Charles & Colvard Ltd Reports Operating Results (10-Q)
Charles & Colvard Ltd has a market cap of $47.3 million; its shares were traded at around $2.49 with and P/S ratio of 5.7. CTHR is in the portfolios of Oak Value of Oak Value Capital Management, Jim Simons of Renaissance Technologies LLC.
Highlight of Business Operations:Net income for the three months ended March 31, 2010 was $298,000, or $0.02 per diluted common share, compared with a net loss of $1.28 million, or $0.07 per diluted common share, for the same period of 2009. Net income for the three months ended March 31, 2010 included a $130,000 income tax benefit resulting in part from the reduction of a deferred tax asset valuation allowance to offset liabilities associated with an uncertain tax position and a reduction of the liability for the same uncertain tax position. We did not recognize an income tax benefit for our operating losses during the first three months of 2009 due to the uncertainty of sufficient future taxable income to utilize our deferred tax assets.
The increase in sales and marketing expenses is primarily due to a $297,000 net increase in advertising expenses and a $105,000 increase in compensation costs, offset in part by $82,000 in expenses associated with the JCPenney trunk shows that were discontinued in September 2009 and lower general allocations of operating expenses, such as bank fees and commercial insurance, resulting from cost reduction initiatives implemented in the latter part of 2009. Our advertising expenses increased primarily due to cooperative advertising resulting from additional marketing support we provided to a new international customer to help increase our presence in the customer s country and a $128,000 reduction in first quarter 2009 expenses due to customers utilizing less cooperative advertising than estimated. Our cooperative advertising program reimburses a portion of our customers marketing costs based on the amount of their purchases from us and is subject to the customer providing us documentation of all advertising copy that includes our products. The increase in compensation costs for the three months ended March 31, 2010 as compared
The decrease in general and administrative expenses is primarily due to a $628,000 reduction in professional services, consisting primarily of $350,000 in fees paid during the three months ended March 31, 2009 to BCG under its February 2009 management services agreement with us, $234,000 in reduced fees for legal services, and $57,000 in audit, tax, and investor relations services due to changes in providers and the timing of work performed. Other factors contributing to lower general and administrative expenses in the three months ended March 31, 2010 include $250,000 in severance expense in the three months ended March 31, 2009, offset in part by a $100,000 increase in salaries in the first quarter of 2010 due to new executive leadership; a $190,000 decrease in bad debt expense; and a $52,000 decrease in corporate insurance premiums for the three months ended March 31, 2010 as compared to the same period in 2009.
We recognized approximately $130,000 of income tax net benefit in the first quarter of 2010. This income tax net benefit consists of a $102,000 reduction of a deferred tax asset valuation allowance to offset liabilities associated with an uncertain tax position and a $41,000 reduction of the liability for the same uncertain tax position, offset by $13,000 of income tax expense recorded for estimated penalties and interest associated with other uncertain tax positions.
We require cash to fund our operating expenses and working capital requirements, including outlays for capital expenditures. As of March 31, 2010, our principal sources of liquidity were cash and cash equivalents totaling $2.79 million, trade accounts receivable of $1.71 million, and inventory of $4.28 million, as compared to cash and cash equivalents totaling $7.41 million, trade accounts receivable of $1.04 million, and inventory of $3.34 million as of December 31, 2009. During the three months ended March 31, 2010, we purchased $5.05 million of highly liquid U.S. government agency securities that we have classified as held-to-maturity long-term assets on our consolidated balance sheets due to our positive intention and ability to hold these securities until their maturity dates.
During the three months ended March 31, 2010, $489,000 of cash was provided by operations primarily as a result of our net income of $298,000, a net decrease in inventory of $639,000, and an increase in accrued cooperative advertising of $138,000, which more than offset a net increase in trade accounts receivable of $665,000. Accounts receivable increased primarily due to higher sales during the quarter.
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