Business Overview and History

Charles & Colvard, Ltd. is a globally recognized fine jewelry company that has specialized in manufacturing, marketing, and distributing Charles Colvard Created Moissanite, the world's first colorless laboratory-created gemstone, for nearly three decades. The company has also expanded into the lab-grown diamond market in recent years, positioning itself as a prominent player in the ethical and sustainable fine jewelry space.

Charles & Colvard was founded in 1995 in North Carolina and has been at the forefront of the moissanite gemstone industry since its inception. The company's journey began when it introduced created moissanite to the world, revolutionizing the fine jewelry market with a gemstone that rivaled the brilliance and fire of diamonds, but at a more affordable price point.

Over the years, Charles & Colvard has continuously innovated and expanded its product offerings. In 2015, the company debuted its premium moissanite brand, Forever One, further solidifying its position as the premier source of high-quality, colorless moissanite. In September 2020, the company made a strategic move into the lab-grown diamond market with the launch of its Caydia brand of premium lab-grown diamonds.

Today, Charles & Colvard operates through two primary business segments: Online Channels and Traditional. The Online Channels segment encompasses the company's e-commerce platforms, including charlesandcolvard.com, moissaniteoutlet.com, charlesandcolvarddirect.com, and madeshopping.com, as well as various third-party online marketplaces and drop-ship retail outlets. The Traditional segment, on the other hand, serves domestic and international wholesale and retail customers, including the company's own Charles Colvard Signature Showroom, which opened in 2022.

In addition to its direct-to-consumer channels, Charles & Colvard sells loose moissanite gems, lab-grown diamonds, and finished jewelry featuring these gemstones to leading jewelry distributors, manufacturers, and retailers at wholesale prices. This diversified distribution strategy allows the company to reach a wide range of customers across different market segments.

Throughout its history, Charles & Colvard has faced various challenges, including its dependence on a single supplier for silicon carbide crystals, the raw materials used to produce moissanite jewels. The company has also had to navigate the evolving privacy regulatory landscape and address cybersecurity incidents that temporarily disrupted its IT network. In response to these challenges, Charles & Colvard has worked closely with security specialists to strengthen its information technology controls and restore affected systems and operations, demonstrating its commitment to adapting and overcoming obstacles in the industry.

Financial Performance and Ratios

Despite the challenges faced by the company in recent years, Charles & Colvard has maintained a relatively strong financial position. In the fiscal year 2023, which ended on June 30, 2023, the company reported total revenue of $29.95 million, with a gross profit margin of 15.79% and a net loss of $19.58 million. The company's operating cash flow for the year was negative $3.88 million, while free cash flow stood at negative $5.16 million.

For the nine-month period ended March 31, 2024, Charles & Colvard reported net sales of $18.12 million, a decrease of 26% compared to the same period in the prior year. Gross margin during this period was 49.27%, while the company incurred a net loss of $9.04 million. The company's operating cash flow was negative $6.06 million, and its free cash flow was negative $6.33 million.

In the most recent quarter (Q3 FY2024), Charles & Colvard reported revenue of $5.26 million, representing a 21% decrease year-over-year. The net loss for the quarter was $3.63 million, or $0.12 loss per diluted share, an improvement from a net loss of $8.4 million, or $0.28 loss per diluted share, in the year-ago quarter. The revenue decline was attributed to continued weak consumer confidence, pricing pressures on lab-grown diamonds, and an expected decline in wholesale revenue as the company focuses on building a more robust direct-to-consumer business.

Gross margin for Q3 FY2024 decreased to 23% from 32% in Q3 FY2023, primarily due to rising commodity prices, increased sale cadence, and liquidation of obsolete inventory. Despite these challenges, the company has observed that revenue declines have been shrinking across sequential quarters, providing some optimism for future performance.

Segment Performance

In the Online Channels segment, which represents the company's direct-to-consumer business, net sales for Q3 FY2024 were $4.06 million, accounting for 77% of total consolidated net sales. Finished jewelry sales in this segment were $3.84 million, while loose jewel sales were $219,830. The product line gross profit for the Online Channels segment was $2.00 million during the quarter.

The Traditional segment, which includes wholesale and retail customers, generated $1.20 million in net sales for Q3 FY2024, representing 23% of total consolidated net sales. Finished jewelry sales in this segment were $1.04 million, with loose jewel sales at $157,640. The product line gross profit for the Traditional segment was $387,170 during the quarter.

Geographic Performance

U.S. net sales accounted for 98% of total consolidated net sales in Q3 FY2024, compared to 97% in the prior year period. International net sales decreased 44% year-over-year during the nine months ended March 31, 2024, due to lower demand from international distributors.

Liquidity

Charles & Colvard's liquidity position remains relatively stable despite recent challenges. As of March 31, 2024, the company's debt-to-equity ratio was 0.09, indicating a low level of financial leverage. Cash and cash equivalents stood at $9.2 million, and the company had access to a $5 million cash collateralized line of credit facility from JPMorgan Chase, with $500,000 outstanding.

The company's current ratio was 2.47 as of March 31, 2024, suggesting that it has sufficient short-term assets to cover its short-term liabilities. The quick ratio stood at 1.26, further indicating the company's ability to meet its short-term obligations.

Challenges and Risks

Charles & Colvard has faced a number of challenges in recent years, including the ongoing effects of the COVID-19 pandemic, global economic uncertainties, and increased competition in the lab-grown gemstone and jewelry market. The company has also grappled with supply chain disruptions, rising commodity prices, and the need to invest heavily in its digital capabilities to remain competitive in the evolving retail landscape.

One of the company's key risks is its dependence on a single supplier, Wolfspeed, Inc., for the majority of its silicon carbide (SiC) crystals, the raw material used to produce moissanite. Any disruption in this supply chain could have a significant impact on Charles & Colvard's operations and financial performance.

Additionally, the company faces the ongoing challenge of maintaining brand recognition and customer loyalty in an increasingly crowded market, where lab-grown diamonds and other synthetic gemstones are becoming more prevalent. The company's ability to differentiate its products and effectively market its sustainable and ethical manufacturing practices will be crucial to its long-term success.

Strategic Initiatives and Outlook

To navigate these challenges, Charles & Colvard has been implementing a number of strategic initiatives. The company has doubled down on its direct-to-consumer efforts, investing in its e-commerce platforms and digital marketing capabilities to reach a wider audience. It has also launched its Charles & Colvard Direct portal, which allows independent jewelers and retailers to purchase loose gemstones directly from the company, a significant shift away from its traditional distribution model.

Furthermore, the company has been focusing on product innovation, diversifying its offerings beyond moissanite to include lab-grown diamonds and other created color gemstones. It has also forged strategic partnerships, such as its exclusive alliance with the International Gemological Institute (IGI) to provide grading reports for its moissanite gemstones, further strengthening its brand credibility.

To address the current economic challenges, Charles & Colvard is working to mitigate additional margin erosion and stabilize product margins by reviewing vendor agreements, evaluating their product assortment, and managing advertising and marketing spend. The company is also implementing cost savings measures and exploring strategic partnerships to position itself for future growth.

Despite the challenges, Charles & Colvard remains optimistic about its long-term prospects. The company believes that the growing consumer demand for ethical and sustainable jewelry, coupled with its strong brand recognition and product innovation, will enable it to capitalize on the expanding lab-grown gemstone and jewelry market. However, the company's ability to execute its strategic initiatives and navigate the ongoing industry headwinds will be crucial to its future success.

Conclusion

Charles & Colvard has a rich history as a pioneer in the moissanite gemstone industry, and it has continued to evolve and adapt to the changing market dynamics. While the company has faced significant challenges in recent years, its focus on innovation, digital transformation, and strategic partnerships suggests a determined effort to position itself for long-term growth in the ethical and sustainable fine jewelry market.

The company's recent financial performance reflects the ongoing challenges in the industry, with declining revenues and margins. However, the shrinking revenue declines across sequential quarters and the company's efforts to stabilize product margins provide some encouragement for the future.

As Charles & Colvard navigates the current industry headwinds, investors will be closely watching the company's ability to execute its strategic initiatives, control costs, and capitalize on the growing demand for lab-grown gemstones and jewelry. The company's success in expanding its direct-to-consumer business, optimizing its product mix, and leveraging its brand equity will be critical factors in determining its future performance and ability to return to profitability.