Charles & Colvard Reports Second Quarter 2017 Financial Results

- Online Channels Segment Generated Double Digit Net Sales Increase -
- Continued Innovation and Marketing Drives Customer Demand for Forever One Gemstones -
- Conference Call to Be Held Today at 4:30 PM EDT -

RESEARCH TRIANGLE PARK, N.C., Aug. 03, 2017 (GLOBE NEWSWIRE) -- Charles & Colvard, Ltd. (NASDAQ:CTHR), the original and leading worldwide source of created moissanite, reports financial results for the second quarter ended June 30, 2017. Continuing operations for the quarter and prior periods do not include the results of Charles & Colvard Direct, LLC (dba Lulu Avenue^®), which are now being reported as a discontinued operation following the sale of certain assets on March 4, 2016 to Yanbal USA, Inc.

Suzanne Miglucci, President and CEO of Charles & Colvard, said, “At the halfway point in 2017, we have made tremendous progress in executing our strategic plan for the year. We saw positive results in the second quarter of 2017 compared to the year-ago quarter, based on several key drivers of success. First, we continued to grow our Online Channels segment, generating a  net sales increase in that segment of 10%, driven by website and marketplace sales. Second, we leveraged our omnichannel strategy, which led to a 21% increase in finished jewelry net sales coming through multiple channels, including our expanded presence in 100 Helzberg Diamonds stores. Third, customers are embracing our expanded and upgraded gemstone cuts and jewelry selection, with more than 86% of net sales related to Forever One™, the world’s first colorless moissanite jewel. And fourth, we continued our strong marketing initiatives, highlighted by Mother’s Day promotions, new television segments with our partner Evine, and marketing campaigns driving increased social media exposure.”

“Our revenue generation efforts are supported by prudent financial management. We achieved an attractive gross margin percentage of 43% in the first half of 2017, compared to 27% in the same period of 2016. Total operating expenses were down 6% in the first half of 2017, compared to the year-ago period, even as we continue to invest in sales and marketing. This performance led to continued improvement in our bottom line, as we neared profitability with a net loss of only $403,000, or $0.02 per share, in the second quarter of 2017,” Ms. Miglucci concluded.

Recent Corporate Highlights

• Appointed Benedetta Casamento, renowned retail, fashion and jewelry expert, to the Company’s Board of Directors, bringing industry, brand marketing and financial expertise from her roles at The Talbots, Inc., Liz Claiborne Inc. and Saks Fifth Avenue;
• Strengthened Traditional segment reach by debuting an assortment of moissanite jewelry curated specifically for Evine, a multiplatform video commerce company that offers consumers an engaging shopping experience via television, online and mobile;
• Increased the Forever One™ moissanite collection to eleven shapes with the introduction of princess and baguette gemstones;
• Displayed the unique and creative designs that are possible with moissanite through a significant booth presence at JCK Las Vegas, North America’s largest annual jewelry trade event, attended by 30,000 of the world’s most influential industry professionals;
• Received recognition of moissanite as a unique gemstone by American Gem Society (AGS), including moissanite in the gemstone listing on the AGS website in order to educate consumers in distinguishing moissanite from other clear gemstones such as diamond, white sapphire and cubic zirconia;
• Promoted two senior executives, Don O'Connell to Chief Operating Officer and SVP, Supply Chain, and Clint J. Pete to Chief Financial Officer, both of whom have served critical roles in the Company’s transformation over the past year and its operational and financial progress; and
• Extended the maturity to June 2018 for a currently unused $10.0 million asset-based revolving credit facility with Wells Fargo Bank.

Financial Summary for the Second Quarter 2017

• Net sales from continuing operations were $6.6 million for the quarter, an increase of 2% compared with $6.5 million in the year-ago second quarter.
• Loose jewel net sales from continuing operations were $4.7 million for the quarter, a decrease of 4% compared with $5.0 million for the year-ago second quarter.
• Finished jewelry net sales from continuing operations were $1.9 million for the quarter, a 21% increase compared with $1.6 million in the year-ago second quarter.
• In the Company’s Traditional segment, which consists of wholesale, retail and television customers, net sales decreased 2% to $4.4 million, or 66% of net sales for the quarter, compared with $4.5 million, or 69% of net sales in the year-ago second quarter.
• In the Company’s Online Channels segment, which consists of e-commerce customers including charlesandcolvard.com, marketplaces, drop-ship and other pure-play, exclusively e-commerce customers, net sales increased 10% to $2.2 million, or 34% of net sales for the quarter, compared with $2.0 million, or 31% of net sales in the year-ago second quarter.
• Operating expenses from continuing operations were $3.2 million for the second quarter of 2017, compared with $3.6 million in the year-ago second quarter.
• Net loss from continuing operations for the second quarter of 2017 was $0.4 million, or $0.02 per share, compared with a net loss from continuing operations of $1.0 million, or $0.05 per share, in the year-ago second quarter.
• Net loss for the second quarter of 2017 was $0.4 million, or $0.02 per share, compared with a net loss of $1.0 million, or $0.05 per share, in the year-ago second quarter.

Financial Summary for the First Six Months of 2017:

• Net sales from continuing operations were $12.3 million for the six months ended June 30, 2017, a decrease of 31% compared with $17.9 million in the year-ago period, which included a sale, in a single transaction, for $6.8 million of legacy loose gemstone inventory.
• Loose jewel net sales from continuing operations were $8.7 million for the six months ended June 30, 2017, a decrease of 41% compared with $14.6 million in the year-ago period.
• Finished jewelry net sales from continuing operations were $3.6 million for the six months ended June 30, 2017, a 9% increase compared with $3.3 million in the year-ago period.
• In the Company’s Traditional segment, which consists of wholesale, retail and television customers, net sales decreased 43% to $7.9 million, or 64% of net sales for the six months ended June 30, 2017, compared with $13.8 million, or 77% of net sales in the year-ago period.
• In the Company’s Online Channels segment, which consists of e-commerce customers including charlesandcolvard.com, marketplaces, drop-ship and other pure-play, exclusively e-commerce customers, net sales increased 8% to $4.4 million, or 36% of net sales for the six months ended June 30, 2017, compared with $4.1 million, or 23% of net sales in the year-ago period.
• Operating expenses from continuing operations were $6.2 million for the first six months of 2017, compared with $6.6 million for the year-ago period.
• Net loss from continuing operations for the six months ended June 30, 2017 was $1.0 million, or $0.05 per share, compared with a net loss from continuing operations of $1.7 million, or $0.08 per share, in the year-ago period.
• Net loss for the six months ended June 30, 2017 was $1.0 million, or $0.05 per share, compared with a net loss of $2.3 million, or $0.11 per share, in the year-ago period.

Financial Position

Cash and cash equivalents totaled $6.3 million at June 30, 2017, a decrease of $1.1 million from $7.4 million at December 31, 2016. The Company had no debt outstanding as of June 30, 2017. Total inventory was $29.2 million at June 30, 2017 compared with $28.1 million at December 31, 2016.

Reportable Business Segments

As previously disclosed, the Company formerly managed its business through two operating and reportable segments: wholesale distribution transacted through the parent entity, and the direct-to-consumer distribution channel transacted through the Company’s wholly owned operating subsidiary, charlesandcolvard.com, LLC. During the three months ended March 31, 2017, the Company began managing its business through two newly defined operating and reportable segments based on its distribution channels: its “Traditional” segment, which consists of wholesale, retail and television customers; and its “Online Channels” segment, which consists of e-commerce customers including charlesandcolvard.com, marketplaces, drop-ship and other pure-play, exclusively e-commerce customers. To allow investors to view certain historical information based on the new reporting framework, the supplemental Summary Financial Information by Reportable Segment (Recast) included herein at Appendix B presents, for each segment, the net sales, product line cost of goods sold, product line gross profit and operating (loss) income, together with a reconciliation of product line cost of goods sold to cost of goods sold as reported in the Company’s consolidated financial statements, for each quarter and cumulative six month and nine month periods and the full year of fiscal 2016. With the exception of information for the first quarter, the Summary Financial Information by Reportable Segment (Recast) for fiscal 2016 has not been subject to review by the Company’s independent registered public accounting firm.

The attached historical supplemental information includes the recasting of previously issued segment-related financial information to reflect the new framework. The attached financial information does not represent a restatement of previously issued financial statements and does not affect the Company’s consolidated financial statements for any of the previously reported periods. For additional information regarding the change in the Company’s segment reporting framework, please refer to Footnote 3 of the Company’s condensed consolidated financial statements included in the Company’s Quarterly Report on Form 10-Q for the three months ended March 31, 2017.

Investor Conference Call

Shareholders and other interested parties may participate in the upcoming investor conference call by dialing 844-875-6912 (U.S. toll-free) or 412-317-6708 (international) and asking to be connected to the “Charles & Colvard, Ltd. Conference Call” a few minutes before 4:30 p.m. EDT on Thursday, August 3, 2017. A replay of this conference call will be available until August 10, 2017 at 877-344-7529 (U.S. toll-free) or 412-317-0088 (international). The replay conference ID is 10101208. The call will also be available live and for replay in the Investor Relations section of the Company’s website at http://ir.charlesandcolvard.com/events.

About Charles & Colvard, Ltd.

Charles & Colvard, Ltd., based in the Research Triangle Park area of North Carolina, is the original creator and leading source of Forever One™, Forever Brilliant® and Forever Classic™ moissanite gemstones for fine jewelry. Moissanite is unique, available in three color grades (colorless, near-colorless and faint color) and produced from silicon carbide (SiC) crystals. Charles & Colvard Created Moissanite® is sold with a Limited Lifetime Warranty to wholesale distributors, manufacturers, retailers, TV shopping networks and designers as loose stones or set in a wide variety of quality metal setting options. Charles & Colvard, Ltd. also sells direct to consumers through its wholly owned operating subsidiary, charlesandcolvard.com, LLC, and through third-party marketplaces. Charles & Colvard, Ltd.’s common stock is listed on the NASDAQ Global Select Market under the symbol “CTHR.” For more information, please visit www.charlesandcolvard.com.

Forward-Looking Statements

This press release 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. Statements expressing expectations regarding our future and projections relating to our products, sales, revenues, and earnings are typical of such statements and are made under the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, statements about our plans, objectives, representations, and contentions and are not historical facts and typically are identified by use of terms such as “may,” “will,” “should,” “could,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “continue,” and similar words, although some forward-looking statements are expressed differently.

All forward-looking statements are subject to the risks and uncertainties inherent in predicting the future. You should be aware that although the forward-looking statements included herein represent management’s current judgment and expectations, our actual results may differ materially from those projected, stated, or implied in these forward-looking statements as a result of many factors including, but not limited to, our dependence on consumer awareness, acceptance, and growth of sales of our products resulting from our strategic initiatives; dependence on a limited number of customers; the impact of the execution of our business plans on our liquidity; our ability to fulfill orders on a timely basis; the financial condition of our major customers and their willingness and ability to market our products; dependence on our exclusive supply agreement with Cree, Inc. for the sole supply of the raw material; intense competition in the worldwide jewelry industry; our ability to maintain compliance with the continued listing requirements of The Nasdaq Stock Market LLC; our current wholesale customers’ potential perception of us as a competitor in the finished jewelry business; quality control challenges from time to time that can result in lost revenue and harm to our brands and reputation; general economic and market conditions, including the current economic environment; risks of conducting business in foreign countries; the impact of natural disasters on our operations; the pricing of precious metals, which is beyond our control; the potential impact of seasonality on our business; our ability to protect our intellectual property; the risk of a failure of our information technology infrastructure to protect confidential information and prevent security breaches; the impact of significant changes in e-commerce opportunities, technology, or models; the failure to evaluate and integrate strategic opportunities; possible adverse effects of governmental regulation and oversight; and the impact of anti-takeover provisions included in our charter documents, in addition to the other risks and uncertainties described in our filings with the Securities and Exchange Commission, or the SEC, including our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 and subsequent reports filed with the SEC. Forward-looking statements speak only as of the date they are made. We undertake no obligation to update or revise such statements to reflect new circumstances or unanticipated events as they occur except as required by the federal securities laws, and you are urged to review and consider disclosures that we make in the reports that we file with the SEC that discuss other factors relevant to our business.

-Financial Tables (Appendix A) and Summary Financial Information by Reportable Segment (Recast) (Appendix B) Follow-

Appendix B

CHARLES & COLVARD, LTD.
SUMMARY FINANCIAL INFORMATION BY REPORTABLE SEGMENT (RECAST)
(unaudited)

The Company evaluates the financial performance of its segments based on net sales; product line gross profit, or the excess of product line sales over product line cost of goods sold; and operating income (loss). Product line cost of goods sold is defined as product cost of goods sold, excluding non-capitalized expenses from the Company’s manufacturing and production control departments, comprising personnel costs, depreciation, rent, utilities, and corporate overhead allocations; freight out; inventory valuation allowance adjustments; and other inventory adjustments, comprising costs of quality issues, damaged goods, and inventory write-offs.

The Company allocates certain general and administrative expenses from its Traditional segment to its Online Channels segment primarily based on net sales and number of employees to arrive at segment operating loss. Unallocated expenses, which also include interest and taxes, remain in its Traditional segment.

Summary financial information by reportable segment for each quarter and cumulative six month and nine month periods and the full year of fiscal 2016 is as follows:

The Company does not allocate any assets to the reportable segments, and, therefore, no asset information is reported to the chief operating decision maker or disclosed in the financial information for each segment.

CHARLES & COLVARD, LTD.
SUMMARY FINANCIAL INFORMATION BY REPORTABLE SEGMENT (RECAST)
(unaudited)

                                              
A reconciliation of the Company’s product line cost of goods sold to cost of goods sold as reported in the consolidated financial statements for each applicable period is as follows: