Charles & Colvard 3Q Sales Down 37%

Charles & Colvard, Ltd., saw net sales for the third quarter drop 37 percent to $4.2 million, year-over-year, primarily due to a cautious retail environment that has contributed to slower sell thru rates and reduced inventory commitments from the major retailers that sell moissanite jewelry, the Morrisville, N.C.-based company said Tuesday.

The sole manufacturer and distributor of moissanite said its net loss for the third quarter ended Sept. 30 was $3.1 million, compared with net income of $200,000 for the third quarter of 2007. Included in the third quarter 2008 net loss are non-cash bad debt expense, severance costs and other non-recurring items totaling $3.2 million.

“The very aggressive actions we have taken to reduce our cost structure have enabled us to be approximately break even this quarter excluding one-time, non-recurring charges,” said Dennis M. Reed, Charles & Colvard president and chief marketing officer. “We were also pleased that we began to see new order flow from retailers which substantially completed a transition to other manufacturers from a former manufacturer.”

Reed continued, “We are now focused on capitalizing on our valuable inventory in order to generate cash. Our recent focus on cost containment and cash preservation will continue as we build the foundation to implement new strategies aimed at expanding our business.”

Domestic sales for the third quarter declined 45 percent to $2.9 million and international sales for the third quarter increased 1 percent to $1.3 million. Total shipments of 22,900 carats for the current period were 44 percent less than the 40,800 carats shipped in the same period of 2007. Shipments of carats in the U.S. decreased 56 percent to 14,900, or 65 percent of total shipments. International shipments of carats increased 16 percent to 8,000. Some portion of the jewels sold through the company’s international sales will be re-imported to North American retailers. The average selling price per carat increased 5 percent in the third quarter of 2008 compared to the third quarter of 2007.

Gross profit declined $2.2 million compared with last year’s third quarter primarily due to lower sales. Gross margin also decreased to 63.5 percent in the third quarter of 2008 from 74.1 percent in the comparable quarter of 2007, primarily due to higher production costs of the jewels being relieved from inventory, a higher amount of damaged jewel returns over the same period last year, and an increase in our reserve on consigned inventory.

Operating expenses were $7.5 million in the third quarter of 2008, an increase of $3.2 million, year-over-year. Marketing and sales expenses were reduced by approximately $1.1 million to $2 million in this year’s third quarter, primarily due to decreased advertising expenses. General and administrative expense increased $4.3 million primarily due to a $4 million increase in the bad debts reserve related to a wholesale customer. In addition, the 2008 third quarter operating expenses included severance expense of $0.5 million and $0.2 million of costs associated with the closure of our Hong Kong and China operations.

Operating loss for the third quarter of 2008 was $4.9 million compared with operating income of $600,000 for the same period in 2007. Net loss for the third quarter was $3.1 million, compared with net income of $200,000, for the third quarter of 2007. Contributing to the third quarter net loss are (all items are net of income tax) $2.6 million related to the increased bad debt reserve, $300,000 related to severance costs, $200,000 related to closure of our operations in Hong Kong and China, and $100,000 related to the increased reserve on consigned inventory. The total of these losses is $3.2 million, net of income tax.

At Sept. 30, Charles & Colvard had $4.1 million in cash and no long term debt.

At the end of the third quarter, the company had trade accounts receivable of $5.2 million with one of its wholesale customers. With the increased reserve for bad debts, the net value on the Company’s books for this receivable is approximately $650,000.

“We are making every effort not to disrupt business at certain large retailers during the holiday season while pursuing collection in full for all amounts owed to us from this wholesale customer,” Reed said. “We reserved the substantial majority of the receivable primarily due to the economic environment’s impact on the jewelry industry and non-payments from this customer.”

In August 2008, Charles & Colvard received a letter from NASDAQ indicating that the company did not meet the minimum $1 closing bid price requirement and is subject to potential delisting. In October 2008, NASDAQ suspended enforcement of the rule requiring a minimum $1 closing bid price. As a result of the suspension, the company will have until May 21, 2009, to regain compliance with the minimum closing bid price requirement.

“We made significant progress this last quarter which included negotiating with our two leading suppliers to defer raw material purchases in the fourth quarter while keeping in place our long term supply agreements. The agreements will reduce our cash requirements in the fourth quarter and allow us to reduce our existing inventory,” Reed said.

“We also completed the closure of our Hong Kong and China operations and transferred the customer relationships to our U.S. operations. We do not expect a disruption of sales in our Asian markets as a result of this move.

“We believe the bold, decisive changes we have made, which include a realignment of our management team, has established a sound foundation from which we can redefine our approach to the market and pursue growth in our sales.”