Charles & Colvard Ltd.

Good day and welcome to the Charles and Colvard second quarter fiscal year 2024 earnings conference call and webcast. All participants will be in a listen-only mode. Should you need assistance, please signal conference specialists by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. And to withdraw your question, please press star then two. This earnings call may contain forward-looking statements as defined in Section 27A of the Securities Act of 1933 as amended. Including statements regarding, among other things, the company's business strategy and growth, expressions that identify forward-looking statements are based largely on our company's expectations and are subject to a number of risk and uncertainties, some of which cannot be predicted or quantified, and are beyond our control. Future developments and actual results could differ materially from those set forth in contemplated by or underlying the forelooking statements in light of these risks and uncertainties. There can be no further assurance that this forelooking information will prove to be accurate. Accompanying today's call is a supporting PowerPoint slide deck, which is available in the investor relations section of the company's website at ir.charlesandcovard.com front slash events. The company will be hosting a Q question and answer session at the conclusion of the prepared remarks session. Should you have any questions, if you'd like to submit, please email IR at Charles and colvard.com. Please know this event is being recorded. I would now like to turn the conference over to Mr. Don O'Connell, Mr. Don O'Connell, president and chief executive officer. Please go ahead, sir.

Good afternoon, everyone, and welcome to our second quarter fiscal 2024 financial results conference call. During our second quarter, we continue to experience the effects of a challenging year for the jewelry industry. But we were not alone. Reports by Teneris indicate that the US jewelry market sank 5.8% in 2023. Despite the impacts on our business and margins from challenging economic conditions, rising commodity prices, and downward pricing pressure on lab-grown diamonds, we remain resilient in the face of adversity. We ended the quarter debt-free with $11.1 million in total cash, delivered $7.9 million in revenue, and decreased inventory to $25.8 million. As lab-grown diamond pricing pressure impacts the value proposition of moissanite and retailers seek competitive prices and alternative sources, it is imperative that we forge direct relationships with independent jewelers to protect our brand equity and the value of Charles & Colvard moissanite. As a result, we anticipated the decline in our traditional segments. specifically loose gemstone sales, as we continue to transition away from our distributor model and prepare to engage directly with thousands of independent jewelers through our new owned web property, charlesandcolvarddirect.com. Allowing independent jewelers to purchase directly from the source will enable them to be more agile and responsive to market conditions to help maximize their profits. We feel this ongoing transition will be critical to the business reaffirming our position in the lab-grown market as the original creator and source of the world's finest Moissanite gems. We believe we will begin to see the positive impact of this strategic shift in the coming quarters. While we experienced softness in loose gemstone sales, during the quarter, we were encouraged by our finished jewelry holiday performance with our brick-and-mortar partners. We continue to modify and optimize our Forever One Moissanite in-store assortment with new designs and increased carat weights, highlighting Moissanite's value proposition and further differentiating ourselves against competitive diamond alternatives. Additionally, we are pleased to have introduced Arcadia Lab Grown Diamond finished jewelry in key Helzberg diamond stores ahead of the holiday season. We believe this addition to our in-store assortment highlights the importance of our strategic merchandising to offer design supporting both moissanite and lab-grown diamonds, reinforcing the market opportunity for both our gem categories. As more retailers adopt lab-grown diamond assortments to meet the growing consumer demand, we believe this important expansion will allow us to gain a greater share of the overall fine jewelry market. In our online channel segment, which now represents 84% of total net sales, we experienced sequential growth in lab-grown diamond sales, up 15% year-over-year on charlesandcobar.com for the quarter. Lab-grown diamonds continue to climb as a percentage of our total revenue, increasing our total achievable market opportunity. We continue to make strategic capital investments to optimize our web property, charlesandcobar.com, as we prepare to launch phase one of our next gen e-commerce platform in Q4. We believe next gen will transfer our Charles and Cobar direct to consumer e-commerce experience in myriad ways designed to create a better user experience and increase sales conversions. We believe our new headless front end e-commerce platform powered by custom proprietary code contained within industry-leading open source applications, will dramatically increase our site speed, gather critical consumer data and shopping behavior, split test shopping journeys, bolster SEO rankings, and add a variety of new shopping experiences. These advanced product configuration capabilities and new two-step custom engagement ring builder will allow consumers to browse the catalog more efficiently. We believe these significant changes to the shopping journey will greatly increase the overall customer experience while driving additional revenue. Our web property, MoissaniteOutlet.com, up 21% year-to-date in revenue compared to last year, remains an important revenue driver and disposition outlet for obsolete and legacy inventory. As we refine our merchandising strategy to support our other channels, MoissaniteOutlet.com continues to serve consumers seeking clearance in low-cost merchandise. MoissaniteOutlet.com enables us to capture the lower end of the market without diminishing the Charles and Colbert brand. During Q2, we also successfully launched a new transactional web property, MadeShopping.com, to support our streaming and broadcast initiative, MadeShopping. In October, we launched our pilot programming on MadeShopping, featuring Charles and Colbert products across satellite, linear broadcasting, and live streams on social media platforms, such as Facebook, YouTube, and X, and other mediums. Our phase one content followed the traditional home shopping model featuring nationally recognized hosts. We are pleased to note an overall lift in direct consumer traffic on made shopping.com as well as charlesandcobart.com which we believe is due to our made shopping presence reaching a broader audience since the launch of our new initiative. Made is for those who want to understand the why behind their purchase. for those who prioritize trust in their purchasing decisions, and for those who appreciate products that are thoughtfully created with a better world in mind. At Made Shopping, we're on a mission to redefine how customers shop, starting with a curated collection of exquisite fine jewelry by Charles and Colvard as the flagship brand. But that's just the beginning. We're working behind the scenes to explore potential partners who share our commitment to quality, craftsmanship, and the made ethos, with plans to eventually expand our made shopping offerings to other product verticals. Phase two of made shopping will evolve into a mix of traditional and modern content, a unique blend of education, entertainment, and interactive live shopping and storytelling, creating a personal and purposeful destination for today's consumers. We believe this initiative will be our solution for consumers seeking hyper curated shopping experiences. Further, solidifying our brand's presence in a growing market and thereby helping to increase shareholder value. Although we experienced softness in the beginning of the quarter, we witnessed an increase in demand in December year over year for CharlesandCobart.com, which we attributed to top of funnel awareness driven by our direct to consumer shopping initiatives. Our concerted efforts across multiple properties collectively fueled top-line revenue growth during the quarter's final month. Furthermore, we are thrilled to have launched two strategic online partnerships within the Corps, with Fred Meyer Jewelers and the Army and Air Force Exchange Service for the Exchange. These partnerships performed well out of the gate and will, we believe, become important revenue drivers for us in future quarters. As we look ahead, we remain focused on preserving cash while strategically scaling resources to support current and future state revenue drivers. I will now turn the presentation over to Clint Peet, our CFO, to provide detailed insight into Q2's financial performance. Clint, please proceed.

Thanks, Don. Today I'll provide a summary of key financials for the second quarter ended December 31, 2023. Additional details can be found in our earnings press release that we issued this afternoon and our Form 10-Q, which we expect to file tomorrow. Please note that all percentage comparisons are to the second quarter ended December 31st, 2022, unless specified otherwise. First, we'll start on slide nine with the comparative analysis of the second quarter of fiscal 2024 compared to the same period one year ago. In total, Net sales for Q2 2024 totaled $7.9 million versus $10.4 million, a decrease of 24%, due primarily to the continued general economic uncertainties and the expected decline in the company's wholesale revenue as we shift to a more direct-to-consumer business model and as our independent jeweler initiatives matures. Net sales for our online channel segment, which is primarily direct-to-consumer and includes charlesandcover.com, MoistureNetOutlet.com, Charles and Colbert Direct.com, MadeShopping.com, Marketplaces, Drop Ship Retail, and other pure play outlets, totaled $6.7 million for the quarter, now representing 84% of total net sales, up from 76% one year ago. Net sales for our traditional segment, which consists of wholesale and brick and mortar customers, totaled $1.3 million for the quarter, representing now 16% of total net sales, compared to 24% of sales in the year-ago quarter. Finished jewelry net sales represented 93% of total sales for the quarter, up from 81% of sales in the second quarter one year ago, as we continue to position ourselves in the fine jewelry market and move more to the direct consumer model. As we expected, due to the previously mentioned strategies, loose jewelry net sales decreased 73% for the quarter. Domestic sales represented 98 percent of all sales in the second quarter, with international net sales totaling 2 percent. Moving on to slide 10 to discuss gross margin, reported a gross margin of 36 percent versus 41 percent gross margin in the year-ago quarter, or a gross profit of $2.9 million versus $4.3 million in gross profit in the year-ago quarter. For Q2 2024, operating expenses increased 5% from the year-ago quarter. Sales and marketing expenses decreased 1% to $4.3 million. General and administrative expenses were $1.5 million for the quarter compared to $1.2 million in the year-ago quarter for a 26% increase. The increase in G&A for Q2 was due in large part to the increase in legal fees related to various corporate matters compared to the prior year quarter. We reported a net loss for Q2 2024 of $2.9 million, or $0.09 loss per diluted share, compared with a net loss of $1 million, or $0.03 loss per diluted share in the year-ago period. The main drivers for our increased net loss were, again, as noted last quarter, the decline in revenue and additional expenses due to the various ongoing corporate matters within the quarter. Our weighted average share is outstanding on a diluted basis used in the calculation of the loss per share for the quarter. We're approximately 30.3 million shares for the period ended December 31, 2023, same as in the year-ago quarter. Now, let's move on to a snapshot of our balance sheet. Our liquidity and capital position remains strong as we ended the quarter with $11.1 million of total cash. compared to $15.6 million at the end of the fourth quarter ended June 30, 2023. Working capital remained strong at $15.3 million. In addition, the company was debt-free as of December 31, 2023. Our cash flow used in operations was $1.3 million during the quarter, compared to $600,000 of cash flow generated from operations during the same quarter a year ago. and a reduction from our cash burn in Q1 2024, which was $2.7 million. In terms of other sources of liquidity, we have access to our $5 million cash-secured credit facility with JPMorgan Chase Bank. As of December 31, 2023, there were no outstanding amounts due on the credit facility. Inventory as of December 31, 2023, totaled $25.8 million, compared to June 30, 2023 when it totaled $26.8 million compared to $35 million at December 31st, 2022. A year-over-year decrease of more than $8 million due to the inventory write-down in Q4 FY2023. Luce Jewell's inventory was $8.5 million as of December 31st, 2023 compared to $9.1 million as of June 30th, 2023. and compared to $15.9 million as of December 31, 2022, a year-over-year decrease, again, due to the inventory write-down referenced above. Vendor Jewelry Inventory was $17 million as of December 31, 2023, compared to $17.3 million as of June 30, 2023, and compared to $18.8 million as of December 31, 2022. The company remains focused on prudent inventory management strategies. Book value per share at the end of the second quarter was $1.13 per share, trading well below market. In summary, we remain steadfast in our cash management, while diligently deploying capital in support of our ongoing strategic initiatives. With that, I'll turn it back over to Don.

Thank you, Clint. In conclusion, we acknowledge the recent industry shift has presented us with numerous challenges and has significantly impacted our earnings. However, we do not believe this setback will deter our progress or hinder our long-term growth and strategic initiatives. We remain committed to delivering long-term shareholder value and look forward to the opportunities that lie ahead. Thank you for your continued support and confidence in our company. At this time, I'll turn it back over to the operator who will open the lines for any questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. We ask that you please limit yourself to one question and one follow-up. And if you have further questions, you may re-enter the question queue. And at this time, we'll pause momentarily to assemble our roster. Again, if you have a question, please press star, then 1. And the first question will come from Paul Johnson with Johnson Investments. Please go ahead.

Yes, good afternoon. I have a question on the operating expenses, which are roughly flat with a year ago, some changes, but roughly flat. We lost $3 million, and I know we've got $11 million in cash, and I know it's not a straight-line cash burn, but if we have one more year of losing $3 million in a quarter, that's going to destroy all the cash that's on the balance sheet. So I'm not hearing anything in the call that makes us think that leaving aside the plans and the marketing plans, how are we going to preserve this cash based on the cash burn now?

Yeah, hey, Paul, thanks for the question. So certainly cash burn, I mean, we did reduce our cash burn from last year, which was I believe was $2.7 million versus $1.3 million this quarter. So we're pretty good at, you know, kind of understanding that we are burning cash and it's costing us money to operate the business. I will tell you that what people don't look at is they don't look at the concentration of inventory, the concentration of the finished jewelry, which is $17 million plus at this time. Incorporated in that finished jewelry is the commodity, which is gold itself. So we're constantly making additional investments in the material and in the merchandise that we bring to market. So that gold within that product is highly liquidable, and we're able to raise cash on that. So with that being said, we have $11 million plus in cash, and then we have the cash equivalents between the inventory side, which is a much different dynamic in business than it was in the years past. So optically, it may seem a little bit different, but we're actually in a better place. You know, we're spending the necessary dollars to make the investments where they need to be to be able to drive the business for the future. I'm pretty confident in kind of where we're going and what we're building, Certainly, cash and preservation of cash is really, really critical, so look to us to be prudent on that. Look to us to make strategic investments where it makes sense, and look to us to cut back and reserve when possible in the coming months. But right now we're launching a new web property that takes capital. We're deploying capital to be able to kind of bring forward the best in class of our web experience. We're making initiatives where we believe it's going to be driving growth for the future. We're making investments in resources, so we're bringing on staff that are specific to different areas of the business that we believe that's going to bring growth and drive growth. Certainly, you know, your question is very valid. But, you know, moving forward, we're pretty confident in where we'll be in the future. So, you know, we had to shift in kind of moissanite versus lab-grown diamonds. We had some downward pressure on the moissanite market. You had the economy, some other things. But I believe that, you know, kind of the quarters ahead, we'll start to turn this a little bit. We'll start to be more, you know, cognizant on the profitability of the business as the shift starts to happen once we start to get some of these things and these new initiatives online and focus more on the revenue side of it and streamline in the business and get the more profitable considerations to come. So I don't know if I answered that, but I appreciate that.

So if there's roughly 10 million in inventory, Going back to your point about a lot of it being gold or very liquid, just ballpark, how much of the $10 million could be liquidated if we needed the cash? Liquidated quickly. I'm talking about not finished products.

Yeah, so, and again, you know, when I was with Berkshire Hathaway's Rich Line Group, I mean, we certainly looked at everything, and, you know, we try to drive the business. If a catastrophic event were to occur, what is liquids? The beauty of our business is the gold is commodities, so it is highly liquid. So with our inventory at $25 million, you look at the concentration of that inventory, specifically that inventory is comprised of finished jewelry at $17 million. If you took, you know, 60% of that inventory and said it's gold, that gold is at 14 carat. It's very, very simple to come up with the economics on that. $4.55. So, I mean, that's basically where you're at with that, and then you have the $11.1 million in cash. You have no debt right now in the business, so we still feel that we're in a good place. We also have a $5 million credit line that's available to us to kind of continue to grow and kind of shape this business. So a lot of other companies don't have the commodity in gold in their finished products, right? So that's one advantage we have.

I appreciate it. Thank you.

Again, if you have a question, please press star, then 1. This concludes our question and answer session. I would like to turn the conference back over to Mr. Don O'Connell for any closing remarks. Please go ahead, sir.

I want to thank everyone for their attention and continued belief in the company. We look forward to sharing our progress and achievements with you in the future. Thank you.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.