SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
Commission File Number : 000-23329
C3, Inc.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
North Carolina 56-1928817
--------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3800 Gateway Boulevard, Suite 310, Morrisville, North Carolina 27560
-------------------------------------------------------------------------------
(Address of principal executive offices, including zip code)
(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 May 8, 1998, there were 6,942,166 shares of the registrant's common stock,
no par value per share, outstanding.
C3, INC.
INDEX
PART I. FINANCIAL INFORMATION
- ----------------------------------------------------------------------------------
ITEM 1. FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS-- MARCH 31, 1998 AND DECEMBER 31, 1997
CONDENSED STATEMENTS OF OPERATIONS--THREE MONTHS ENDED MARCH 31, 1998 AND 1997
CONDENSED STATEMENTS OF CASH FLOWS--THREE MONTHS ENDED MARCH 31, 1998 AND 1997
NOTES TO CONDENSED FINANCIAL STATEMENTS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PART II. OTHER INFORMATION
- ----------------------------------------------------------------------------------
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
C3, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
CONDENSED BALANCE SHEETS
MARCH 31,
1998 DECEMBER 31,
(Unaudited) 1997
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 41,722,943 $ 43,980,385
Accounts receivable, net 60,020 4,298
Interest receivable 166,700 177,654
Inventories 670,364 278,602
Prepaid expenses and other assets 149,052 73,274
------------ ------------
Total current assets 42,769,079 44,514,213
Equipment, net 316,238 214,990
Patent and license rights, net 163,799 143,886
------------ ------------
TOTAL ASSETS $ 43,249,116 $ 44,873,089
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable:
Cree Research, Inc. $ 647,216 $ 567,110
Other 367,231 237,186
Accrued expenses 208,126
Deferred revenue 24,387 22,512
------------ ------------
Total current liabilities 1,246,960 826,808
Commitments and contingencies
SHAREHOLDERS' EQUITY:
Common stock 47,743,431 47,743,431
Additional paid-in capital - stock options 1,683,683 1,632,804
Deficit accumulated during the development stage (7,424,958) (5,329,954)
------------ ------------
Total shareholders' equity 42,002,156 44,046,281
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 43,249,116 $ 44,873,089
============ ============
See notes to Condensed Financial Statements
C3, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
CUMULATIVE FOR
THREE MONTHS ENDED MARCH 31, THE PERIOD
----------------------------- JUNE 28, 1995 TO
1998 1997 MARCH 31, 1998
----------- ----------- ----------------
Net sales $ 250,555 $ -- $ 250,555
Cost of goods sold 155,076 -- 155,076
----------- ----------- -----------
Gross profit 95,479 -- 95,479
Operating expenses:
Marketing and sales 761,136 21,707 1,353,797
General and administrative 611,831 180,783 3,471,696
Research and development 1,322,512 201,264 3,675,673
Depreciation and amortization 15,499 2,554 46,069
----------- ----------- -----------
Operating Loss (2,615,499) (406,308) (8,451,756)
Interest income, net 520,495 33,419 1,026,798
----------- ----------- -----------
Net loss $(2,095,004) $ (372,889) $(7,424,958)
=========== =========== ===========
Basic and diluted net loss per share $ (0.30) $ (0.16) $ (2.73)
=========== =========== ===========
Weighted-average common shares,
Basic and diluted 6,938,476 2,261,102 2,716,074
=========== =========== ===========
See notes to Condensed Financial Statements.
C3, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
CUMULATIVE FOR
THREE MONTHS ENDED MARCH 31, THE PERIOD
---------------------------- JUNE 28, 1995 TO
1998 1997 MARCH 31, 1998
---------- ---------- ----------------
OPERATING ACTIVITIES:
Net loss $(2,095,004) $ (372,889) $(7,424,958)
Adjustments:
Depreciation and amortization 15,499 2,554 46,069
Compensation expense related to exercise
and issuance of stock options 50,879 66,000 1,749,683
Change in operating assets and liabilities:
Net change in assets (512,308) 7,000 (1,046,136)
Net change in liabilities 420,152 122,014 1,246,960
----------- ---------- -----------
Net cash used by operating activities (2,120,782) (175,321) (5,428,382)
----------- ---------- -----------
INVESTING ACTIVITIES:
Purchase of equipment (114,181) (18,342) (351,791)
Patent costs (22,479) (21,416) (174,315)
----------- ---------- -----------
Net cash used by investing activities (136,660) (39,758) (526,106)
----------- ---------- -----------
FINANCING ACTIVITIES:
Proceeds from common stock
offerings, net of costs -- -- 42,102,785
Proceeds from preferred stock
offerings, net of costs -- 4,981,375 5,574,646
----------- ---------- -----------
Net cash provided by financing activities -- 4,981,375 47,677,431
----------- ---------- -----------
Net change in cash and equivalents (2,257,442) 4,766,296 41,722,943
Cash and equivalents
at the beginning of the period 43,980,385 1,167,458 --
----------- ---------- -----------
Cash and equivalents at the end of the period $41,722,943 $5,933,754 $41,722,943
=========== ========== ===========
See notes to Condensed Financial Statements.
C3, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
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. However, certain
information or footnote disclosures normally included in 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 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 fiscal year. Certain reclassifications
have been made to prior year's financial statements to conform to the
classifications used in fiscal 1998. These financial statements should be read
in conjunction with the Company's audited financial statements for the year
ended December 31, 1997, as set forth in the Company's Form 10-K, filed with the
Securities and Exchange Commission on March 31, 1998.
C3, Inc. is a development stage company which has devoted substantially
all of its efforts to research and product development and did not, through
March 31, 1998, generate significant revenues from its planned principal
operations.
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.
2. INVENTORIES
Inventories are stated at the lower of cost or market. Inventories
consisted of the following:
MARCH 31, DECEMBER 31,
1998 1997
--------- ------------
Raw materials $ 55,950 --
Work in process 385,768 $278,602
Finished goods 228,646 --
-------- --------
Total inventory $670,364 $278,602
======== ========
3. NON-CASH OPERATING EXPENSES
During the quarter ended March 31, 1998, in accordance with APB 25, the
Company recorded compensation expense of approximately $51,000 relating to stock
options. Cumulatively for the period from June 28, 1995 (date of inception) to
March 31, 1998, such compensation expense aggregated approximately $1,750,000.
This compensation expense is recorded in general and administrative expense in
the statements of operations.
4. NEWLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, Statement of Financial Accounting Standards No. 130 ("FAS
130"), Comprehensive Income, was issued. This Statement establishes standards
for reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements. FAS 130 is effective for fiscal years beginning after December 15,
1997. Reclassification of financial statements for earlier periods is required.
However, this Statement does not currently affect the Company's financial
statements since it has no items of other comprehensive income in any period
presented.
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 and Section 21E of the Securities
Exchange Act of 1934 that relate to the Company's future plans, objectives,
estimates and goals. These statements are subject to numerous risks and
uncertainties, including macro and micro economic factors that affect businesses
operating in the international economy, the Company's reliance on Cree Research,
Inc. as a developer and supplier of silicon carbide crystals, the level of
growth in domestic and international gemstone jewelry markets, the level of
market acceptance of and demand for the Company's products, and the actions of
existing and potential competitors. 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, 1997, which was filed with the Securities and Exchange
Commission on March 31, 1998. 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
Since its organization in June 1995, the Company has devoted its
resources to funding research and development of colorless lab-created
moissanite gemstones, market research, qualifying potential retail jewelers and
other potential customers for distribution arrangements and assembling a
management team. As a development stage company, the Company is subject to all
the risks inherent in establishing a new business, including the risk that
full-scale operations may not occur.
The Company began selling its moissanite/diamond test instrument and
lab-created moissanite gemstone samples during the quarter ended March 31, 1998,
although these sales were not significant. The Company expects its sales volumes
to increase gradually as it increases production capacity and develops its
distribution channels. The Company has been unprofitable since inception and
anticipates that it will continue to incur increasingly significant expenses as
it transitions from the development stage to full-scale production. Historic
spending levels are not indicative of anticipated future spending levels because
the Company is in the early stages of a period in which it will rapidly increase
spending to achieve its business objectives, including refinement and
commercialization of its lab-created gemstone technology, introduction of its
gemstone products, establishment of distribution channels, expansion of its
manufacturing capacity, optimization of SiC crystal yields and further marketing
of its moissanite/diamond test instrument. For these reasons, the Company
expects to continue operating at a loss through at least some or all of 1998.
Moreover, there can be no assurance that the Company will ever achieve
profitability or if profitability is achieved, that such profitability can be
sustained.
RESULTS OF OPERATIONS
Net sales for the quarter ended March 31, 1998, were $250,555, which
resulted entirely from sales of the Company's proprietary test instrument. In
addition, the Company generated net sales of $81,101 for gemstone samples, which
were netted against research and development expenses on the operating statement
because many of the samples were associated with a research and development
program. There were no sales for the first quarter of 1997.
Gross profit was $95,479 or 38% of sales for the quarter ended March
31, 1998. Gross profit related entirely to sales of the Company's proprietary
test instrument. Gross margins will likely decrease through most or all of 1998
as the Company enters into volume distribution agreements for its testers,
potentially experiences pricing pressures on its testers from the introduction
of competitive test instruments, and as it introduces its gemstones which will
have a lower initial gross margin as the Company and Cree work to improve yields
from the crystal growth process.
Research and development expenses increased from $201,264 for the three
months ended March 31, 1997 to $1,322,512 for the three months ended March 31,
1998. The increase was primarily attributable to development expenses incurred
under the Company's June 1997 Development Agreement and January 1998
Supplemental Development Agreement with Cree Research, Inc. under which Cree is
continuing its efforts to develop a fully repeatable process for producing
larger diameter SiC crystals in specified diamond color grades. The increase was
also due to increased expenditures for the Company's internal development of
prototype gemstone pre-forming and faceting operations and compensation expense
for Company research and development staff.
Marketing and sales expenses increased from $21,707 for the three
months ended March 31, 1997 to $761,136 for the three months ended March 31,
1998. The increase was primarily due to compensation expense, increased market
research expenditures, and the development of advertising and marketing
materials.
General and administrative expenses rose from $180,783 for the three
months ended March 31, 1997 to $611,831 for the three months ended March 31,
1998. The increase primarily reflected compensation expense of additional staff,
occupancy expenses, regulatory and investor relations, and franchise tax. In the
first quarter of 1997, the Company had few paid employees and incurred no
occupancy expenses until after February 4, 1997. Prior to that time, the Company
conducted its operations from the home of two of its founders.
Net interest income increased from $33,419 for the three months ended
March 31, 1997 to $520,495 for the three months ended March 31, 1998. This
increase resulted from higher interest income earned on higher cash balances due
primarily to the investment of proceeds from the Company's initial public
offering in November 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations primarily from the net proceeds
of its initial public offering of common stock in November 1997 and, prior to
such offering, from the net proceeds of private equity sales. The net proceeds
from the initial public offering were $41,072,982. During the first quarter of
1998, the Company used $2,120,782 to fund operations and $136,660 to fund
capital expenditures and patent expenses. At March 31, 1998, the Company had
$41,722,943 of cash and equivalents and $41,522,119 of working capital. The
Company anticipates that its existing capital resources will be adequate to
satisfy its capital requirements for at least the next 12 months.
Due to developments in the Company's business, several balance sheet
items changed during the quarter. Accounts receivable and inventories have
increased significantly over December 1997 levels due to the introduction of the
moissanite/diamond test instrument and gemstone sample sales. In addition,
accrued expenses increased over fiscal year-end levels primarily as a result of
payroll and benefit expenses.
In May 1998, the Company agreed to acquire approximately $3.4 million
of crystal growth systems from Cree to provide additional production capacity
for silicon carbide crystals. The Company will pay the purchase price of the
systems on a monthly basis as the systems are manufactured. Once completed, the
systems will remain at Cree where Cree will use them to produce SiC crystals for
the Company. When the systems are fully depreciated, the Company is obligated to
transfer title to Cree. The Company intends to fund the purchase of these
systems from its existing cash and equivalents.
The Company has also entered into two agreements for the distribution
of moissanite gemstones and test instruments. These agreements require the
purchase of an aggregate of approximately $2.0 million of moissanite gemstones
and $500,000 of test instruments through the year 2000, with approximately
$370,000 of these purchases required in 1998. The Company intends to fund the
production of the moissanite gemstones and test instruments required by these
agreements from its existing cash and equivalents.
PART II - OTHER INFORMATION
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
On November 14, 1997, the Securities and Exchange Commission declared
the Company's Registration Statement on Form S-1 (File No. 333-36809) to be
effective. The net proceeds of this offering were $41,072,982. As of March 31,
1998, the Company had approximately $37,305,400 of the remaining net proceeds of
the offering invested in money market accounts, debt instruments having an
original maturity of three months or less and other highly liquid investments.
Approximately $2,112,500 of the proceeds have been used in research and
development, of which $45,600 was paid to officers, directors or shareholders
owning more than ten percent of the Common Stock outstanding. The Company has
also used approximately $1,189,100 to fund sales, marketing and administrative
expenses, of which $58,000 was paid to officers, directors or shareholders
owning more than ten percent of the Common Stock outstanding. The Company also
expended approximately $302,000 to build inventory of its products. In addition,
the Company spent $164,000 to acquire and install certain computerized slicing
and dicing equipment and other equipment.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27.1 Financial Data Schedule
(b) Report on Form 8-K
The Company did not file any reports on 8-K during the three months
ended March 31, 1998.
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.
Dated: May 10, 1998 /s/ Jeff N. Hunter
----------------------------
JEFF N. HUNTER
President and Chairman of the Board
and Director
(Principal Executive Officer)
Dated: May 10, 1998 /s/ Mark W. Hahn
-----------------------------
MARK W. HAHN
Chief Financial Officer
(Principal Financial and
Accounting Officer)
5
3-MOS
DEC-31-1998
JAN-01-1998
MAR-31-1998
41,722,943
0
60,020
0
670,364
42,769,079
350,891
34,653
43,249,116
1,246,960
0
0
0
47,743,431
0
43,249,116
250,555
250,555
155,076
155,076
0
0
0
(2,095,004)
0
(2,095,004)
0
0
0
(2,095,004)
(.30)
(.30)
