Q3 2024 Charles & Colvard Ltd Earnings Call

Participants

Don O'Connell; President, Chief Executive Officer, Director; Charles & Colvard Ltd

Clint Pete; Chief Financial Officer, Treasurer; Charles & Colvard Ltd

Bruce Lindenman

Ben Franklin; Analyst; Riverstyx Capital Management

Presentation

Operator

Good day and welcome to the Charles & Colvard third quarter Fiscal Year 2024 earnings call and webcast. All participants will be in a listen only mode. (Operator Instructions)
This earnings call may contain forward-looking statements as defined in Section 27 A. of the Securities Act of 1933 as amended, including statements regarding, among other things, the Company's business strategy and growth expressions identify forward-looking statements are based largely on our company's expectations and are subject to a number of risks 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 forward-looking statements.
In light of these risks and uncertainties, there can be no further assurance that the forward-looking 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 dot charlesandcolvard.com/events. The Company will be hosting a question and answer session. At the conclusion of the prepared remarks, should you have any questions you'd like to submit, please e-mail ir at Charles & Colvard.com. Please note this event is being recorded.
I would now like to turn the conference over to Mr. Dan O'Connell, President and Chief Executive Officer. Please go ahead.

Don O'Connell

Good afternoon, everyone, and welcome to our Third Quarter Fiscal 2024 financial results conference call. Fashion industry leaders predicted uncertainty for 2024 amid subdued economic growth, weak consumer confidence and persistent inflation. According to a recent McKenzie report, and Charles & Colvard continued to experience these challenges during Q3 during the global luxury group, buying fashion houses such as Gucci, Alexander McQueen and others recently reported downward pressures on their top line, citing lingering luxury buying slowdowns and sluggish market conditions.
So these trends have impacted us for the last several quarters. We remain optimistic about the Company's long-term value as we've seen revenue declines shrink across sequential quarters. Overall, revenue for Q3 was $5.3 million. And while down 21% compared to Q3 FY 2023, that figure is a 12 basis points improvement over the Q1 FY 2024 decline and a 3 basis points improvement over the Q2 FY 2024 decline.
We believe that we continue to close the gap and make progress towards profitability. Margin erosion, however, continued during the quarter due we believe to the significant rise in gold pricing greater promotional pricing pressure amid a deeply discounted retail environment, driving an increased sale cadence and increased demand for Arcadia lab-grown diamond as a percentage of sales on Charles & Colvard.com, elevated shipping costs, a disposition strategy to liquidate some obsolescence, inventory and other inflationary impacts.
We are working to mitigate additional margin creep and stabilize product margins by reviewing our vendor agreements and relationships and negotiating when possible to reduce cost of goods sold, evaluating our overall product assortment and mindfully, managing our overall advertising and marketing spend. While the current environment we're encouraged by the opportunities that conscious consumerism and ethical manufacturing awareness create for Charles & Colvard and our forward momentum on our strategic initiatives Forever One, the company's Cornerstone and Pinnacle lab-grown voice and a gemstone product brand saw revenues increased 5% compared to Q3 FY 2023, while KDL lab-grown diamond sales and Charles & Colvard were up 16% compared to the year ago quarter.
We believe we're well positioned to capitalize on increased consumer awareness of lab-grown gems, particularly voice-enabled lab-grown diamonds as more brands and retailers continue to embrace the lab grown movement product joined LVMH brands Fred and tax lawyer as one of the first high jewelry houses to adopt LeBron James launching a collection featuring lab-grown diamonds and recycled gold last year, we feel that the wider acceptance of lab grown diamonds and recycled metals further validates that Charles & Colvard made not mind story.
Additionally, we've re-branded invoicing by Charles & Colvard to our newest gem brand for Everbright to further distinguish our premium moist snuff gemstones in the market for Everbright voice tonight will replace more tonight by Charles & Colvard's listings on our drop-ship and marketplace partner sites, including Macys.com, Belk.com, Kohls.com, Fred Meyer, jewelers.com Shop, My exchange.com, the Army and Air Force Exchange services, online store and others. The new gemstone brand will also be available for purchase by approved independent jewelers and retailers on Charles & Colvard direct.com, a downstream solution for value-oriented consumers seeking quality synonymous with Charles & Colvard tonight and lower price points to broaden our overall reach.
Inventory decreased 24% for the quarter as the Company continued to refine its jewelry offerings in response to consumer preferences on Charles & Colvard.com. The Company expanded engagement in fashion jewelry categories in both Forever One, moissanite and KDL lab-grown diamond product brand during the quarter to better penetrate the low cost consumer market and capture additional market share. The Company updated its merchandise outlet.com website with improved item filters for a better user experience, a fresh look and feel refreshed assortment and increased frequency of its marketing campaigns and emails.
The company continued to make significant investments in its people resources, its next generation web platform and its marketing and advertising assets and capabilities with what we deem to be essential for a lifestyle brand to better align with consumers in a crowded and competitive environment, keeping us top of mind with more concentrated social media campaigns, refreshed evergreen assets across paid media platforms and new brand ambassador ships such as the recently announced strategic partnership with American actress Skyler Samuels, Aaron Lim, host of E, the rundown Don Kania, lab-grown diamonds on the red carpet for the People's Choice Awards in February and the Company's successful Valentine's Day sale comprised 52% of Charles & Colvard.com's revenue for the quarter. We strategically incorporate more user-generated content this quarter as we have seen positive results from the Company's paid search and paid social campaigns by implementing these new assets.
In Q. three, the company launched an ethical consumerism campaign across its digital marketing efforts, focusing on Charles & Colvard's may not mind story. We believe our increased digital marketing efforts and e-commerce presence enable us to reach a broader audience and drive more customers online to more places consumers can reach Charles & Colvard. The stronger the company's brand equity can become showcasing our quality, craftsmanship and innovation, thereby seeking to capture greater market share. Bottom line. We believe that our marketing efforts are gaining traction. We continue to beta test our main shopping, broadcast and streaming initiatives gleaning valuable insights into a new customer base, while recognizing a lift in top of funnel brand awareness. We have recently begun to scale back spending while effectively fine-tuning the programming to appeal to optimal markets for our products. We look forward to updating you with further Mais shopping plans in more detail on future calls as we believe this network will enable us to cross more verticals beyond the jewelry and gemstone industry.
As we look to hedge against the pricing pressures that continue to impact the jewelry and gemstone industry as well as our traditional segment. We believe that the new launch of our Charles & Colvard direct dot-com wholesale portal enables the Company to be more competitive while incentivizing independent jewelers retailers to buy direct. In support of this initiative, we launched the trade campaign announcing Charles & Colvard direct website with biweekly newsletter ads on JCK. dot com, a leading industry website publication. We partnered with JCK. to send a dedicated email to more than 30,000 independent jewelers and retailers announcing Charles & Colvard direct. We revamped the Charles & Colvard direct.com website with updated marketing assets and simple to use account registration and most recently, we issued a press release announcing the strategic shift with our traditional segments. I firmly believe while we face challenges within our industry, we are confident that our team's agility in the face of adversity will guide us towards success and growth.
I will now turn the presentation over to Clint Pete, our CFO, to provide detailed insight into our financial performance during Q three. Clent. Please proceed.

Clint Pete

Thanks, Dan. Today I'll provide a summary of key financials for the third quarter ended March 31st, 2020. For 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 early next week. Please note that all percentage comparisons are to the third quarter ended March 31st, 2023, unless specified otherwise.
First, we'll start on slide 8 with a comparative analysis of the third quarter of fiscal 2024 compared to same period one year ago.
In total, net sales for Q3 2024 totaled $5.3 million versus $6.6 million, a decrease of 21% due primarily to the continued weak consumer confidence, continued pricing pressures on the lab grown diamond market, and the expected decline in the company's wholesale revenue as we continue to build a more robust direct-to-consumer business. And as our independent dealer and retailer initiative of Charles & Colvard, direct.com continues to mature net sales for our Online Channels segment, which is primarily direct to consumer and includes charlesandcolvard.com merchandise, outlet.com. Charles & Colvard direct.com made Shopping.com marketplaces, drop, ship retail and other pure-play outlets totaled $4.1 million for the quarter now representing 77% of total net sales, up 7% from a year ago.
Net sales for our traditional segment, which consists of wholesale and brick-and-mortar customers totaled $1.2 million for the quarter, representing now 22% of total net sales compared to 30% of sales in the year-ago quarter. Finished jewelry net sales represent 93% of total sales in the quarter, up from 80% of sales in the third quarter one year ago. As previously mentioned, due to the Company's strategic shift in its traditional segment strategies. Industrial net sales decreased 71% for the quarter. Domestic sales of charlesandcolvard.com represented 98% of all sales in the third quarter with international sales totaling 2%.
Moving to Slide 9 to discuss. Gross margin reported a gross margin at 23% versus 32% gross margin in the year-ago quarter. A gross profit of $1.2 million versus $2.1 million in gross profit in the year-ago quarter, due in large part to rising commodity prices, the company's sale cadence and a disposition strategy to liquidate some obsolescence inventory.
For Q3 2024, operating expenses increased 13% from the year-ago quarter. Sales and marketing expenses increased 13% to $3.7 million. This increase reflects our continuing investments in people, resources, top of funnel and influencer marketing campaigns and brand awareness initiatives that we believe allow us to elevate our brands is this general and administrative expenses were $1.2 million for the quarter compared to $1.1 million in the year-ago quarter, a 14% increase.
The increase in G&A for Q3 2024 was due in large part to increased legal fees compared to the prior year quarter. We reported a net loss for Q3 2024 $3.6 million or $0.12 loss per diluted share, compared with a net loss of $8.4 million or $0.28 loss per diluted share in the year-ago period.
The main driver for our decreased net loss was $6.3 million tax expense in the year-ago quarter, driven by the establishment of a deferred tax asset valuation allowance on our debt deferred tax assets. Our weighted average shares outstanding on a diluted basis used in the calculation of loss per share for the quarter were approximately 30.3 million shares for the period ended March 31st, 2024, same as in the year ago period.
Now let's move on to a snapshot of our balance sheet. Our liquidity and capital position remained strong as we ended the quarter with $9.2 million of total cash compared to $11.1 million at the end of Q2. Working capital remained strong at $12.7 million. As of March 31, 2024, the company had $500,000 in short-term outstanding debt. Our cash flow used in operations was $2.1 million during the quarter, compared to $800,000 of cash flow used in operations in the same quarter a year ago.
In terms of other liquidity, we have access to our $5 million cash secured credit facility with JPMorgan Chase Bank. As of March 31st, 2024, the company had $500,000 outstanding on the credit facility. Inventory as of March 31, 2024, totaled $25.3 million compared to June 30, 2023, when it totaled $26.8 million, compared to $33.3 million at March 31, 2023, a year-over-year decrease of $8 million due to inventory write-down in Q4 FY 2023.
Sorry, loose jewels inventory was $8.2 million as of March 31st, 2024, compared to $9.1 million as of June 30, 2023, and compared to $15.6 million as of March 31st, 2023. A year-over-year decrease, again due to the inventory write-down we referred to above. Finished jewelry inventory was $16.9 million as of March 31st, 2024, compared to $17.3 million as of June 30, 2023, and compared to $17.4 million as of March 31st, 2023.
Company remains focused on prudent inventory management strategies and support of our in-stock requirements. What's so like drop-ship marketplace partners, book value per share at the end of the third quarter was $1.01 per share trading well below market.
In summary, I remain confident in our continued efforts to increase shareholder value and brand equity.
With that, I'll turn it back over to Dan.

Don O'Connell

Thank you, Clint. As we approach our fiscal year end, our focus remains steadfast on launching key initiatives while diligently working to navigate the challenge of reducing expenses while driving revenue by leveraging our resources more efficiently and better maximizing our efforts. We are committed to achieving sustainable growth and delivering value to our stakeholders. With the collective dedication to innovation and operational excellence, we believe we are poised to capitalize on the opportunities we've created and to overcome challenges as we chart a successful path forward Thank you for your unwavering support as we continue this journey together.
With that, I'll turn the call back over to the operator to open the lines for any questions.

Question and Answer Session

Operator

(Operator Instructions) [Bruce Lindenman], investor. Please go ahead, sir.

Bruce Lindenman

Hi. Do you still have your stock buyback on in-place and are you still -- management buying stock back -- buying stock personally?

Don O'Connell

Yes, Hi, Bruce. Yes, if you look at the last on historical product, purchases, right? When we had the ability to purchase and it wasn't a quiet period, you'll look at the directors inclusive of myself that bought significant amount of shares recently.

Bruce Lindenman

Do you think you'll continue that.

Don O'Connell

Certainly we believe that this is an opportunity at these prices. So, you know, and that the first part of it, the second part is so in relation to the stock buyback repurchase program. We currently have, I believe, $4.5 million left within the repurchase program to be able to buy.

Bruce Lindenman

Are you gentlemen going to buy back stock at a sort of book value here?

Don O'Connell

Well, that's a, you know, an executive decision is always contemplated on a daily basis. So we certainly believe that we're trading way below book, and we believe that it's a wise move in capital. You know, one thing, just to be very clear, we want to make sure that we maintain liquidity want to make sure that we have the cash to be able to operate the business and want to make sure that we complete a lot of these initiatives that we had initiated and we're funding. So we weigh all these things on a daily basis.

Bruce Lindenman

At what point do you think the company could at least turn cash flow positive in terms of your business? Yes.

Don O'Connell

Yes. I mean, we don't give forward looking statements, but I will tell you that we're completing a lot of the goals and initiatives that we put forth in the last few quarters, kind of building out capabilities, content capabilities, marketing strategy, a lot of the spend of late has been on performance, marketing and so forth. So that really is something that we need to kind of look at and we need to do a better job and kind of getting a return on our ad spend. So we're looking at that diligently. But look to us to wind down and start to really we look for the path to profitability.
No. So as we were in the last couple of quarters, we've been kind of building and making these investments to be able to build out what we believe is the future state of the Company and what we believe is necessary to be able to build a next generation company in the long run. So we made strategic investments in our web property. We're building out a new. What we call the next-gen website has unbelievable functionality, a lot better than what we have today and literally a single point for the consumer to be able to click and buy any shape, any size, any configuration between the actual piece of jewelry they're buying.
That's really important. They can pick whatever color they want. So we believe that that investment was very, very strategic and very critical. It's taken us a little bit longer than we anticipated to be able to kind of launch that. But we stated on the last call that we'd be launching in Q4. So that still is the target to once we get that launch, we get it up and running. The spend will level out a little bit there. And then we believe that's probably the most significant driver for future growth for us. And then that will get us really to the path to profitability because we'll start to save dollars there and economies of scale.
So the new next-gen property will enable us to peel off a lot of these. And for all intents and purposes, API.s or third party resources and partnerships that we have that we will need once we launch the next-gen platform. So that will help us also to become more profitable in the long run. So we're pretty excited about getting this thing up and running and feeling the benefits in the cost savings.

Bruce Lindenman

Do -- have you discussed or tried to form any partnerships in terms of companies that you sell through invest in the company or to help you with any of this stuff in terms of finance?

Don O'Connell

Yes. I mean, as always --

Bruce Lindenman

So much cash every quarter.

Don O'Connell

No, I mean that's no question, right. So for us, these are investments. That's the way we look at it right now. I mean, we knew the horizon for us to peel back these investments and we knew what we wanted to be kind of focused on and strategically spending the dollars where we needed to spend them. So that actually is starting to come down. But certainly every down, honestly, every day. We have a lot of conversations between partners out there. I mean, we've been in the jewelry industry for a long time. There's certainly a lot of viable partnerships, alliances or things that could be and could come to fruition. But at this point, there's nothing to be spoken about in that.

Bruce Lindenman

I just like to see something happen or good or before you guys run out of money?

Don O'Connell

So let's talk about that. You want to talk about the liquidity. So given the fact that we have -- and thank you for bringing that up. So we have $9.2 million in cash at the end of the quarter. We certainly had the credit line capability and have the capabilities drawn that we we believe that our inventory in finished jewelry is comprised of really valuable inventory.
So that means active inventory. That means finished jewelry inventory that means a large portion of that inventory contains the commodity in the metals gold rate. So I don't mean to say to anybody right now, but gold is really rising and climbing and as you know, it has an adverse effect on new orders that are priced at a prior gold price. And then as a benefit when the inventory that we have, that's been on the shelf, the valuation that inventory increases to the current market. So we know that if you just said if we wanted to raise capital or we wanted to get more liquid, we would sell off the finished jewelry first.
Then the other thing I want to point out is on Charles & Colvard Direct is a real new initiative for us to be able to control our destiny. We started moving more toward direct to consumer, but as of late, we realized the fact that we've got over $8.2 million in loose jewels and loose gems. So that's another avenue for us to raise capital or generate some more cash.
So look to us to kind of build out and lean in on that and going after the trade for loose jewels, I know it's been my messaging quarter over quarter to go more direct to consumer. That hasn't wavered and that hasn't changed at all the different is now we're going to go Charles & Colvard direct with this portal and be able to tap thousands of independent retailers. So and those retailers will buy the loose jewels and therefore, we'll be able to convert it to cash.

Operator

Ben Franklin, Riverstyx Capital.

Ben Franklin

I just have one question. Why draw on the credit facility considering the high cash balance?

Don O'Connell

Yes, that's that's a good question. So we're making I mean -- we only drew the $0.5 million, we felt that we wanted to draw down. I mean, we haven't used the credit facility since we've been in operation here and for several years. So we want to make sure that the credit facility should we want to draw on. It is available and everything flows in and out the way it does. Certainly the money factor there is very fractional so to preserve cash, sometimes it's in and out. It really depends. So we just we just wanted to go ahead and draw on it. So we thought it was a good thing for us to do at the time.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Mr. Dan O'Connell, President and Chief Executive Officer for any closing remarks. Please go ahead.

Don O'Connell

Thank you, Chuck. I just want to thank you for your support of Charles & Colvard. We look forward to continuing updates for our shareholders in future quarters. I want to thank everyone support, and we'll talk to you next quarter, and we look forward to telling you some great things that are coming forward.

Operator

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