Charles & Colvard Reports Third Quarter 2009 Financial Results

MORRISVILLE, N.C.--(BUSINESS WIRE)--Charles & Colvard, Ltd. (NASDAQ: CTHR), the sole manufacturer of moissanite jewels, The Most Brilliant Jewel in the World^TM, announced today its financial results for the third quarter ended September 30, 2009.

Net sales for the quarter were $2.1 million, down 48% from $4.2 million in the third quarter of 2008. Net sales for the first nine months of 2009 were $6.0 million, down 47% from $11.2 million for the same period of 2008. Sales were impacted by the economic recession, which has measurably affected the retail and jewelry industries, combined with reduced demand from major retailers who curbed purchases due to current levels of moissanite inventory. However, net sales for the quarter were up 62% over net sales of $1.3 million in the second quarter of 2009 compared to a 14% increase in third quarter 2008 over second quarter 2008.

Loss from operations for the quarter was $491,000, a $4.4 million, or 90%, improvement over the loss from operations of $4.9 million in the third quarter of 2008. Loss from operations for the first nine months of 2009 was $2.9 million, a $4.6 million, or 61%, improvement over the loss from operations of $7.6 million for the same period of 2008. Offsetting sales declines was a reduction in costs and expenses in the three and nine months ended September 30, 2009 of $6.4 million and $9.9 million, respectively, when compared with the corresponding periods in 2008, due to lower sales and cost control measures, including a reduction in headcount and decreased expenses for sales and marketing programs, and a bad debt charge of $4.1 million recorded in third quarter 2008.

Randy N. McCullough, Chief Executive Officer of Charles & Colvard, commented, "My first week on the job has been quite pleasing with the third quarter results generated by the team. Seasonally, sales in this quarter are generally strong; however, we experienced a larger increase than projections that were based on prior months’ trends. The team also continued identifying cost savings which, when combined with our improved sales, resulted in the lowest quarterly net loss we have recorded since third quarter 2007. My first priority as Charles & Colvard's new Chief Executive Officer will be to work closely with our customers and the management team to leverage our strengths, thus creating new opportunities for moissanite in the marketplace. We believe our jewel has great potential as we reposition its future."

Financial Position

The Company had $6.8 million in cash at the end of the quarter and generated $1.4 million of cash from operations during the nine months ended September 30, 2009. A $1.5 million decrease in accounts receivable, receipt of a $2.1 million income tax receivable, and a $2.2 million decrease in inventory were the primary drivers for positive cash flow, which more than offset the net loss of $3.0 million and a $1.3 million decrease in accounts payable.

Total inventory, including long-term and consignment inventory, was $42.2 million at the end of the quarter, down slightly from $43.0 million at year-end 2008 and at the end of second quarter 2009. No purchases of raw material were made in the nine months ended September 30, 2009. Trade accounts receivable were $918,000, down from $3.8 million at year-end 2008 and up from $363,000 at the end of second quarter 2009. Cash collections and a settlement agreement with a former customer positively impacted accounts receivable during the first nine months of 2009.

NASDAQ Listing Status

In August 2008, the Company was notified by the Listing Qualifications Department of The NASDAQ Stock Market LLC (“NASDAQ”) that its common stock is subject to potential delisting from the NASDAQ Global Select Market because, for the preceding 30 consecutive business days, the price of the Company’s common stock had closed below the minimum $1.00 closing bid price requirement. In response to extraordinary market conditions, NASDAQ suspended enforcement of the minimum $1.00 closing bid requirement until July 31, 2009. As a result of the temporary suspension, the Company currently has until December 2, 2009 to regain compliance with the minimum $1.00 closing bid price requirement for continued listing on the NASDAQ Global Select Market.

Third Quarter Results Webcast

Charles and Colvard will host a webcast to present third quarter 2009 results on Thursday, November 12, 2009 at 4:15 p.m. Eastern Time. The webcast can be accessed live and will be available for replay at www.charlesandcolvard.com.

About Charles & Colvard, Ltd.

Charles & Colvard, Ltd. (NASDAQ: CTHR), based in the Research Triangle Park area of North Carolina, is the global sole source of lab-created moissanite, a unique, near-colorless jewel that is distinct from other gemstones and jewels based on its exceptional fire, brilliance, luster, durability, and rarity. Charles & Colvard Created Moissanite is currently used in fine jewelry sold primarily through domestic and international retailers. For more information, please access www.moissanite.com or www.charlesandcolvard.com.

Charles & Colvard and Charles & Colvard Created Moissanite are registered trademarks of Charles & Colvard, Ltd.

This press release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Statements expressing expectations regarding our future and projections relating to products, sales, revenues, and earnings are typical of such statements and are made under the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, statements about our plans, objectives, representations, and contentions and are not historical facts and typically are identified by use of terms such as “may,” “will,” “should,” “could,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “continue,” and similar words, although some forward-looking statements are expressed differently.

All forward-looking statements are subject to the risks and uncertainties inherent in predicting the future. You should be aware that although the forward-looking statements included herein represent management’s current judgment and expectations, our actual results may differ materially from those projected, stated, or implied in these forward-looking statements as a result of many factors including, but not limited to, the recent downturn in the worldwide economy and its ongoing impact on our business and the business of our customers and suppliers, any continued trends in the general economy that would adversely affect consumer spending, a further decline in our sales, dependence on consumer acceptance of our products, dependence on Cree, Inc. as the current supplier of most of the raw material, ability to develop a material second source of supply, dependence on a limited number of customers, risks of conducting operations in foreign countries, dependence on third parties for the sales and marketing of our products to end consumers, continued listing of our common stock on the NASDAQ Global Select Market, and the impact of significant changes in our management on our ability to execute our business strategy in the near-term, in addition to the other risks and uncertainties described in more detail in our filings with the Securities and Exchange Commission, or the SEC, including our Annual Report on Form 10-K for the fiscal year ended December 31, 2008 and subsequent reports filed with the SEC. Forward-looking statements speak only as of the date they are made. We undertake no obligation to update or revise such statements to reflect new circumstances or unanticipated events as they occur except as required by the federal securities laws, and you are urged to review and consider disclosures that we make in the reports that we file with the SEC that discuss other factors relevant to our business.

Charles & Colvard, Ltd. Condensed Consolidated Statements of Operations (unaudited)
		Three Months Ended September 30,								Nine Months Ended September 30,
		2009				2008				2009				2008
Net sales		$	2,145,003			$	4,162,544			$	5,950,398			$	11,206,104
Costs and expenses:
Cost of goods sold			848,936				1,519,997				2,580,899				4,227,588
Sales and marketing			673,917				2,006,745				1,504,308				5,821,681
General and administrative			1,082,000				5,480,036				4,411,042				8,686,837
Research and development			31,084				12,461				376,775				35,640
Total costs and expenses			2,635,937				9,019,239				8,873,024				18,771,746
Loss from operations			(490,934	)			(4,856,695)				(2,922,626	)			(7,565,642	)
Interest income			6,746				21,495				25,594				96,218
Loss before income taxes			(484,188	)			(4,835,200	)			(2,897,032	)			(7,469,424	)
Income tax benefit (expense)			(17,270	)			1,712,587				(62,187	)			2,570,236
Net loss		$	(501,458	)		$	(3,122,613	)		$	(2,959,219	)		$	(4,899,188	)
Net loss per common share:
Basic and fully diluted		$	(0.03	)		$	(0.17	)		$	(0.16	)		$	(0.27	)
Weighted average number of shares used in computing net loss per common share:
Basic and fully diluted			18,925,224				18,334,136				18,638,453				18,209,532

Charles & Colvard, Ltd. Condensed Consolidated Balance Sheets
		September 30, 2009 (unaudited)			December 31, 2008
ASSETS
Current assets:
Cash and cash equivalents		$	6,795,215		$	5,587,144
Accounts receivable, net			918,473			3,754,657
Interest receivable			60			2,747
Income tax receivable			-			2,074,420
Notes receivable			-			142,000
Inventory, net			2,297,863			6,849,239
Inventory on consignment, net			672,127			1,442,608
Prepaid expenses and other assets			292,077			500,643
Deferred income taxes			1,484,140			1,231,071
Total current assets			12,459,955			21,584,529
Property and equipment, net			339,160			412,234
Patent and license rights, net			268,081			279,315
Inventory, non-current, net			39,241,461			34,727,841
Note receivable, non-current			224,627			82,627
Deferred income taxes, non-current			575,075			940,903
TOTAL ASSETS		$	53,108,359		$	58,027,449
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	315,530		$	1,631,074
Deferred revenue			-			171,181
Accrued co-op advertising			308,965			401,849
Accrued expenses and other liabilities			200,171			623,584
Total current liabilities			824,666			2,827,688
Long-term liabilities:
Accrued income taxes			3,214,218			3,154,110
Total liabilities			4,038,884			5,981,798
Commitments and contingencies
Stockholders’ equity:
Common stock, no par value			52,910,075			52,910,075
Additional paid-in capital – share-based compensation			6,160,289			6,177,246
Accumulated deficit			(10,000,889	)		(7,041,670	)
Total stockholders’ equity			49,069,475			52,045,651
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	53,108,359		$	58,027,449

Charles & Colvard, Ltd. Condensed Consolidated Statements of Cash Flows (unaudited)
	Nine Months Ended September 30,
	2009				2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(2,959,219	)		$	(4,899,188	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		126,418				159,756
Share-based compensation		93,520				333,983
Provision for uncollectible accounts		166,600				4,540,000
Provision for sales returns		(135,000	)			125,000
Consignment inventory reserve		(153,000	)			324,000
Provision (benefit) for deferred income taxes		112,759				(1,785,494	)
Loss on disposal of assets		-				62,135
Changes in assets and liabilities:
Accounts receivable		1,530,344				1,445,091
Income tax receivable		2,074,420				(596,637	)
Inventory		2,235,477				(663,913	)
Other assets, net		211,253				272,077
Accounts payable		(1,315,544	)			(2,507,210	)
Deferred revenue		(171,181	)			100,000
Accrued co-op advertising		(92,884	)			218,208
Other accrued liabilities, net		(363,305	)			257,801
Net cash provided by (used in) operating activities		1,360,658				(2,614,391	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(20,044	)			(28,910	)
Patent and license rights costs		(22,066	)			(268,751	)
Proceeds from sale of equipment		-				898
Net cash used in investing activities		(42,110	)			(296,763	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Excess tax cost from share-based payment arrangements		(110,477	)			-
Net cash used in financing activities		(110,477	)			-
Effect of foreign currency translations		-				1,263
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		1,208,071				(2,909,891	)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		5,587,144				7,048,409
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	6,795,215			$	4,138,518
Supplemental schedule of non-cash operating activities:
Inventory acquired from settlement of accounts receivable	$	1,274,240			$	-
Supplemental schedule of non-cash investing activities:
Reduction of note receivable	$	-			$	140,763