SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 2000
[ ] 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
C3, Inc.
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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 incorporation or organization) (I.R.S. Employer Identification No.)
3800 Gateway Boulevard, Suite 311, 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
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As of May 8, 2000 there were 7,119,471 shares of the Registrant's Common Stock,
no par value per share, outstanding.
C3, Inc. dba Charles & Colvard
INDEX
PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements
Condensed Statements of Operations - Three Months Ended March 31,
2000 And 1999
Condensed Balance Sheets - March 31, 2000 And December 31, 1999
Condensed Statements Of Cash Flows - Three Months Ended March 31,
2000 And 1999
Notes To Condensed 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 5. Other Information
Item 6. Exhibits And Reports On Form 8-K
Signatures
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
C3, Inc. dba Charles & Colvard
Condensed Statements Of Operations
(Unaudited)
Three Months Ended March 31,
-----------------------------------
2000 1999
---------------- ---------------
Net sales $ 3,011,250 $ 3,229,464
Cost of goods 1,376,748 2,095,578
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Gross profit 1,634,502 1,133,886
Operating expenses:
Marketing and sales 2,456,176 603,304
General and administrative 989,329 798,934
Research and development 439,632 803,056
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Total operating expenses 3,885,137 2,205,294
Operating loss (2,250,635) (1,071,408)
Interest income, net 140,474 364,977
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Net loss $ (2,110,161) $ (706,431)
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Basic and diluted net loss $
per share $ (0.30) (0.10)
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Weighted-average common
shares, basic and diluted 7,109,304 6,997,726
================ ===============
See Notes to Condensed Financial Statements.
3
C3, Inc. dba Charles & Colvard
Condensed Balance Sheets
March 31, 2000 December 31, 1999
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ASSETS (Unaudited)
Current Assets:
Cash and equivalents $ 7,451,580 $ 13,161,665
Accounts receivable, net 876,337 1,331,528
Interest receivable 43,845 74,999
Inventories 17,775,598 14,767,888
Prepaid expenses and other assets 406,354 659,821
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Total current assets 26,553,714 29,995,901
Equipment, net 6,082,058 6,292,221
Patent and license rights, net 473,173 492,780
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Total assets $ 33,108,945 $ 36,780,902
===================== ======================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable:
Cree, Inc. $ 998,002 $ 2,305,218
Other 346,733 627,704
Accrued expenses 205,853 235,107
Deferred revenue 22,815 118,730
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Total current liabilities 1,573,403 3,286,759
Commitments
Shareholders' Equity:
Common stock 48,979,750 48,757,702
Additional paid-in capital - stock options 1,881,078 1,951,566
Accumulated deficit (19,325,286) (17,215,125)
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Total shareholders' equity 31,535,542 33,494,143
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$ 33,108,945 $ 36,780,902
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See Notes to Condensed Financial Statements
4
C3, Inc. dba Charles & Colvard
Condensed Statements Of Cash Flows
(Unaudited)
Three Months Ended March 31,
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2000 1999
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OPERATING ACTIVITIES:
Net loss $ (2,110,161) $ (706,431)
Adjustments:
Depreciation and amortization 256,831 130,467
Stock option compensation 52,666 68,457
Loss on disposal of long-term assets 835 --
Change in operating assets and liabilities:
Net change in assets (2,267,898) (1,023,506)
Net change in liabilities (1,713,356) (107,572)
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Net cash used in operating activities (5,781,083) (1,638,585)
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INVESTING ACTIVITIES:
Purchase of equipment (5,127) (77,744)
Patent and license rights costs (22,769) (13,415)
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Net cash used in investing activities (27,896) (91,159)
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FINANCING ACTIVITIES:
Stock options exercised 98,894 30,558
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Net cash provided by financing activities 98,894 30,558
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Net change in cash and equivalents (5,710,085) (1,699,186)
Cash and equivalents, beginning of period 13,161,665 32,004,045
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Cash and equivalents, end of period $ 7,451,580 $ 30,304,859
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See Notes to Condensed Financial Statements.
5
C3, Inc. dba Charles & Colvard
Notes To Condensed Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in conformity
with generally accepted accounting principles for interim financial information.
However, certain information or footnote disclosures normally included in
complete financial statements prepared in accordance with generally accepted
accounting principles 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. These financial statements should be read in conjunction with the
Company's audited financial statements for the year ended December 31, 1999, as
set forth in the Company's Form 10-K, filed with the Securities and Exchange
Commission on March 27, 2000.
In preparing financial statements that conform with generally accepted
accounting principles, 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.
The ability of the Company to successfully develop, manufacture, and market its
products is dependent on many factors, including obtaining funds necessary to
sustain operations. The Company does not currently have committed capital
resources to fund its desired level of expenditures on its planned timetable. To
continue pursuing its planned strategy, the Company believes that it will be
required to seek additional capital resources during 2000. Management has
initiated actions to ensure that the necessary funds will be available on a
timely basis. During the first quarter of 2000, the Company has implemented a
new domestic distribution strategy that, together with a continuation of its
global branding strategy which commenced in the fourth quarter of 1999, is
designed to substantially increase the sales volume of Charles & Colvard created
moissanite and to allow the Company to slow the growth of inventories. Also, as
discussed in Note 5, the Company has entered into an agreement with Cree to sell
its crystal growth equipment to Cree for $5 million. In addition, the Company
has engaged an investment banking firm to assist the Company in its capital
raising efforts. If the Company is not able to secure capital resources on terms
acceptable to the Company, it will be necessary for the Company to conserve cash
by decreasing advertising expenditures, deferring or decreasing other operating
expenditures and attempting to renegotiate its agreements with Cree. There can
be no assurance that the Company will be able to secure the required capital
resources to execute its new domestic distribution strategy or that its new
domestic distribution strategy will be successful.
2. INVENTORIES
Inventories are stated at the lower of cost or market determined on a first in,
first out basis. Test instruments are shown net of a reserve for excess
inventory of approximately $242,000 at March 31, 2000, and December 31, 1999.
March 31, December 31,
2000 1999
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Moissanite
Raw materials $ 4,892 $ 371,843
Work-in-process 6,286,951 5,779,326
Finished goods 11,064,892 8,127,119
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17,356,735 14,278,288
Test Instruments 418,863 489,600
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Total Inventory $ 17,775,598 $ 14,767,888
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3. STOCK BASED COMPENSATION
During the quarter ended March 31, 2000, in accordance with Accounting
Principles Board Opinion No. 25, the Company recorded compensation expense of
$52,666 relating to stock options. Compensation expense related to stock options
for the quarter ended March 31, 1999 was $68,457. This compensation expense is
recorded in general and administrative expense in the statements of operations.
4. NEWLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, Statement of Financial Accounting Standards No. 133 ("FAS 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, is effective for all fiscal quarters of all fiscal years beginning
after June 15, 2000. The Company has not evaluated the impact of the adoption of
this Statement on the financial statements.
5. SUBSEQUENT EVENT
In May 2000, the Company has agreed to sell its crystal growth equipment to
Cree, Inc. for $5 million. This transaction will result in a loss on disposal of
fixed assets of approximately $125,000 in the second quarter of 2000. The
purchase price will be recorded as an account receivable and be payable as a
credit against future invoices for the purchase of crystals from Cree, with
any remaining balance due in full by June 30, 2001.
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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 the
Company's judgment on future events. Because the Company is in the early stages
of the establishment, by Cree, Inc. ("Cree"), the Company's key supplier, of
manufacturing processes and capacity and of building the Company's own
distribution channels and has not yet engaged in significant revenue-producing
activities, the Company is subject to risks and uncertainties that could cause
the Company's actual performance and results to differ materially from those
projected or discussed herein. These and other risks and uncertainties are
described under the heading "Business Risks" in the Company's Form 10-K for the
year ended December 31, 1999, which was filed with the Securities and Exchange
Commission on March 27, 2000. These risks and uncertainties could cause actual
results and developments to be materially different from those expressed or
implied by any of the forward-looking statements included herein.
OVERVIEW
The Company manufactures, markets and distributes Charles & Colvard created
moissanite jewels (hereinafter referred to as 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, the Company is creating 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 its inception in June 1995 through June 30, 1998, the Company was a
development stage enterprise that devoted its resources to fund research and
development of colorless, scientifically made moissanite jewels. At the same
time, the Company assembled a management team, conducted market research and
developed its strategic business plans. The Company began shipping moissanite to
authorized retail jewelers in Atlanta and Miami/Ft. Lauderdale during the second
quarter of 1998. At that time it launched limited consumer-focused advertising
and promotion activities in those areas. In addition, the Company entered into
exclusive distribution agreements with a number of international distributors.
Through the first half of 1999, the Company limited its efforts to expand the
distribution of moissanite jewels as a result of limited product availability
and the lack of confidence the Company had regarding the quality of the SiC
crystals it was receiving. Late in the second quarter, the Company began to
receive indications that the quality of the SiC crystals it was receiving was
improving rapidly. The rate of improvement in the quality of the SiC crystals
continued to accelerate through the end of 1999, far exceeding the Company's
expectations. At the same time, the Company experienced a decline in shipments
of moissanite jewels during the third quarter as a result of a slower than
expected rate of adding retailers domestically, 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, the Company and Cree agreed to reschedule
approximately 50% of the expected shipments of SiC crystals from Cree to the
second half of 2000 from the first half of 2000.
With the improvements in the supply of salable moissanite jewels, the Company
launched its strategic global marketing program in the fourth quarter of 1999 to
spur consumer awareness of this new category of jewel. In addition, in March
2000, the Company entered into distribution agreements with Stuller Settings,
Inc. ("Stuller") and Rio Grande, two of the largest suppliers of jewelry-related
products to the jewelry industry, for the North American distribution of
moissanite. The Company has also sought and has entered into several agreements
with domestic jewelry manufacturers. The Company's decision to enter into
agreements with Stuller, Rio Grande and jewelry manufacturers is intended to
rapidly increase the introduction of moissanite into the domestic jewelry
market.
As discussed below, the shift in the Company's domestic distribution strategy
may affect the Company's historical relationships between revenues and expenses
as well as the Company's liquidity and capital requirements.
8
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1999.
Net sales were $3,011,250 for the three months ended March 31, 2000 compared to
$3,229,464 for the three months ended March 31, 1999, a decrease of $218,214 or
6.8%. The decrease resulted from a reduction in the average selling price of
moissanite jewels as the Company began to experience the effects of the volume
purchase discounts offered to the Company's new large domestic distributors
partially offset by increased shipments. Shipments of moissanite jewels
increased in the first quarter of 2000 to approximately 15,000 carats from
14,400 carats in the first quarter of 1999. As our new large distributors begin
their marketing efforts, the Company expects carat shipments to dramatically
increase. However, the Company does not expect to see a very significant impact
in volumes until, at earliest, the third quarter of 2000. As sales to the
domestic distributors become a larger percentage of total sales, the Company
expects the average selling price to drop in the second quarter and beyond.
The Company's gross profit margin was 54.3% for the three months ended March 31,
2000 compared to 35.1% for the three months ended March 31, 1999. The increase
resulted from higher yields of moissanite jewels from SiC crystals purchased
from Cree, thereby lowering the cost per carat. Gross margins are expected to
vary over the next few quarters as the yield of salable jewels from each crystal
fluctuates and as the Company's average selling price per carat decreases due to
the volume discounts offered to the Company's large distributors. The Company
expects margins to decrease in the short-term and, as yields improve, increase
gradually in the long-term.
Marketing and sales expenses were $2,456,176 for the three months ended March
31, 2000 compared to $603,304 for the three months ended March 31, 1999, an
increase of $1,852,872 or 307.1%. The increase was due primarily to the
continued execution of the strategic global marketing program launched in the
fourth quarter of 1999, as well as increased compensation costs. The Company has
currently budgeted approximately $4.5 million for advertising and marketing
activities for the remainder of 2000.
General and administrative expenses were $989,329 for the three months ended
March 31, 2000 compared to $798,934 for the three months ended March 31, 1999,
an increase of $190,395 or 23.8%. The increase resulted primarily from an
increase in the Company's allowance for uncollectable accounts, increased rent
on the Company's expanded facility and increased insurance and taxes on the
Company's increased fixed assets.
Research and development expenses were $439,632 for the three months ended March
31, 2000 compared to $803,056 for the three months ended March 31, 1999, a
decrease of $363,424 or 45.3%. The decrease resulted primarily from cost savings
related to the reduction of development efforts effective September 1, 1999,
from a funding level of $240,000 per month to $120,000 per month.
Net interest income was $140,474 for the three months ended March 31, 2000
compared to $364,977 for the three months ended March 31, 1999, a decrease of
$224,503 or 61.5%. This decrease resulted from lower interest income earned on
lower cash balances due primarily to the use of the invested proceeds from the
Company's initial public offering in November 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception primarily through the
net proceeds of its initial public offering of common stock in November 1997
and, prior to such offering, through private equity sales. Net proceeds from the
Company's initial public offering were $41,072,982. During the first quarter of
2000, the Company used $5,781,083 to fund operations and $27,896 to fund capital
expenditures and patent expenses. At March 31, 2000, the Company had $7,451,580
of cash and cash equivalents and $24,980,311 of working capital.
The 4-year Development Agreement, as amended, between the Company and Cree
requires the Company 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 Company and Cree do not
mutually agree on the performance milestones for the ensuing year.
The Company's new domestic distribution strategy, together with a continuation
of its global branding strategy
9
which commenced in the fourth quarter of 1999, is designed to substantially
increase the sales volume of Charles & Colvard created moissanite and to allow
the Company to slow the growth of inventories. The Company does not currently
have committed capital resources to fund its desired level of expenditures. To
continue pursuing this strategy, the Company believes that it will be required
to seek additional capital resources during 2000. Therefore, the Company has
engaged Scott & Stringfellow, Inc., a Virginia-based investment banking firm, to
assist the Company in its capital raising activities. If the Company is not able
to secure capital, it will be necessary for the Company to conserve cash by
decreasing advertising expenditures, deferring or decreasing other operating
expenditures and attempting to renegotiate its agreements with Cree. There can
be no assurance that the Company will be able to secure the required financing
to execute its new domestic distribution strategy, or, if available, that it
will be available on terms acceptable to the Company. Additionally, there can be
no assurance that if the Company does secure the desired capital resources that
its new domestic distribution strategy will be successful.
In May 2000, the Company has agreed to sell its crystal growth equipment to
Cree, Inc. for $5 million. This transaction will result in a loss on disposal of
fixed assets of approximately $125,000 in the second quarter of 2000. The $5
million receivable from Cree will be reduced by future purchases from Cree, with
any remaining balance due in full by June 30, 2001.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company believes that its exposure to market risk for changes in interest
rates is not significant because the Company's investments are limited to highly
liquid instruments with maturities of three months or less. At March 31, 2000
the Company has approximately $7.3 million of short-term investments classified
as cash and equivalents. All of the Company's transactions with international
customers and suppliers are denominated in US dollars.
PART II - OTHER INFORMATION
ITEM 5: OTHER INFORMATION
The Company announced management changes effective May 14, 2000. The Company's
press release is attached as Exhibit 99 hereto.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
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27.1 Financial Data Schedule
10.42 Letter Agreement dated May 14, 2000 between Cree, Inc. and C3, Inc. *
99 Press Release dated May 15, 2000
+ 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
The Company did not file any reports on Form 8-K during the quarter ended
March 31, 2000.
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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 15, 2000 /s/ Robert S. Thomas
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Robert S. Thomas
President and Chief Operating Officer
(Principal Executive Officer)
Date: May 15, 2000 /s/ Mark W. Hahn
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Mark W. Hahn
Chief Financial Officer
(Principal Financial and
Accounting Officer)
11