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

November 16, 2009 | About:
10qk

10qk

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Charles & Colvard Ltd (CTHR) filed Quarterly Report for the period ended 2009-09-30.

Charles and Colvard manufacture, market and distribute moissanitejewels for sale in the worldwide jewelry market. Moissanite, also known by its chemical name, silicon carbide, is a rare, naturally occurring mineral found primarily in meteorites. The Company is the sole manufacturer of scientifically-made moissanite jewels. Their strategy is to create a unique brand image which positions moissanite as a jewel in its ownright, distinct from all other jewels based on its fire, brilliance, luster, durability and rarity. Charles & Colvard Ltd has a market cap of $16.28 million; its shares were traded at around $0.86 with and P/S ratio of 1.11.

Highlight of Business Operations:

Net sales were $2,145,000 for the three months ended September 30, 2009 compared to $4,163,000 for the three months ended September 30, 2008, a decrease of $2,018,000 or 48%. Net sales were $5,950,000 for the nine months ended September 30, 2009 compared to $11,206,000 for the nine months ended September 30, 2008, a decrease of $5,256,000 or 47%. In the third quarter of 2009, carat sales of moissanite jewels and jewelry decreased 43% to approximately 13,000 carats from 23,000 carats in the third quarter of 2008. Sales of moissanite jewelry represented 12% of total net sales in the third quarter of 2009 compared to 3% of total net sales in the same period of 2008. For the nine months ended September 30, 2009, carat sales of moissanite jewels and jewelry decreased 47% to approximately 33,000 carats from 62,000 carats in the same period of 2008. Sales of moissanite jewelry represented 17% of total net sales for the nine months ended September 30, 2009 compared to 3% of total net sales in the same period of 2008. The majority of our moissanite jewelry sales in 2009 were to a certain customer for sales at trunk show events. This customer has decided to cancel the remaining scheduled trunk shows after September 2009, and we are therefore expecting a significant decline in our jewelry sales in the fourth quarter of 2009 unless we can identify alternate channels for this inventory. In the third quarter of 2009, the average selling price per carat for our sales of loose jewels decreased 4% from the third quarter of 2008. For the nine months ended September 30, 2009, the average selling price per carat for our sales of loose jewels decreased 7% from the nine months ended September 30, 2008 primarily as a result of a special pricing in the first quarter of 2009. U.S. net sales accounted for approximately 67% and 70% of net sales during the three months ended September 30, 2009 and 2008, respectively, and approximately 65% and 68% of net sales during the nine months ended September 30, 2009 and 2008, respectively.

44%, respectively, for the three months ended September 30, 2009 as compared to the three months ended September 30, 2008; and by 49% and 54%, respectively, for the nine months ended September 30, 2009 as compared to the nine months ended September 30, 2008. U.S. sales decreased during these periods primarily due to the ongoing significant slowdown in the retail environment, reduced sales and excessive inventory of moissanite jewelry at retailers, and reduced purchases from jewelry manufacturers serving major retailers that sell moissanite jewelry. Some of our retailers have indicated they are experiencing less than desired inventory turns for their moissanite jewelry. There continues to be a pullback in consumer spending that has negatively affected the jewelry industry and exacerbated the moissanite jewelry retail inventory turn issue. We experienced an improvement in orders placed by a major U.S. distributor during the three months ended September 30, 2009 but saw no significant orders by other U.S. customers, including manufacturing customers to support in-case business at the largest retailers selling moissanite jewelry. Further, we do not anticipate significant orders from our manufacturing customers to service these larger retailers in the near-term. As retailers evaluate their businesses, 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.

Also negatively impacting revenue during the three and nine months ended September 30, 2009 was the termination of our manufacturing agreement with Reeves Park, Inc., or Reeves Park, during the fourth quarter of 2008 due to repeated failure by Reeves Park to make timely payments on its open payables to us. We assisted those retailers supplied by Reeves Park to find an alternate supplier of moissanite jewelry if they chose to stay in the moissanite jewelry business, but a few of these retailers decided not to continue carrying moissanite jewelry and other retailers have not yet decided whether they plan to continue their moissanite businesses. We will likely continue to see a negative impact on our results of operations, at least in the near-term, due to current inventory levels and/or the retailers contemplation of continuing with their moissanite businesses. One of these retailers returned to us a consignment of Reeves Park jewelry that we assumed as part of our settlement agreement with Reeves Park. This retailer is still currently selling moissanite jewelry but has consolidated its inventory into fewer stores in an attempt to achieve better inventory turn. We did not have any sales to Reeves Park during the three and nine months ended September 30, 2009, and it accounted for 3% and 10%, respectively, of our sales during the same periods of 2008.

Our largest customer during the three months ended September 30, 2009 accounted for 31% of our sales compared to 32% during the same period of 2008. A second customer accounted for 14% of our sales in the same period of 2008 but did not account for a significant percentage of our sales during the three months ended September 30, 2009. No additional customers accounted for more than 10% of sales in the third quarter of 2009 or 2008. Our two largest customers during the nine months ended September 30, 2009 accounted for 18% and 10%, respectively, of our sales compared to 19% and 0%, respectively, during the same period of 2008. No additional customers accounted for more than 10% of sales in the nine months ended September 30, 2009. Three additional customers in 2008 comprised 11%, 10%, and 10% of our sales during the nine months ended September 30, 2008. 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. One of the retailers carrying moissanite jewelry filed for Chapter 11 bankruptcy protection in March 2009, and we do not expect to receive new orders for the foreseeable future from this customer. As part of a July 2009 stipulation and consent order entered with this customer, however, we did record $146,000 of sales during the three months ended September 30, 2009 on inventory previously held on consignment.

International net sales and carat shipments, which do not include shipments of consigned inventory, decreased by 43% and 38%, respectively, for the three months ended September 30, 2009 as compared to the three months ended September 30, 2008; and by 42% and 34%, respectively, for the nine months ended September 30, 2009 as compared to the nine months ended September 30, 2008. International sales decreased during the three months ended September 30, 2009 primarily due to reduced sales to Thailand, India and Turkey; and during the nine months ended September 30, 2009 primarily due to reduced sales in India, Thailand, Turkey, and Taiwan. A portion of our international sales represents jewels sold internationally that will be re-imported to North American retailers. Our top three international distributors during the three and nine months ended September 30, 2009 were located in the United Kingdom, Hong Kong, and Italy.

Cost of goods sold was $849,000 for the three months ended September 30, 2009 compared to $1,520,000 for the three months ended September 30, 2008, a decrease of $671,000 or 44%. Cost of goods sold was $2,581,000 for the nine months ended September 30, 2009 compared to $4,228,000 for the nine months ended September 30, 2008, a decrease of $1,647,000 or 39%. Cost of goods sold decreased primarily due to the 48% and 47% decrease in sales for the three and nine months ended September 30, 2009, respectively. Other factors that contributed to the decreases were that cost of goods sold for the three and nine months ended September 30, 2008 included a $184,000 and $324,000, respectively, increase in our reserve on consigned inventory to allow non-return or damage of certain jewels on consignment with customers; and a larger quantity of damaged jewel returns in the three and nine months ended September 30, 2008 over the same periods of 2009. These factors were partially offset during the nine months ended September 30, 2009 by a $264,000 increase in jewelry reserves primarily due to an adjustment of the value of consigned jewelry inventory with a retailer in Chapter 11 bankruptcy protection as well as an increased allocation of expenses, previously capitalized as a cost of inventory, to cost of goods sold as a result of reduced manufacturing activities.

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