Charles & Colvard Reports Fourth Quarter Sales Increase 13% as Full Year Sales Increase 40% over Prior-Year

  Charles & Colvard Reports Fourth Quarter Sales Increase 13% as Full Year
  Sales Increase 40% over Prior-Year

Business Wire

MORRISVILLE, N.C. -- February 26, 2013

Charles & Colvard, Ltd. (NASDAQ Global Select Market: CTHR), the sole
manufacturer of created moissanite gemstones, The Most Brilliant Jewel in the
World^®, today announced that net sales for the fourth quarter and year ended
December 31, 2012, increased 13% and 40%, respectively, over the prior-year
periods.

Financial Highlights:

  *Q4 net sales increase 13% to $8.1 million vs. $7.2 million in Q4 2011, and
    full year net sales increase 40% to $22.4 million vs. $16.0 million in
    2011
  *Profitable Q4 and full year – Q4 net income of $4.2 million after
    approximate $471,000 incremental quarter-over-quarter investment in
    consumer-direct business models, vs. prior-year period net income of $1.8
    million; full year net income of $4.4 million after approximate $2.7
    million incremental year-over-year investment in consumer-direct business
    models, vs. prior-year net income of $1.6 million
  *Income tax benefit in Q4 of $3.8 million and full year of $4.1 million
  *$12.4 million cash and investments and no long-term debt at 12/31/12
  *Positive cash flow from operations in Q4 of $679,000 and full year of $2.8
    million

Net sales for the three months ended December 31, 2012, increased 13% to
approximately $8.1 million, compared with approximately $7.2 million in net
sales during the corresponding period of the previous year. Loose moissanite
gemstone sales decreased 3% to approximately $4.7 million, compared with
approximately $4.8 million in the corresponding period of the previous year.
Finished jewelry sales increased 45% to approximately $3.4 million, compared
with approximately $2.4 million in the corresponding period of the previous
year.

Net sales for the year ended December 31, 2012, increased 40% to approximately
$22.4 million, compared with approximately $16.0 million in net sales during
the year ending December 31, 2011. Loose moissanite gemstone sales increased
24% to approximately $15.0 million, compared with approximately $12.1 million
in the previous year. Finished jewelry sales increased 87% to approximately
$7.4 million, compared with approximately $4.0 million in the previous year.

The Company recorded net income of $4.2 million, or $0.21 per diluted share,
in the fourth quarter of 2012, representing an approximate $2.4 million
improvement relative to net income of $1.8 million, or $0.09 per diluted
share, in the fourth quarter of 2011. For the year ended December 31, 2012,
the Company recorded net income of $4.4 million, or $0.22 per diluted share,
representing an approximate $2.8 million improvement relative to net income of
$1.6 million, or $0.08 per diluted share, in the previous year. Fourth quarter
2012 net income included a $3.8 million tax benefit resulting from the
Company’s reduction of a valuation allowance on certain deferred tax assets
based on management’s expectation of their future utilization. In addition to
this, full year 2012 net income also included an income tax benefit of
approximately $320,000 generated by the reversal of a liability for an
uncertain tax position resulting from a voluntary disclosure agreement the
Company entered into with a taxing authority.

Operating expenses increased $1.3 million, or 56%, and $4.0 million, or 49%,
during the fourth quarter and year ended December 31, 2012, respectively, when
compared with the same periods of 2011. Of these increases, sales and
marketing expenses increased $1.6 million, or 150%, and $4.1 million, or 125%,
during the fourth quarter and year ended December 31, 2012, respectively, when
compared with the same periods in 2011. These increases were primarily due to
the Company’s ongoing investments in marketing and branding initiatives to
better position Charles & Colvard’s product lines in the marketplace, as well
as marketing investments and key strategic personnel additions in support of
its direct-to-consumer Moissanite.com e-commerce and Lulu Avenue^TM home party
businesses.

“Our continued success growing our business at Charles & Colvard is a tribute
to the many initiatives put in place over the past three years. We are very
pleased with our results in the fourth quarter and for the year,” stated Randy
N. McCullough, Chief Executive Officer of Charles & Colvard, Ltd. “Our
wholesale business executed exceptionally throughout the year, providing
significant increases in sales of loose jewels and finished jewelry; both
providing the necessary cash flow to grow our consumer-direct businesses as we
invest in our future. In addition to this, finishing the year with a $2.8
million positive cash flow after approximate $2.7 million incremental
year-over-year investment in our consumer-direct business models highlights
our strong financial performance, making our results even more gratifying to
us.

“In addition, investments in improving our information technology
infrastructure paid off as the volume of transactions increased with sales,
thereby validating our ability to operationally execute during the ramp up.
Continuous process improvement is top of mind throughout our company as we
focus on 2013.

“Moissanite.com launched a new software platform in the fourth quarter,
providing many site functionality improvements that resulted in considerable
revenue growth that we expect, with annual traffic of over one million
visitors, will continue to increase. Also during the fourth quarter, our Lulu
Avenue^TM direct sales initiative underwent a significant remake with the
addition of the JudeFrances team developing an exclusive product line and
creating catalogs and marketing collateral targeting second quarter of 2013.
Several improvements in both the front-end and back-office system are designed
to better support our Lulu Avenue^TM field personnel in their businesses while
providing operational support to drive the business forward. We believe our
investment in Lulu Avenue^TM will begin to yield higher revenues in 2013 while
significantly increasing our market exposure and our revenue streams for years
to come.

“We recently announced the production of new raw material providing the
opportunity for continued enhancements in our manufacturing processes as our
team works closely in a collaborative effort with a designated team at Cree.
Initial results are very promising, providing the opportunity to further
explore the gemstone enhancement process for our products, Charles & Colvard
Created Moissanite^® and Forever Brilliant^®, beginning with the initial
growth of the SiC crystal. Everyone at Charles & Colvard is excited to work
together with Cree, the world’s leading producer of SiC crystals, on this
ongoing strategic initiative.”

“Our expectations for the first quarter of 2013, based on the to-date
execution of our direct and wholesale businesses, are for continued stronger
sales. Our objectives are focused on steadily building a solid foundation, now
and for the long term health of our business…to win with consumers by
providing a superior gem backed with world class service; and to deliver total
shareholder return that ranks Charles & Colvard among the best performing
companies in our industry. We are confident that we are doing what is right
and necessary to achieve these objectives,” concluded McCullough.

Financial Position

Cash and liquid long-term investments totaled $12.4 million at December 31,
2012, up from approximately $10.5 million at December 31, 2011, and the
Company had no long-term debt outstanding as of December 31, 2012. Cash
generated from operations totaled $679,000 and $2.8 million during the three
months and year ended December 31, 2012, respectively. During the fourth
quarter of 2012, the primary drivers of positive cash flow were the Company’s
net income of $4.2 million that included $3.4 million of net non-cash benefit,
an increase in interest receivable of $8,000, a net decrease in inventory of
$782,000, an increase in trade accounts payable of $1.2 million, and a net
increase in accrued liabilities of $87,000. These factors more than offset an
increase in trade accounts receivable of $2.1 million and an increase in
prepaid expenses and other assets of $34,000.

During the year ended December 31, 2012, the primary drivers of positive cash
flow were the Company’s net income of $4.4 million that included $1.6 million
of net non-cash benefit, an increase in interest receivable of $11,000, a net
decrease in inventory of $2.1 million, and an increase in trade accounts
payable of $1.1 million. These factors more than offset an increase in trade
accounts receivable of $2.6 million, an increase in prepaid expenses and other
assets of $316,000, and a net decrease in accrued liabilities of $353,000.

Total inventory, including long-term and consignment inventory, approximated
$32.8 million as of December 31, 2012, which was down from approximately $35.0
million at the end of 2011 primarily as a result of sales, offset in part by
purchases during the year of jewelry castings, findings, and other jewelry
components; fashion finished jewelry in support of the Company’s home party
direct sales business; and production of moissanite gemstones. Net trade
accounts receivable approximated $8.1 million at December 31, 2012, up $2.0
million from December 31, 2011.

Investor Conference Call

The Company will host an investor conference call at 11:15 a.m. EST today,
February 26, 2013, to discuss its fourth quarter and full year 2012 operating
results, along with other topics of interest. Shareholders and other
interested parties may participate in the conference call by dialing
877-317-6789 (international/local participants dial 412-317-6789) and asking
to be connected to the “Charles & Colvard, Ltd. Conference Call” a few minutes
before 11:15 a.m. EST on Tuesday, February 26, 2013. The call will also be
broadcast live on the Internet at www.visualwebcaster.com/event.asp?id=91612.

A replay of the conference call will be available one hour after the call
until 9:00 a.m. EST on Friday, March 8, 2013, by dialing 877-344-7529 (U.S.)
or 412-317-0088 (international) and entering the conference ID number
10023598.

The conference call will also be archived for review on the Internet at
www.visualwebcaster.com/event.asp?id=91612  and  on the Company’s website at
www.charlesandcolvard.com until Friday, March 8, 2013.

About Charles & Colvard, Ltd.

Charles & Colvard, Ltd., based in the Research Triangle Park area of North
Carolina, is the global sole source of moissanite, a unique, near-colorless
created gemstone that is distinct from other gemstones and jewels based on its
exceptional fire, brilliance, luster, durability, and rarity. Charles &
Colvard Created Moissanite^® and Forever Brilliant^® are currently
incorporated into fine jewelry sold through domestic and international
retailers and other sales channels. Charles & Colvard, Ltd. is headquartered
in Morrisville, North Carolina, and its common stock is listed on the NASDAQ
Global Select Market under the symbol “CTHR.” For more information, please
visit www.charlesandcolvard.com.

This press release contains forward-looking statements within the meaning of
Section27A of the Securities Act of 1933, as amended, and Section21E of the
Securities Exchange Act of 1934, as amended. 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, our dependence on consumer
acceptance and growth of sales of our products resulting from our strategic
initiatives; our ability to fulfill orders on a timely basis; dependence on a
limited number of customers; our current wholesale customers’ potential
perception of us as a competitor in the finished jewelry business; dependence
on Cree, Inc. as the sole current supplier of the raw material; intense
competition in the worldwide jewelry industry; general economic and market
conditions, including the current economic environment; the financial
condition of our major customers; risks of conducting business in foreign
countries; the pricing of precious metals, which is beyond our control; the
potential impact of seasonality on our business; our ability to protect our
intellectual property; the risk of a failure of our information technology
infrastructure to protect confidential information and prevent security
breaches; and possible adverse effects of governmental regulation and
oversight, in addition to the other risks and uncertainties described 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, 2011 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.
Consolidated Statements of Operations
(unaudited)
                                                                             
                                                                             
                                               Year Ended December 31,
                                               2012             2011
Net sales                                      $ 22,412,810     $ 16,033,408
Costs and expenses:
Cost of goods sold                               9,959,500        6,510,452
Sales and marketing                              7,443,784        3,312,383
General and administrative                       4,756,432        4,671,111
Research and development                         17,013           145,720
Loss on abandonment of assets                   2,016          94,408     
Total costs and expenses                        22,178,745     14,734,074 
Income from operations                           234,065          1,299,334
Other income (expense):
Interest income                                  69,520           85,271
Interest expense                                 (1,260     )     (1,141     )
Gain on call of long-term investments           -              721        
Total other income                              68,260         84,851     
Income before income taxes                       302,325          1,384,185
Income tax net benefit                          4,146,651      183,947    
Net income                                     $ 4,448,976     $ 1,568,132  
                                                                             
Net income per common share:
Basic                                          $ 0.23           $ 0.08
Fully diluted                                  $ 0.22           $ 0.08
                                                                             
Weighted average number of shares used in
computing net income per common share:
Basic                                            19,581,670       19,443,288
Fully diluted                                    19,967,271       19,703,204
                                                                             

                                                             
                                                                             
Charles & Colvard, Ltd.
Consolidated Balance Sheets
(unaudited)
                                                                             
                                                                             
                                               December 31,
                                               2012             2011
ASSETS
Current assets:
Cash and cash equivalents                      $ 11,860,842     $ 6,701,701
Accounts receivable, net                         8,100,670        6,064,764
Interest receivable                              694              12,109
Inventory, net                                   8,442,430        6,849,592
Held-to-maturity investments                     505,068          -
Prepaid expenses and other assets                737,406          419,729
Deferred income taxes                           1,104,505      -          
Total current assets                             30,751,615       20,047,895
Long-term assets:
Held-to-maturity investments                     -                3,760,399
Inventory, net                                   24,365,743       28,157,497
Property and equipment, net                      1,746,792        1,420,971
Intangible assets, net                           346,732          248,812
Deferred income taxes                            2,749,333        -
Other assets                                    12,199         13,746     
Total long-term assets                          29,220,799     33,601,425 
TOTAL ASSETS                                   $ 59,972,414    $ 53,649,320 
                                                                             
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable                               $ 2,112,585      $ 1,060,937
Accrued cooperative advertising                  200,000          213,000
Accrued expenses and other liabilities          574,522        581,009    
Total current liabilities                        2,887,107        1,854,946
Long-term liabilities:
Accrued income taxes                            408,131        741,645    
Total liabilities                               3,295,238      2,596,591  
Commitments and contingencies
Shareholders’ equity:
Common stock, no par value; 50,000,000
shares authorized; 19,654,050 and 19,454,689     53,318,044       52,833,716
shares issued and outstanding at December
31, 2012 and 2011, respectively
Additional paid-in capital – stock-based         8,459,020        7,767,877
compensation
Accumulated deficit                             (5,099,888 )    (9,548,864 )
Total shareholders’ equity                      56,677,176     51,052,729 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY     $ 59,972,414    $ 53,649,320 
                                                                             

                                                             
                                                                             
Charles & Colvard, Ltd.
Consolidated Statements of Cash Flows
(unaudited)
                                                                             
                                                                             
                                               Year Ended December 31,
                                               2012             2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income                                     $ 4,448,976      $ 1,568,132
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization                    608,165          299,550
Amortization of bond premium                     5,331            4,498
Stock-based compensation                         1,017,078        983,504
Provision for uncollectible accounts             245,582          430,261
Provision for sales returns                      307,000          39,000
Provision for inventory reserves                 102,000          (274,000   )
Benefit for deferred income taxes                (3,853,838 )     -
Loss on abandonment of assets                    2,016            94,408
Gain on call of long-term investments            -                (721       )
Changes in assets and liabilities:
Accounts receivable                              (2,588,488 )     (2,854,884 )
Interest receivable                              11,415           (5,946     )
Income tax receivable                            -                113,030
Inventory                                        2,096,916        2,649,412
Prepaid expenses and other assets, net           (316,130   )     (88,348    )
Accounts payable                                 1,051,648        518,853
Accrued cooperative advertising                  (13,000    )     (101,000   )
Accrued income taxes                             (333,514   )     (195,769   )
Other accrued liabilities                       (6,487     )    272,356    
Net cash provided by operating activities       2,784,670      3,452,336  
                                                                             
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment              (868,986   )     (1,385,132 )
Purchases of long-term investments               -                (6,995,625 )
Proceeds from call of long-term investments      3,250,000        4,250,000
Patent, license rights, and trademark costs     (164,936   )    (48,715    )
Net cash provided by (used in) investing        2,216,078      (4,179,472 )
activities
                                                                             
CASH FLOWS FROM FINANCING ACTIVITIES:
Stock option exercises                           158,393          47,234
Share repurchases                               -              (354,441   )
Net cash provided by (used in) financing        158,393        (307,207   )
activities
                                                                             
NET INCREASE (DECREASE) IN CASH AND CASH         5,159,141        (1,034,343 )
EQUIVALENTS
CASH AND CASH EQUIVALENTS, BEGINNING OF         6,701,701      7,736,044  
PERIOD
CASH AND CASH EQUIVALENTS, END OF PERIOD       $ 11,860,842    $ 6,701,701  
                                                                             
Supplemental disclosure of cash flow
information:
Cash paid during the year for interest         $ 1,260          $ 1,141
Cash paid during the year for income taxes     $ 52,523         $ -
                                                                             

Contact:

Charles & Colvard, Ltd.
Timothy Krist, 919-468-0399, ext. 295
Chief Financial Officer
tkrist@charlesandcolvard.com
or
Investor Relations:
Taglich Brothers, Inc.
Christopher Schreiber, 800-383-8464
Investor Relations Counsel
cs@taglichbrothers.com
 
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