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Charles & Colvard Reports First Quarter Sales Increase 40% Over Prior-Year Period

Charles & Colvard, Ltd. (NASDAQ Global Select Market: CTHR), the sole manufacturer of created moissanite gemstones, The Most Brilliant Jewel in the World ® , today announced its operating results for the first quarter ended March 31, 2012.

Financial Highlights:
  • Q1 net sales increased 40% to $4.2 million vs. $3.0 million in Q1 2011
  • Net loss of $376,000 after approximate $720,000 investment in consumer-direct business models, vs. prior-year period net loss of $236,000
  • $10.6 million cash and investments and no long-term debt at 3/31/12
  • Positive cash flow from operations in Q1 of $384,000

Net sales for the three months ended March 31, 2012 increased 40% to approximately $4.2 million, compared with approximately $3.0 million in sales during the corresponding period of the previous year. Loose moissanite gemstone sales decreased 4% to approximately $2.5 million, compared with approximately $2.6 million in the corresponding period of the previous year due primarily to the timing of restocking orders from a number of the Company’s existing wholesale customers as they managed existing inventory ahead of the planned second quarter of 2012 rollout of the Company’s new Forever Brilliant TM enhanced gemstones. Finished jewelry sales increased 319% to approximately $1.7 million, compared with approximately $410,000 in the corresponding period of the previous year.

The Company recorded a net loss of $376,000, or $0.02 per share, in the first quarter of 2012, compared with a net loss of $236,000, or $0.01 per share, in the first quarter of 2011.

Operating expenses increased $989,000, or 53%, during the first quarter of 2012 when compared to the same period of 2011. Of this increase, sales and marketing expenses increased $821,000, or 120%, when compared with the same period in 2011. This increase was 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 key strategic personnel additions in support of its direct-to-consumer Moissanite.com e-commerce and Lulu Avenue TM home party businesses.

“I’m very pleased with a $500,000 gross margin increase for the first quarter of 2012 over the first quarter of 2011,” commented Randy N. McCullough, Chief Executive Officer of Charles & Colvard, Ltd. “This demonstrates that we’re on the right track toward building profitable long-term sustainable revenue. We believe our investments in Lulu Avenue TM and Moissanite.com, while unfavorably impacting our bottom line today, have laid the groundwork to drive substantial revenue and profits in the near future. Our Lulu Avenue TM direct sales front-end and back-office system went live earlier this month, which we believe is a significant catalyst in recruiting and supporting independent sales representatives as we grow the business. Additionally, we had over 120 people turn out at our launch event last week here in Raleigh to learn more about Lulu Avenue TM . We continue to anticipate that the third quarter of 2012 will begin the home party build with fourth quarter hitting a stride to produce meaningful revenue.

“In the interim, our new Forever Brilliant TM enhanced gemstone is getting a lot of attention within the jewelry industry. We have put together a marketing campaign targeting the upcoming JCK jewelry show in Las Vegas at the end of May, which is the largest jewelry industry trade show in the U.S., to announce the launch of Forever Brilliant TM . Our campaign includes a 12-page catalog designed to highlight the features and benefits of the Forever Brilliant TM gemstone, with an emphasis on the improvement of up to four color grades whiter. Five of our larger distributors are participating in the catalog that will be inserted into over 40,000 JCK show magazines targeting jewelry trade professionals at the show. In addition, Charles & Colvard will have banners throughout the show and an informational booth.

“The company today is positioned to reap the benefits of the past two and a half years since I came on board and refocused on developing a jewelry-producing entity that leverages the moissanite gemstone. Our largest customer is Jewelry Television, for which we produce all of the moissanite jewelry that it sells, and the growth in our finished jewelry segment accounted for all of our revenue increase in the first quarter of 2012. We expect our finished jewelry business to continue to grow, and in addition, our ability to produce jewelry supports all of our consumer-direct initiatives. We have completed reallocating our resources to these objectives, including implementing a new jewelry specific ERP system and putting a seasoned management team in place. We also see significant opportunities to grow our wholesale loose gemstone business with the increased consumer awareness we expect from exposure we receive from home shopping networks, our consumer-direct sales efforts, and exciting new product offerings like our Forever Brilliant TM enhanced gemstone. Lastly, we completed the initial stage of branding for all the company’s entities that has yielded a refreshed look and logos. Much progress has been made this quarter, and I’m happy to report that we’re ready and moving ahead into the next chapter for Charles & Colvard.”

Financial Position

Cash and liquid long-term investments totaled $10.6 million at March 31, 2012, up slightly from approximately $10.5 million at December 31, 2011, and the Company had no long-term debt outstanding as of March 31, 2012. Cash generated from operations totaled $384,000 during the three months ended March 31, 2012. The primary drivers of positive cash flow were the Company’s net loss of $376,000 that included $471,000 of net non-cash expenses, a decrease in trade accounts receivable of $13,000, a net decrease in inventory of $490,000, and an increase in trade accounts payable of $507,000. These factors more than offset an increase in prepaid expenses and other assets of $19,000 and a net decrease in accrued liabilities of $700,000.

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