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C&

CHARLES & COLVARD LTD (CTHR)·Q1 2024 Earnings Summary

Executive Summary

  • Q1 FY2024 net sales declined 33% year over year to $4.95M and gross margin contracted to 39% from 45% YoY; diluted EPS was -$0.08, driven by weaker wholesale demand and higher G&A including ~$0.3M cybersecurity costs .
  • Sequentially, revenue fell vs Q4 FY2023 ($5.56M) but margins rebounded from a negative Q4 driven by a $5.9M inventory write-down; Q1 gross margin of 39% vs Q4’s -90% is a meaningful improvement .
  • Management emphasized direct-to-consumer expansion and shoppable streaming (Made Shopping), and highlighted holiday preparedness with $12.7M cash and $27.3M inventory; no formal quantitative guidance was provided .
  • Call catalysts: strategic pivot to DTC and streaming, stabilization in lab-grown diamond pricing, and NASDAQ compliance efforts; Q&A surfaced Wolfspeed supply agreement arbitration and Board’s consideration of alternatives amid multi-quarter losses .

What Went Well and What Went Wrong

  • What Went Well

    • Gross margin recovery: Q1 GM 39% vs Q4’s -90% after prior write-down; CFO cited improved mix and holiday inventory positioning .
    • DTC focus strengthening: Online Channels were 79% of sales (up from 66% YoY), reflecting strategic shift; management highlighted shoppable streaming and Charles & Colvard Direct .
    • Product expansion and brand elevation: Larger Caydia lab-grown diamond assortments and couture designs; CEO: “We believe…our product portfolio…to meet and exceed customer demands during the upcoming holiday season” .

  • What Went Wrong

    • Revenue and wholesale pressure: Net sales -33% YoY; Traditional segment -59% YoY to $1.0M as distributors reduced demand .
    • Operating expense and cybersecurity: G&A +31% YoY to $1.9M including ~$0.3M cybersecurity costs; net loss widened to -$2.54M .
    • Lab-grown diamond price pressure compressing moissanite delta; CEO noted “price of lab grown has come down unbelievably low,” pressuring moissanite positioning .

Financial Results

MetricQ3 2023Q4 2023Q1 2024
Revenue ($USD Millions)$6.64 $5.56 $4.95
Diluted EPS ($USD)-$0.28 -$0.30 -$0.08
Gross Margin (%)32% -90% 39%
Operating Expenses ($USD Millions)$4.32 $4.34 $4.58
Net Income ($USD Millions)-$8.40 -$9.25 -$2.54

Segment and product breakdown

MetricQ3 2023Q4 2023Q1 2024
Online Channels ($USD Millions; % of sales)$4.6; 70% $4.2; 75% $3.9; 79%
Traditional ($USD Millions; % of sales)$2.0; 30% $1.4; 25% $1.0; 21%
Finished Jewelry ($USD Millions)$5.3 $4.7 $4.3
Loose Jewels ($USD Millions)$1.3 $0.9 $0.7

Key KPIs

KPIQ3 2023Q4 2023Q1 2024
Weighted Avg Diluted Shares (Millions)30.34 30.34 30.44
Cash + Restricted Cash ($USD Millions)$15.97 $15.57 $12.67
Inventory ($USD Millions)$33.3 $26.8 $27.3
Book Value per Share ($USD)$1.60 $1.30 $1.22
DebtNone None None
Working Capital ($USD Millions)n/a$17.3 $15.1

Estimate comparison (consensus unavailable via S&P Global for microcap)

MetricQ1 2024 ActualQ1 2024 Consensus
Revenue ($USD Millions)$4.95 N/A – unavailable (S&P Global data not accessible due to quota limits)
Diluted EPS ($USD)-$0.08 N/A – unavailable (S&P Global data not accessible due to quota limits)

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
RevenueQ2 FY2024/HolidayNot providedNot provided; management “remain[s] focused on reaching broader audiences…as our investments in technology begin to drive revenue” Maintained “no formal guidance”
Gross Margin %FY2024Not providedNot provided; margin drivers discussed qualitatively (pricing/mix, impact of prior write-down) Maintained
Operating ExpensesFY2024Not providedNot provided; noted cybersecurity spend (~$0.3M in Q1) and continued brand/tech investment Maintained
EPSFY2024Not providedNot provided Maintained
Tax RateFY2024Not providedNot discussed numerically in Q1; prior commentary on deferred tax valuation allowance (Q3 FY2023) Maintained
Segment-specificFY2024Not providedDirectional: increase DTC/streaming; stabilize Traditional via selective assortments Strategic shift, no ranges
DividendsFY2024NoneNone discussed No change

Earnings Call Themes & Trends

TopicPrevious Mentions (Q3 FY2023)Previous Mentions (Q4 FY2023)Current Period (Q1 FY2024)Trend
DTC and Streaming (Made Shopping)Investing in video/streaming; building shoppable capability Beta launch to 20M households; multi-platform streaming; holiday debut Live multi-platform streaming blocks; building content, QR-driven shoppable commerce; expanding portal Scaling functionality and content
Lab-grown vs Moissanite PricingDownward lab-grown pricing compresses moissanite delta; plan to maintain value gap Inventory write-down; reassessing value proposition; expand Caydia Seeing stabilization; opportunistic lab-grown buys; plan to widen moissanite delta Moderating pressure; tactical procurement
Traditional/Wholesale ChannelDistributors cutting forecasts; Traditional down 40% Traditional down 61%; shift to DTC Traditional down 59%; direct portal for independent jewelers Continuing decline; strategic pivot
Cybersecurityn/aIncident identified late Q4; no data compromise; incremental costs ~$0.3M spend; insurance expected; BAU restored Contained; residual minor costs
Liquidity/Inventory$16.0M cash; $33.3M inventory $15.6M cash; $26.8M inventory after write-down $12.7M cash; $27.3M inventory; 94% in-stock service levels Stable inventory; cash down from Q4
NASDAQ compliancen/an/aCompliance deadline Dec 11; extension plan if needed Monitoring listing compliance
Supplier Agreement (SiC/Wolfspeed)Single supplier dependence noted in filings Continued risk disclosures Arbitration over obligations; no liability recorded; ample inventory Active arbitration; balance-sheet neutral currently

Management Commentary

  • “We remain optimistic that our strategic initiatives will help us to overcome weakened consumer spending…We remain focused on reaching broader audiences and capturing greater market share as our investments in technology begin to drive revenue.” — Don O’Connell, CEO .
  • “Our in-house technology enables us to reach a wider audience…We believe there is potential for future revenue growth as we leverage this medium to educate consumers and showcase our Forever One moissanite and Caydia lab grown diamond….” — Don O’Connell .
  • “We reported a net loss for Q1 2024 of $2.5 million or $0.08 loss per diluted share…The main drivers…were the decline in revenue and added expenses due to the cybersecurity event.” — Clint Pete, CFO .
  • “Price of lab grown has come down unbelievably low…It did absolutely put pressure on moissanite…we believe there’s stabilization coming up.” — Don O’Connell .

Q&A Highlights

  • Wolfspeed supply agreement arbitration: Management confirmed no liability recorded on balance sheet for the $18M outstanding under the agreement; outcome subject to arbitration; company has ample inventory and prioritizes shareholder value in any resolution .
  • Lab-grown diamond pricing: Noted significant declines over nine months with signs of stabilization; opportunistic acquisitions of oversupply goods to enhance margin .
  • Strategic alternatives and capital discipline: Board and management evaluating options daily; core pivot to DTC and Charles & Colvard Direct with reduced reliance on distributors; streaming commerce as differentiated channel .
  • Cybersecurity: ~$0.3M expense in Q1; no ransom paid; insurance expected to offset some costs; operations normalized .
  • Customer metrics and NASDAQ compliance: Repeat customers increased to ~23%; compliance deadline Dec 11 with extension path if needed .

Estimates Context

  • Wall Street consensus for Q1 FY2024 revenue and EPS via S&P Global was unavailable to us due to data access limits; microcap coverage may be limited. Management did not provide formal quantitative guidance ranges this quarter . Where sell-side estimates are unavailable, investors should focus on sequential margin normalization and DTC traction as key inputs to revisions.

Key Takeaways for Investors

  • Margin normalization is the near-term lever: Q1 GM rebounded to 39% from Q4’s -90% post write-down; watch holiday mix and lab-grown procurement strategy for sustainability .
  • DTC and streaming execution are central to the thesis: Online Channels rose to 79% of sales; scaling Made Shopping and Charles & Colvard Direct should reduce wholesale volatility and improve unit economics .
  • Monitor lab-grown price stabilization and moissanite positioning: If lab-grown prices stabilize, CTHR’s plan to widen the moissanite value delta could support ASPs and margins .
  • Liquidity is adequate but trending lower: Cash + restricted cash fell to $12.7M; inventory steady at $27.3M; no debt; working capital ~$15.1M supports holiday season but necessitates disciplined OpEx .
  • Regulatory/listing overhang: NASDAQ compliance timeline and potential reverse split/actions are a watch item; not fundamental but can impact trading dynamics .
  • Arbitration outcome with Wolfspeed is a binary risk: Balance-sheet neutral today, but settlement terms could affect cash; track disclosures .
  • Near-term trading: Stock likely reacts to evidence of holiday sell-through and streaming conversion metrics; medium-term performance hinges on DTC share gains and sustained margin improvement.