10-Q: Charles & Colvard Reports Q2 Loss Amid Sales Decline

Charles & Colvard, a lab-created gemstone company, reported a significant decline in net sales for the quarter and six months ended December 31, 2024, alongside ongoing concerns about its ability to continue as a going concern.

Summary

• Net sales for the three months ended December 31, 2024, decreased by 41% to $4.63 million from $7.91 million in the prior year period.
• Net sales for the six months ended December 31, 2024, decreased by 39% to $7.86 million from $12.86 million in the prior year period.
• The net loss for the three months ended December 31, 2024, was $2.54 million, an improvement from a $2.87 million loss in the prior year period.
• The net loss for the six months ended December 31, 2024, was $4.67 million, an improvement from a $5.41 million loss in the prior year period.
• Cash and cash equivalents decreased to $1.52 million as of December 31, 2024, from $4.14 million as of June 30, 2024.
• Net cash used in operating activities for the six months ended December 31, 2024, was $2.39 million, an improvement from $3.94 million used in the prior year period.
• A $4.77 million settlement agreement was reached with Wolfspeed, terminating the exclusive supply agreement for SiC materials.
• The company's $5.00 million cash collateralized line of credit with JPMorgan Chase was not renewed on January 31, 2025, and the outstanding balance of $2.3 million was paid off.
• A $2.00 million secured convertible note agreement was executed with Ethara Capital, LLC on June 24, 2025.
• The company's common stock was delisted from The Nasdaq Stock Market on April 25, 2025, and now trades on the OTC Expert Market.

Sentiment

Score: 2

Explanation: The company faces severe financial challenges, including significant sales declines, substantial doubt about its ability to continue as a going concern, and a recent delisting from Nasdaq. While cash burn has improved, the overall financial health is precarious, necessitating a new capital raise and ongoing cost-cutting measures.

Positives

• Net loss from operations decreased by 13.6% for the three months and 16% for the six months ended December 31, 2024, compared to the prior year periods.
• Net cash used in operating activities significantly improved, decreasing to $2.39 million for the six months ended December 31, 2024, from $3.94 million in the prior year period.
• Net cash used in investing activities decreased to $180,407 for the six months ended December 31, 2024, from $536,952 in the prior year period.
• The confidential arbitration with Wolfspeed was settled for $4.77 million, terminating the supply agreement and resolving a significant legal contingency.

Negatives

• Consolidated net sales decreased by 41% for the three months and 39% for the six months ended December 31, 2024, primarily due to weakening consumer confidence, inflation, rising interest rates, and increased competition.
• Finished jewelry sales decreased by 42% for the three months and 38% for the six months ended December 31, 2024.
• Loose jewel sales decreased by 30% for the three months and 46% for the six months ended December 31, 2024.
• The company has concluded that existing cash and other resources will not be sufficient to meet working capital and capital expenditure needs over the next twelve months, raising substantial doubt about its ability to continue as a going concern.
• Cash and cash equivalents significantly declined to $1.52 million as of December 31, 2024, from $4.14 million as of June 30, 2024.
• The company's common stock was delisted from Nasdaq and now trades on the OTC Expert Market, potentially limiting liquidity and price.
• The $25.00 million shelf registration statement on Form S-3 is currently unavailable due to late periodic filings, limiting access to capital markets.
• Identified material weaknesses in internal control over financial reporting related to IT general controls and the design/maintenance of effective controls for business processes.

Risks

• Substantial doubt about the ability to continue as a going concern due to losses and cash flow usage.
• Material adverse effects from general economic and market conditions.
• Dependence on increased consumer acceptance, sales growth, and operational execution of strategic initiatives.
• Intense competition in the worldwide gemstone and jewelry industry.
• Potential harm to business if supply of high-quality SiC crystals is interrupted (despite Wolfspeed settlement, new supplier risks exist).
• New legal compliance challenges from evolving privacy regulatory regimes.
• Impact of cyber-attacks or other security incidents on IT infrastructure and network.
• Risks due to international operations, distribution channels, and vendors.
• Inability to fulfill orders on a timely basis.
• Dependence on a limited number of distributor and retail partners in the Traditional segment.
• Quality control challenges leading to lost revenue and harm to brands/reputation.
• Adverse effects on net sales and operating income due to seasonality of business.
• Disruption of operations by natural disasters.
• Dependence of moissanite and lab-grown diamond jewelry sales on precious metal pricing, which is beyond control.
• Current customers potentially perceiving the company as a competitor in the finished jewelry business.
• Adverse effects if the e-commerce opportunity changes dramatically or technology/providers change models.
• Adverse impact from governmental regulation and oversight.
• Uncertain effects of potential future public health crises, epidemics, pandemics, or similar events.
• Arbitration, litigation, and demands resulting in significant liability, costs, and impact on resources/reputation.
• Adverse effects from financial difficulties or insolvency of major customers or their unwillingness/inability to market products.
• Negative or inaccurate information on social media impacting brand and reputation.
• Harm to reputation and negative business effects from real or perceived inaccuracies in key metrics calculations.
• Inability to adequately protect intellectual property.
• Impact of environmental, social, and governance matters on business, reputation, financial condition, and results of operations.
• Business suffering if strategic acquisition or disposition opportunities are not evaluated, implemented, and integrated successfully.
• Inability to accurately report financial results or report them timely due to failure to establish and maintain effective internal control over financial reporting and disclosure controls and procedures.
• Limited liquidity and price of common stock due to delisting from Nasdaq and move to OTC trading.
• Negative effects from proxy contests or other actions of activist shareholders.
• Delay or prevention of company takeover due to anti-takeover provisions of charter documents.
• Uncertainty that the share repurchase program will be fully utilized or enhance long-term shareholder value, and potential negative impact on available cash balance.

Future Outlook

Management is actively working on plans to fund operations and alleviate substantial doubt about the company's ability to continue as a going concern. These plans include evaluating financing arrangements, implementing cost savings actions to reduce cash outflow, and evaluating the liquidation of certain inventories if needed. The company expects to continue innovating and investing in lab-created gemstone technologies and growing global marketplace sales, while focusing on affordability initiatives and domestic markets.

Management Comments

• Our mission is to provide a more conscious and conflict-free fine jewelry experience for our customers, dedicated to blazing a more brilliant path forward with our 'Made, not Mined' gemstones and committed to creating fine jewelry with a conscience.
• Our strategy is to build a globally revered and accessible brand of gemstones and finished fine jewelry products set with moissanite and lab grown diamonds, leveraging our advantage as the original and leading worldwide source of moissanite and purveyor of premium lab grown diamonds.
• A significant component of our strategy in this environment is to focus on our core products, improving the quality and predictability of the delivery of our products and services and placing those products quickly into the hands of our U.S. and international customers at affordable prices.
• Recognizing today that our customers and vendors are resource-constrained, we are endeavoring to develop and extend our portfolio of products in a disciplined manner with a focus on domestic markets close to our core capabilities, and growing our global marketplace sales.

Industry Context

The company operates in an e-commerce environment characterized by complexity in global markets and ongoing economic uncertainties in the U.S. and internationally. Overall consumer confidence has shown signs of weakening due to general economic uncertainties, coupled with domestic and worldwide inflation, including recessionary fears, and rising interest rates. These conditions have caused weakness in demand for moissanite jewels from domestic and international distributors, leading to lower loose jewel and jewelry product net sales. The industry also faces increased competition and continued downward pricing pressure on mined and lab-grown diamonds.

Comparison to Industry Standards

• NA

Corporate Governance

Legal Proceedings

• Settlement of confidential arbitration with Wolfspeed, Inc. for breach of contract. The company agreed to pay Wolfspeed a total of $4.77 million, which includes purchased and consigned inventory, Wolfspeed's attorneys' fees, and interest. Payments are scheduled for February 11, 2025 ($500,000), February 28, 2025 ($1.83 million), and December 31, 2025 ($2.44 million). The Supply Agreement was terminated as part of the settlement.

Stakeholder Impact

• Shareholders face significant risk due to the 'going concern' doubt, the delisting from Nasdaq to the OTC Expert Market (potentially reducing liquidity and value), and potential dilution from the new convertible note if converted.
• Employees may be impacted by cost-saving actions implemented to reduce cash outflow.
• Customers may experience changes in product availability or service levels if the company's financial difficulties persist, although the company aims to improve product delivery and affordability.
• Creditors (like Ethara Capital, LLC) are providing new financing, indicating a willingness to support the company, but also taking on risk given the going concern warning.

Next Steps

• Evaluate financing arrangements to address going concern issues.
• Implement cost savings actions to reduce cash outflow.
• Evaluate the liquidation of certain inventories if needed.
• Continue designing and implementing improved processes for IT general controls related to user access and logical access.
• Enhance the precision of management review controls to remediate material weaknesses in internal control over financial reporting.
• Seek shareholder approval for the conversion option of the $2 million secured convertible note with Ethara Capital, LLC.

Key Dates

Recommendation

The company faces severe financial distress, explicitly stating 'substantial doubt about our ability to continue as a going concern.' This is compounded by a significant decline in net sales (41% for the quarter), a deteriorating working capital position, and the delisting of its stock from Nasdaq to the OTC Expert Market, which severely limits liquidity and investor confidence. While the company has reduced its net loss and cash burn from operations, these improvements are overshadowed by the fundamental viability concerns and limited access to capital markets. The new convertible note provides some short-term liquidity but introduces potential dilution and does not fully resolve the underlying financial challenges.

Keywords

Moissanite, Lab Grown Diamonds, Fine Jewelry, Gemstones, Charles & Colvard, CTHR, Quarterly Report, Financial Results, E-commerce, Wholesale Jewelry, Going Concern, SEC Filing