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Charles & Colvard Ltd Reports Operating Results (10-Q)

August 13, 2010 | About:
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10qk

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Charles & Colvard Ltd (CTHR) filed Quarterly Report for the period ended 2010-06-30.

Charles & Colvard Ltd has a market cap of $42.2 million; its shares were traded at around $2.21 with and P/S ratio of 5. CTHR is in the portfolios of Jim Simons of Renaissance Technologies LLC.

Highlight of Business Operations:

We began to realize some initial successes from the implementation of our strategy and corresponding messaging in the first half of 2010. Though the current global economic recession continues to result in a significant slowdown in the retail environment, with the impact on the jewelry industry particularly severe, we believe that market conditions are stabilizing in the market segment in which we operate, and we have received increased order volume from a number of our major customers. Despite this, a number of major retailers continue to have excessive inventories of moissanite jewelry and have curtailed their purchases from jewelry manufacturers to which we sell our moissanite jewels. Therefore, during the first half of 2010, we focused our sales efforts on (i) supporting existing channel partners to improve sell-through to retailers and end consumers, including partnering with them more closely to formulate strategies designed to increase consumer awareness of moissanite; and (ii) identifying new channel partners that had no inventory overhang issues to open new markets, both domestically and internationally. As a result, our total net sales for the six months ended June 30, 2010 were 62% greater than total net sales during the same period of 2009, with loose jewel sales improving 78% period to period. Jewelry sales were 2% greater than the same period of 2009 as we worked to define new markets for finished jewelry featuring moissanite.

Net sales were $3.33 million for the three months ended June 30, 2010 compared to $1.32 million for the three months ended June 30, 2009, an increase of $2.01 million or 152%. Net sales were $6.18 million for the six months ended June 30, 2010 compared to $3.81 million for the six months ended June 30, 2009, an increase of $2.38 million or 62%. In the second quarter of 2010, carat sales of moissanite jewels and jewelry increased 291% to approximately 26,000 carats from 7,000 carats in the second quarter of 2009. Sales of moissanite jewelry represented 18% of total net sales in the second quarter of 2010 compared to 24% of total net sales in the second quarter of 2009. For the six months ended June 30, 2010, carat sales of moissanite jewels and jewelry increased 136% to approximately 46,000 carats from 20,000 carats in the same period of 2009. Sales of moissanite jewelry represented 13% of total net sales for the six months ended June 30, 2010 compared to 20% of total net sales in the same period of 2009. The majority of our moissanite jewelry sales in 2009 were to a certain retailer for sales at trunk show events, which were discontinued after September 2009. We have been pursuing new opportunities in finished jewelry in 2010, and as a result of those efforts, we have begun to experience an increase in jewelry sales. In the first half of 2010, jewelry sales were $788,000 compared to $770,000 in the same period in 2009, an increase of $18,000 or 2%. In the second quarter of 2010, the average selling price per carat for our sales of loose jewels decreased 12% from the second quarter of 2009. For the six months ended June 30, 2010, the average selling price per carat for our sales of loose jewels decreased 14% from the same period in 2009. These decreases primarily resulted from lower prices we implemented in December 2009 and special pricing in the second quarter of 2010 that we extended to support new customers launching in new markets. U.S. net sales accounted for approximately 55% and 52% of net sales during the three months ended June 30, 2010 and 2009, respectively, and approximately 56% and 64% of net sales during the six months ended June 30, 2010 and 2009, respectively.

U.S. net sales and carat shipments, which do not include shipments of consigned inventory, increased by 164% and 322%, respectively, for the three months ended June 30, 2010 as compared to the same period in 2009; and by 44% and 126%, respectively, for the six months ended June 30, 2010 as compared to the same period in 2009. U.S. sales increased during these periods primarily due to our continuing efforts to revitalize existing customer relationships as well as the addition of several new customers during the first half of 2010. As our management team continues to reposition moissanite and explore new opportunities for our product, including finished jewelry featuring moissanite, we anticipate orders and related sales will continue to improve in 2010. However, as existing retailers evaluate their businesses within the current economic environment, we are at risk that some retailers may not be able to achieve acceptable financial performance and may choose not to continue selling moissanite jewelry.

Our two largest U.S. customers during the three months ended June 30, 2010 accounted for 25% and 13%, respectively, of our total sales compared to 0% and 11%, respectively, during the same period of 2009. A third U.S. customer accounted for 21% of our sales in the same period of 2009 but did not account for a significant percentage of our sales during the three months ended June 30, 2010. No additional U.S. customers accounted for more than 10% of sales in the second quarter of 2010 or 2009. Our two largest U.S. customers during the six months ended June 30, 2010 accounted for 17% and 14%, respectively, of our total sales compared to 11% and 0%, respectively, during the same period of 2009. A third U.S. customer accounted for 15% of our sales in the same period of 2009 but did not account for a significant percentage of our sales during the six months ended June 30, 2010. No additional U.S. customers accounted for more than 10% of sales in the six months ended June 30, 2010 or 2009. We expect that we will remain dependent on our ability and that of our largest customers to maintain and enhance their retail programs. A change in or loss of any of these customer or retailer relationships could have a material adverse effect on our results of operations.

International net sales and carat shipments, which do not include shipments of consigned inventory, increased by 139% and 270%, respectively, for the three months ended June 30, 2010 as compared to the same period in 2009; and by 95% and 147%, respectively, for the six months ended June 30, 2010 as compared to the same period in 2009. International sales primarily increased during the three months ended June 30, 2010 due to the acquisition of a new customer in Russia and during the six months ended June 30, 2010 due to the acquisition of new customers in India and Russia. Our largest international customer during the three months ended June 30, 2010 accounted for

27% of our total sales compared to 0% during the same period of 2009. A second international customer accounted for 14% of our sales in the same period of 2009 but did not account for a significant percentage of our sales during the three months ended June 30, 2010. Our largest international customer during the six months ended June 30, 2010 accounted for 15% of our total sales compared to 0% during the same period of 2009. No additional international customers accounted for more than 10% of sales in the six months ended June 30, 2010 or 2009. A portion of our international sales represents jewels sold internationally that will be re-imported to North American retailers. Our top three international distributors by sales volume during the three months ended June 30, 2010 were located in Russia, Hong Kong, and Italy; and our top three international distributors by sales volume during the six months ended June 30, 2010 were located in Russia, India, and Hong Kong.

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