Charles & Colvard – A True Gem in the Making

Charles & Colvard, Ltd (CTHR $1.27) is the original and leading worldwide source of moissanite gemstones. The Company’s goal is to position moissanite as an affordable, luxurious alternative to other gemstones, such as diamond.

Natural moissanite is only found in minute quantities on Earth. Charles & Colvard’s manufacturing process however mimics nature. Gem-grade Silicon Carbide (SiC) crystals are grown slowly, subjecting them to tremendous heat and pressure for days until crystals of moissanite take shape. Then each stone is cut and polished by master craftsmen. Only the stones with the best clarity are chosen to become one of Charles & Colvard’s gemstones. The Company has an exclusive supply agreement for silicon carbide crystals with Cree, Inc. (CREE).

Moissanite stones are available in three color grades: colorless (Forever One brand), near-colorless (Forever Brilliant brand), and faint color (Forever Classic brand). All these gemstones surpass the fire, brilliance, and sparkle of diamonds, but retail for only a fraction of the cost.

C&C’s Moissanite is sold as loose stones or set in a wide variety of quality metal setting options. Moissanite jewelry is sold in fine jewelry stores, on domestic and international shopping networks, in catalogs, at home parties, and online.

Sales in the Company’s third quarter, ended September 30, 2015 were $6.5 million, up 44% compared with $4.5 million in the third quarter of 2014. In addition, its gross margins improved 1,200 basis points to 40% for the third quarter 2015 from 28% in the year-ago third quarter.

Moreover, C&C has recently introduced gemstones with an unprecedented color and its distribution continues to expand.

Forever Gemstone Family

In addition to carat size, important characteristics of a gemstone are rarity, durability, and beauty.

Rarity is the availability, or perceived availability, of a gemstone.

Durability is determined by a gemstone’s hardness (resistance to scratching) and toughness (resistance to chipping or cleaving).

And the beauty of a gemstone is characterized by its color, brilliance, and fire. Diamonds come in a variety of colors, some of them highly prized (pinks, blues, even yellow). However in a white diamond, the presence of a yellow tint will lower the price. The less body color in a white diamond, the more true color it will reflect, and thus the greater its value.

GIA grades diamonds on a scale of D (colorless) through Z (light color). All D-Z diamonds are considered white, even though they contain varying degrees of color. True fancy colored diamonds (such as yellows, pinks, and blues) are graded on a separate color scale.

GIA is the oldest, largest, and one of the most respected independent laboratories in the world, issuing certifications for diamonds in the form of a Grading Report or Dossier.

The brilliance of a gemstone is measured by its refractive index, or the extent to which, when coupled with the facet design, the gemstone reflects light. Finally, the fire of a gemstone, or the breaking of light rays into spectral colors, is measured by its dispersion.

Moissanite jewels have a unique combination of brilliance, fire, durability, and rarity. Moissanite’s beauty is objectively derived from its refractive index, which is higher than other gemstones, including diamond, and its hardness is greater than all known gemstone materials except diamond.

Description	Refractive Index	Dispersion	Hardness	Toughness
Charles & Colvard Moissanite	2.65-2.69	0.104	9 1/4	Excellent
Diamond	2.42	0.044	10	Excellent
Ruby	1.77	0.018	9	Excellent
Sapphire	1.77	0.018	9	Excellent
Emerald	1.58	0.014	7 1/2	Good to Poor
The table compares the physical properties of moissanite jewels with other fine gemstone materials. Source: Company Filing

In September 2015, C&C introduced its Forever One gemstones, a true game changer in the industry, because the stones are colorless. So far, the Company had only been able to produce Forever Brilliant near-colorless (G-H-I), and the original Forever Classic faint color (J-K) gemstones. Now thanks to recent technological advancements, the first colorless grade D-E-F Moissanite stones were produced.

Forever One is the ultimate innovation in a colorless gemstone that is the end-desire of consumers who seek to own a colorless gem that would usually be completely out of their reach monetarily.

The stones have been very well received. In fact, during the third quarter of 2015 more than 10% of the Company’s total sales were Forever One.

Sales Channels

Charles & Colvard basically has three sales channels: a wholesale distribution channel through key distributors, jewelry manufacturers, and retailers; and two direct-to-consumer distribution channels which are e-commerce and home-parties.

The Company’s wholesale business operates through a broad range of channels, including jewelry stores, online retailers, television shopping networks, department stores, and catalogs. The wholesale loose jewel business has historically been the largest percentage of total sales, and this trend has continued despite significant growth in the wholesale finished jewelry business that was launched in 2010. For the years ended December 31, 2014 and 2013, the wholesale distribution segment represented 81% and 90% of our total consolidated net sales, respectively, of which wholesale loose jewel sales comprised 59% and 71%, respectively.

C&C also sells moissanite stones and finished jewelry through its direct-to-consumer Moissanite.com e-commerce website. The Company is convinced that its e-commerce sales channel will not only add to top-line revenues in a significant manner, but will also play a key role in increasing overall consumer awareness of moissanite. For the years ended December 31, 2014 and 2013, the e-consumer segment represented 13% and 9% of total net sales, respectively.

In the direct-to-consumer home parties segment, finished moissanite jewelry is offered under the Lulu Avenue brand. Since sales of moissanite are highest when the consumer is educated about its attributes and has the opportunity to see and touch it, home parties are an excellent venue for selling product and expanding consumer awareness. Lulu Avenue was test launched in April 2012. This segment generated 6% and 1% of total net sales during the years ended December 31, 2014 and 2013 respectively.

Expanding Distribution

In the past few weeks Charles & Colvard added some significant wholesale distribution. Moissanite jewelry is now sold at 44 Boscov’s Department stores located in New York, Pennsylvania, Connecticut, New Jersey, Maryland, Delaware, and Ohio as well as its online store at Boscovs.com. The fine jewelry collection consists of earrings, pendants, plus unique fashion and bridal styles starting at $299.

Tejmohan Sawhney, Vice President/DMM, Jewelry at Boscov’s said, “This is a great opportunity for Boscov’s Department Stores as we believe that Charles & Colvard Created Moissanite is a fantastic incremental business for our fine jewelry department. Our customers will love the large stone settings that moissanite provides at such an extraordinary value and we believe introducing this beautiful gemstone during the holiday season is a great benefit for Boscov’s. We believe this gemstone is exactly what our customers are looking for.”

In addition, the Company recently launched its Forever Brilliant jewelry at an undisclosed nationwide U.S. retailer for a 50-store test.

Marketing Expert as New CEO

Effective December 1, 2015, Suzanne Miglucci will become the next President and Chief Executive Officer of Charles & Colvard. The current CEO will retire as of that date.

In order to excel in today’s retail environment, understanding omni-channel marketing and distribution strategies is key. This is exactly the forte of Ms. Miglucci. She was ChannelAdvisor’s Chief Marketing Officer since 2012, and previously held executive marketing positions at SciQuest, MicroMass Communications and Arsenal Digital Solutions.

Neal Goldman, Executive Chairman of the Board of Directors of Charles & Colvard commented, “As corporations strive to optimize the customer experience and gain market share in an increasingly complex digital marketing space, it is no surprise they are turning to their marketing bench to lead the charge. With our decision to appoint Ms. Miglucci, Charles & Colvard joins the ranks of other brand name market-leading companies which have also recently appointed marketing executives to their helms. We believe Suzanne, as our new President and Chief Executive Officer, will advance the Company to its next levels of success.”

Third Quarter Financials

Net sales for C&C’s third quarter, ended September 30, 2015 increased 44% to $6.5 million compared with $4.5 million in net sales during the same period of 2014. This improvement was primarily due to the launch of the new colorless gemstones Forever One.

Wholesale net sales increased 13% in the quarter compared to the third quarter of 2014 to $3.9 million and comprised 60% of net sales. The Company’s direct-to-consumer home party business, Lulu Avenue, had net sales of $1.4 million in the third quarter of 2015, an increase of 255% compared to approximately $400,000 in the third quarter of 2014. And the direct-to-consumer e-commerce business, Moissanite.com, had net sales of $1.2 million in the third quarter of 2015, an increase of 77% compared to $676,000 in the third quarter of 2014.

The Company’s net sales of loose jewels increased approximately 23% to $2.9 million in the third quarter and comprised 44% of sales, compared with $2.3 million or 51% of sales in last year’s third quarter. Finished jewelry net sales during the third quarter of 2015 were $3.7 million, an increase of 66% as compared to the same quarter in 2014.

Operating expenses were $4.6 million for the third quarter of 2015, compared with $4.3 million for the year-ago third quarter. And net loss for the third quarter was just under $2.0 million, or $0.10 per share, compared with a net loss of $3.1 million, or $0.15 per share, in the year-ago third quarter.

	Three Months Ended September 30		Nine Months Ended September 30
Amounts in $000’s	2015	2014	2015	2014
Net Sales	6,518	4,521	22,372	18,431
Net (Loss)	(1,966)	(3,065)	(7,693)	(10,323)
(Loss) Per Share	(0.10)	(0.15)	(0.38)	(0.51)
Most important income statement data for the quarters and nine months ending September 30, 2015 and September 30, 2014. Source: Company Press Release

Gross margins for the third quarter of 2015 were 40% compared to gross margins for the third quarter of 2014 of 28%. The strong rise was achieved thanks to increased direct-to-consumer business. Lulu Avenue and Moissanite.com have higher gross margins than wholesale business.

Balance Sheet as of September 30, 2015

Cash and liquid investments totaled $5.6 million at September 30, 2015, an increase of $1.6 million from approximately $4.0 million as of December 31, 2014. The Company has no long-term debt and has not utilized the $10 million credit facility it entered with Wells Fargo at the end 2014.

Amounts in $000’s	September 30, 2015	December 31, 2014
Cash and Cash Equivalents	5,602	4,007
Accounts Receivable	2,859	5,510
Inventories	12,808	13,321
Total Current Assets	22,342	23,441
Property and Equipment	1,546	1,859
Inventories	21,185	25,618
Total Assets	45,425	51,426
Accounts Payable	3,297	3,286
Other Current Liabilities	1,172	685
Total Current Liabilities	4,497	4,191
Accrued Expenses	737	810
Total Liabilities	5,651	5,408
Total Stockholder Equity	39,774	46,018
Most important balance sheet data for the periods ending September 30, 2015 and December 31, 2014. Source: Company Press Release

Inventory at the end of the third quarter of 2015 was $34 million, which was a decrease of $4.9 million from $38.9 million at December 31, 2014. The Company spent considerable time and effort reviewing its inventory. The third quarter of 2015 marks the sixth consecutive quarter in which C&C reduced its inventory. Loose jewel inventory at the end of the third quarter was $29.3 million and finished jewel inventory was $4.7 million.

Conclusion

We believe that Charles & Colvard is ready for a true growth spurt in coming quarters, thanks to several recent and upcoming events.

Sales in the Company’s third quarter of 2015 were up 44% and gross margins improved 1,200 basis points to 40% in the same quarter. Much of the sales growth was derived from the new colorless Forever One gemstones, which were only launched in September 2015. We expect to see lots more from this best-in-class brand.

In addition, since online retail sales are increasingly important, we’re convinced that the Company’s new CEO will be able to boost sales through that channel.

Moreover, brick & mortar distribution is increasing as well. In recent weeks two jewelry store chains in the US started offering C&C’s products.

Since the beginning of the year, the Company has lowered its inventory levels by nearly $5 million and increased its cash position by $1.6 million. Reducing the inventory and increasing the cash position remain two key focus points for the Company in coming years.

Charles & Colvard, Ltd.’s common stock is listed on NASDAQ. As of November 10, 2015, there were 21,111,585 shares outstanding, and the stock’s 52-week range is $1.11 to $1.92.

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