong dollar and the
lack of substantial advertising and public relations activities.
Our gross profit margin was 56.5% for the three months ended March 31, 2001
compared to 54.3% for the three months ended March 31, 2000. The increased
gross margin rate relates to improved yield of moissanite jewels from SiC
crystals, which was partially offset by a reduction in the per carat average
selling price of moissanite jewels.
Marketing and sales expenses were $713,582 for the three months ended March 31,
2001 compared to $2,456,176 for the three months ended March 31, 2000, a
decrease of $1,742,594 or 70.9%. The decrease resulted primarily from a $1.5
million reduction in marketing and advertising costs consistent with our new
strategy to increase consumer impressions through lower cost approaches such as
public relations activities and media editorial coverage, as well as decreased
compensation costs.
General and administrative expenses were $699,246 for the three months ended
March 31, 2001 compared to $989,329 for the three months ended March 31, 2000, a
decrease of $290,083 or 29.3%. The decrease resulted from a $130,000 decrease
in compensation costs, as well as decreases in rent, bad debt expense,
production costs of our annual report, and other general overhead items
consistent with our efforts to cut costs
Research and development expenses were $1,033 for the three months ended March
31, 2001 compared to $439,632 for the three months ended March 31, 2000, a
decrease of $438,599 or 99.8%. The decrease resulted from the suspension of
development efforts with Cree effective January 1, 2001.
Other expenses for the three months ended March 31, 2001 amounted to $46,071
which resulted from the write-down to market of certain fixed assets scheduled
for disposal.
9
Net interest income was $69,821 for the three months ended March 31, 2001
compared to $140,474 for the three months ended March 31, 2000, a decrease of
$70,653 or 50.3%. This decrease resulted from lower interest income earned on
lower average cash balances.
Liquidity And Capital Resources
- -------------------------------
At March 31, 2001, we had $9.1 million of cash and cash equivalents and $32.3
million of working capital. During the three months ended March 31, 2001, we
used $777,000 to fund operations; the decrease can be attributed to the
satisfaction of all outstanding liabilities to Cree. In addition, we completed a
Rights Offering to our shareholders on February 21, 2001, raising $6 million of
net proceeds. These proceeds will be used for working capital purposes. We
believe our existing capital resources are adequate to satisfy our capital
requirements for at least the next 12 months.
In December 2000, we agreed with Cree on a framework for purchase of SiC
crystals during 2001. Under the terms of the Agreement, we will be obligated to
purchase SiC crystals only upon issuance and Cree's acceptance of purchase
orders. We have committed to purchase approximately $400,000 of SiC crystals
during the second quarter of 2001. The price paid to Cree will be based upon a
set price per gram for specified SiC crystals.
The 4-year Development Agreement with Cree, as amended, requires us to fund a
development program at Cree for $1.44 million annually through June 30, 2002.
Either party may terminate the agreement if Cree does not meet the annual
performance milestone or if the parties do not mutually agree on the performance
milestones for the ensuing year. Effective January 1, 2001, our funding
obligation under the Development Agreement was suspended through June 30, 2001.
Our strategy for 2001 is to remain profitable and conserve cash by achieving
modest growth in sales while maintaining our lower marketing and advertising
costs, maintaining our lower general and administrative expense levels,
continuing to curtail research and development expenses and reducing
inventories. We believe that our sales can increase as the distribution of
moissanite jewels expands domestically and internationally. We believe that our
current infrastructure and stage of product development can support a
significant growth in sales. Although we attained our goal to achieve
profitability in the first quarter of 2001, we cannot be sure that we will ever
be able to achieve increased sales or sustain profitability.
Newly Adopted Accounting Pronouncements
In June 1998, Statement of Financial Accounting Standards (FAS) No. 133,
Accounting for Derivative Instruments and Hedging Activities, was issued. This
statement establishes standards for valuing and reporting at fair value all
derivative instruments as either assets or liabilities. FAS 133, as amended by
FAS 137, was effective January 1, 2001. The adoption of FAS 133 did not have a
material effect on our consolidated financial statements
Item 3: Quantitative and Qualitative Disclosures About Market Risk
We believe that our exposure to market risk for changes in interest rates is not
significant because our investments are limited to highly liquid instruments
with maturities of three months or less. At March 31, 2001, we had
approximately $8.6 million of short-term investments classified as cash and
equivalents. All of our transactions with international customers and suppliers
are denominated in U.S. dollars.
10
Part II - Other Information
Item 6: Exhibits And Reports On Form 8-K
(a) Exhibits
Exhibit No. Description
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10.45 Letter Agreement dated December 7, 2000 between Cree, Inc. and
Charles & Colvard, Ltd., incorporated by reference to exhibit
99.2 of the Company's current report on Form 8-K dated January 9,
2001.*
10.46 Fifth Amendment to Agreement, dated December 29, 2000 between
John M. Bachman Inc. and Charles & Colvard, Ltd.*
+ Denotes a management contract or compensatory plan or arrangement.
* The Company has requested that certain portions of this exhibit be
given confidential treatment.
(b) Report on Form 8-K
Date Subject
- ---- -------
January 9, 2001 Item 5: Announcement of Shipments and Revenue Expectations
for The Fourth Quarter of 2000
February 9, 2001 Item 5: Announcement of the resignation of Mark W. Hahn as
Chief Financial, Secretary and Treasurer
February 15, 2001 Item 5: Announcement of Extension of Rights Offering to
February 16, 2001
February 22, 2001 Item 5: Announcement of Completion of Rights Offering
11
Signatures
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.
C3, Inc.
Date: May 4, 2001 /s/ Robert S. Thomas
--------------------
Robert S. Thomas
President & Chief Executive Officer
(Principal Executive Officer)
Date: May 4, 2001 /s/ Earl R. Hines
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Earl R. Hines
Vice President Manufacturing
(Principal Accounting Officer)
12