Randy McCullough - President and CEO Steve Larkin - COO Kyle Macemore - CFO.

Neil Cataldi -·Blueprint Capital Management Justin Ruiss – Sidoti Michael Potter - Monarch Capital Group Abba Horwitz - Old School Lenny Brecken - Brecken Capital Marc Robins - Catalyst Research Rodney Baber - Newport Coast Securities.

Good afternoon, and welcome to the Charles & Colvard's First Quarter 2014 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions) Please note this event is being recorded.

This webcast may contain forward-looking statements as defined in Section 27A 1 (1) of the Securities Act of 1933 as amended, including statements regarding among other things, the company's business strategy and growth strategy. Expressions which identify forward-looking statements speak only as of the date the statement is made.

These 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 underlined in the forward-looking statements. In light of these risks and uncertainties there can be no assurance that the forward-looking information will prove to be accurate.

This webcast does not constitute an offer to purchase any securities, nor a solicitation of a proxy, consent, authorization or agent designation with respect to a meeting of company's stockholders. I'd now like to turn the conference over to Randy McCullough, President and Chief Executive Officer. Please go ahead..

Thanks, operator. Thank you for joining us everybody. We do not believe the financial results for the first quarter represent our future growth opportunity. We continue to believe there is a large market for our gem. We are a growing company.

That means investment, time, energy, systems integrations, marketing, operations are all necessities to drive the business. As such, we are continuously taking necessary steps to increase our wholesale, retail and online footprint in order to be well positioned over the long-term to surpass any previous sales records.

Let me give you some color for this quarter. We came out of the fourth quarter holiday season like many other companies with some of our distributors and retailers of our stock due to general economic issues coupled with the worst winter conditions the U.S. has seen in a long time. This created bit of temporary wholesale sluggishness for us..

Going forward, however, as we focus on our long-term growth, we are very excited to say that we have taken several very important steps to position us to capture greater sales opportunities, reduce inventory levels and increase our cash position. Our objectives remain focused on steady building a solid foundation.

Now, as always for the long-term health of our business to win with consumers by providing a superior gem packed with world-class service and to deliver shareholder value that we believe will bring Charles & Colvard among the best performing companies in our industry.

We remain confident that we're doing what is right and necessary to achieve these objectives. We have continued to hire and integrate experienced industry-connected sales professionals. These new sales hires have been solely charged with opening new business accounts. Some of these hires took a bit longer to make that would have been ideal.

But we chose to be very selective in order to maintain our corporate culture as we grow.

As such, we are willing to wait for the right people; those that we feel represented the best talent, had the most established potential client relationships, and shared the personality aspects that would align most closely with our plans for Charles & Colvard's growth. Already we are seeing the proofs of our investments in these new hires.

These folks are hitting the ground running. As they continue to get more comfortable in their new roles and with our merchandize offerings we expect this to impact us positively in the future quarters and throughout the year. Our relationship with Kohls.com continues to deliver sales.

And interestingly it also delivered a valuable learning experience and compatible software systems. Many of our retailers have unique tracking, stocking and sales technology requirements.

As such, we have upgraded a variety of capabilities of our technology backbone to help you make this technology aspect of our relationships with our clients more fluid in the future.

Although these technological investments require time, energy and expense, we do believe this expenditure was a very worthwhile investment in our future, because it will service well with existing and new customers.

We can proudly say that our integration has been very good having received an A rating every month thus far from Kohls since the start-up in November. And this experience has and will benefit us with every other relationship going forward.

We concentrated on capitalizing on our enhance ability now to provide state-of-the-art fulfillment as a result of our Kohls start-up by hiring a sales person that is exclusively focused on growing major e-commerce opportunities. It took some time to complete this strategic hire that we brought in specifically to manage the growth of our online sales.

But he has hit the ground running, and the wait was well worth it. We are very excited about the work ethic we are seeing and new doors opening, resulting in potential new relationships that were almost non-existent before. Additionally, to better position us for greater market share growth he hired Sarah Williams as our VP of Marketing.

Sarah is a forward thinking strategist with lots of experience in developing and nurturing global brands, including over the past couple of decades, for example, the Body Shop, L'Oréal, Chanel and Calvin Klein. She intimately understands what appeals to women, who continue to be our target consumers.

Already she is working to help us establish consistent messaging and branding while aligning our business objectives and identifying strength to optimize productivity, creativity and top performance. All of these changes and sales initiatives that I've discussed are pushing forward with positive results.

In addition, we will be participating next month in the JCK jewelry show in Las Vegas, the biggest jewelry show in the country. It is a wholesaler to retailer format. And we have more employments pre-scheduled major retailers this year than ever before. This is very exciting.

We'll be introducing our new team and products to many key buyers and we are better positioned to sell and deliver. Looking forward, we believe Charles & Colvard's wholesale division, Moissanite.com and Lulu Avenue, are all positioned for significant growth opportunity.

We are focusing on increasing market share by expanding our portfolio of exciting branded products with existing and new customers. On the bottom line, our productivity opportunity should help finance future top line growth and ensure our consumer value positions, our superior sustainable and ultimately deliver better earnings growth.

I'd now like to turn the call over to Kyle Macemore, our Chief Financial Officer to go through the numbers for the quarter.

Kyle?.

Thank you, Randy. Good afternoon everyone, and thank you for joining us today. As announced in today's press release, net sales from the first quarter of 2014 decreased 7% to $6.1 million compared with 6.5 million in net sales during the same period of 2013. U.S.

net sales for the first quarter were $5.7 million, an increase of 12% over the same period in 2013. International net sales for the first quarter 2014 were $359,000, a decrease of 74% compared to the first quarter of 2013.

The decrease was primarily due to one distributor that placed a large order during the first quarter of 2013, but did not place any orders during the first quarter of 2014. We do expect future orders from this distributor throughout 2014.

Also, our net sales declined 14% this quarter compared to the first quarter of 2013 to $5.2 million and comprised 85% of net sales. The decrease in the first quarter of 2014 was primarily due to the decline in the international sales. The company's direct-to-consumer businesses increased 89% in the first quarter to $914,000 or 15% of our net sales.

Net sales of loose jewels decreased approximately 15% to $3.7 million in the first quarter and comprised 61% of sales this quarter compared with $4.3 million or 67% of sales in last year's first quarter.

Net sales of Forever Brilliant loose jewels in the first quarter of 2014 were approximately $2.9 million or 79% of our loose jewel sales compared with approximately $1.3 million or 30% of our loose jewel sales in last year's first quarter.

Finished jewelry net sales during the first quarter of 2014 were $2.4 million, an increase of 11% as compared to the same quarter in 2013. Operating expenses totaled $3.6 million in the first quarter of 2014 compared with $3.1 million for the same period of 2013. Operating expenses were down sequentially from the fourth quarter of 2013.

The company recorded a net loss of $1.1 million or loss of $0.05 per share during the first quarter of 2014 relative to net income of $306,000 or $0.02 per diluted share during the first quarter of 2013.

The company ended the quarter with $2.5 million of cash and cash equivalents from the balance sheet compared to $2.6 million of cash and cash equivalents at the end of the fourth quarter of 2013. Company ended the first quarter of 2014 with $43.7 million of inventory.

Loose jewel inventory was $34 million, and finished jewelry inventory was $9.6 million. Inventory increase from the fourth quarter of 2013 due primarily to an increase in the raw materials of loose jewel inventory. As we discussed last quarter we expect inventory decrease throughout 2014 and be a positive source of cash flow.

I'd now like to turn the call over to Steve Larkin, our Chief Operating Officer..

Thanks, Kyle. The first quarter included the all important Valentine's Day holiday selling period. Operationally we continue to deliver and service our wholesale and direct-to-consumer businesses in an efficient and on time manner. Our customers demand operational excellence, and we are delivering that.

Based on the success of our existing e-commerce drop-ship programs we are expanding SKUs and working closely with our key e-commerce progress to market, promote and grow their businesses. We are eager to expand additional e-commerce accounts and grow our digital footprint.

The infrastructure of product assortments, inventory levels, EDI and data exchange; pick, pack and ship fulfillment are all set to scale. The growth of these e-commerce programs gains us awareness, revenues and leverages a common pool of inventory.

Our Moissanite.com business continues to grow and show substantial increases to revenues, traffic, pageviews, conversion and average order value during the first quarter of 2014.

As this business matures, we are managing it for both growth and profit, including manage our expenses tightly and looking to leverage the bottom line by continued top line growth. Our Lulu Avenue business continues to grow. We now have representation in 39 states and the Commonwealth of Puerto Rico.

First quarter revenues, the number of active style advisors and revenues per party were all up. We are proud of the quality and enthusiasm of the selling organization Michelle and her team are building. Our direct-to-consumer businesses give us an ongoing dialog with our end consumer.

We are capturing data, watching the analytics, listening to the commentary, the behaviors and the actions. These insights are driving fact-based decision-making across all of our divisions. Our goal is to get our amazing gem in front of and in the hands of many more consumers.

And as Randy mentioned we believe we have created a solid foundation to achieve our goals. And now I'll turn the call over to Randy for some closing comments..

Thank you, Steve. As you heard Steve say we are excited about the opportunities in the future of our company. As always, our goals are aligned with our shareholders.

We are building and will continue to build Charles & Colvard into a premiere jewelry company that provides superior sales and marketing as more and more people embrace the value of our gem from the heavens displaying more fire, brilliance and luster than any gem on earth. This concludes our formal remarks for this afternoon.

Now, we would like to open the call to take any questions that participants in the call may have.

Operator, could you please open the floor for the Q&A session?.

We will now begin the question-and-answer session. (Operator Instructions) And the first question comes from Neil Cataldi with Blueprint Capital Management. Please go ahead..

Hey, guys. I was wondering if you could provide a real-time update on cash and inventory as of today, and maybe talk a little bit about the near-term outlook for moving the legacy inventory..

Hi, Neil, this is Kyle. Our financial position from cash and inventory is pretty consistent with where we were at the reported numbers in the release today. So, nothing has changed significantly from that. As we said in last call, we do think that the inventory will come down over 2014. We said it will take some time.

We think it will start to come down in Q2 as we work through some of that inventory. So we think we -- now, we're in a process of driving that inventory down, and we will start to see that benefit in the second quarter..

Okay, thanks..

The next question comes from Justin Ruiss with Sidoti. Please go ahead..

Good afternoon, guys.

I just had a quick question when it comes to the hires that you [brought] (ph) obviously for the sales team, their prior experience, is it typically with brick and mortar retailers, and is that kind of where you were talking about when it came to hitting the ground and running?.

Justin, this is Randy. One is bricks and mortar. He is over a 30-year veteran, has the key contacts with all the majors. The other comes out of the e-commerce background which is a specific new target for us, now that we have experienced Kohls in Kohls.com.

And we feel like that that's a channel that we have just developed the ability to go after it, being able to do the fulfillment have the EDI hookups and the digital assets. We think it's going to be very fruitful for 2014..

Okay, thank you..

The next question comes from Michael Potter with Monarch Capital Group. Please go ahead..

Hi, Randy.

Can you give us maybe a current update of how things are trending internationally, especially with Asia and India, and maybe an update on steps that we are taking to turn the current direction there?.

Well, from an international standpoint you hit the two biggest areas that we service, being Asia, Hong Kong and to China and being India. India, anybody that follows -- it happened in India in the latter part of 2013 and even this first quarter of 2014. There were a lot of new laws imposed especially in the jewelry area.

And I think -- I feel like that our distributors have gotten to the point where they are able to deal with it. Communications are that it's just been more of a timing issue. I know that Tom is working with two of our key distributors in India on some orders, and we hope to see those come through if not this quarter, early next quarter.

In Asia we had two significant buyers at the end of the fourth quarter, and there is communication back from the largest distributor there in China that his sell-through has been at or better than his projections and that he is also looking to put together an order.

So we are feeling pretty good about the position that we are in for the rest of the year..

Okay. And one follow-up, I see the position for sales returns that significantly move up, I think 810,000.

Can you give us some commentary on that as well?.

Kyle?.

Yeah. That was just processing of the return that we had from a previous order that we had booked in Q4..

It was primarily from one customer?.

Yes..

And are they still a customer?.

No..

Okay.

What do we plan to do with that inventory, that inventory that we could turn some place else?.

It is. We will be able to sell it to other customers..

Okay. Thanks, guys. I will get back in the queue..

Okay. Thank you, Michael..

The next question comes from Abba Horwitz from Old School. Please go ahead..

Hi. My question, I want to start with off here is I am trying to understand something. You have a lot of confidence in the future, but in the meantime what we have seen is a falloff in the sales, for many different reasons, we have seen an inventory build, and we have seen the cash go down.

And I don't understand why we should have faced it; the future is going to be brighter. What should give us confidence right now especially when I look at what's happened in the reflection of the business is reflected in the stock price, which is hemorrhaged.

I don't understand why we should have any face that we are going to see a turn in the business. I have seen the opposite here, is that the whole business is trying to slow down to the point of going negative..

Yeah. Abba, this is Randy. Abba, we are a growing company, and like any growing company you are going to have quarters that are really good and quarters that aren't so good.

I mean, as far as the inventory bill we stated May of last year that we would be building raw material with Cree's new process, and we made a commitment to Cree and we lived up to that. And our sales in that new product has been ramping significantly quarter-over-quarter.

And the new product gives us a position especially with the Forever Brilliant brand. Now, going forward, and we've talked about this last quarter, I don't know that you were on the call.

But last quarter we talked about the fact that second and third quarter, we have pulled those orders back with Cree and that the pendulum will swing, and as the inventory sale is down, the cash position will build back up. As far as what's going on in the market, I am not a stock market guy; you do that better than me..

A) The stock go from eight to two, but more importantly is to not be able to see tangible evidence that the business is to -- and to gain traction. In fact it's doing the opposite.

That's why I am trying to understand, Randy, is why -- what is it that you are so confident about that we are going to see in the next couple of quarters we are going to see a turn in the business?.

Abba, I am shareholder too, a large one. And believe me I am just as upset about the market as you are. But I am in for the long haul. I am looking to sell my shares this quarter or next quarter or even this year, and I have a good feel for where we are going. I'd love to share all that with you, but I can't give you all of the data that I know.

Obviously I am going to have access to a council we are speaking with and where we are at in those conversations. I feel good that we're going to finish the year somewhere in line with where we have been [before] (ph) prior years..

Now, what is going on in the marketplace that you're not able to get this traction? Why are you not able right now to get another Kohls? Why is it being so long?.

Abba, we are in those conversations. And again, I just can't share that data at this point, but we are in those conversations and that's the back half is -- after the show, the show is so vital to attracting new customers, because most of the majors they rather than have you come in, they book down with the show.

You meet with them there, so we do Kohls last year. And as a result of that you are able to move forward..

The next question comes from Lenny Brecken with Brecken Capital. Please go ahead..

I just got to reiterate what the last caller asked about. Randy, last call you said you met -- you almost meet with the retailer once a week, I recall. So the frustration on investors in understanding if that's the case, you had met with most of the majors, and what we are looking for is feedback as to why they haven't moved yet.

You can provide that, that would really help us out..

Lenny, all we can do is showing the product layout, the assortments showing what the opportunities are. It's no different than when you dated your wife you didn't get married after the first date and these guys don't put the line in after the first show..

Yeah..

But we are making a lot of headway and we feel very good about it..

Let me give you an analogy. I broke up with my wife and I found out why, and then I married her, so there you go..

All right..

All right. In terms of follow-up, Kyle, you disclosed the Forever Brilliant mix of the quarter..

We did. We said that Forever Brilliant sales for the quarter were just under $3 million, $2.9 million compared to about $1.3 million in the first quarter of last year..

Excellent.

Do you think that trajectory is going to continue in terms of growth into this quarter?.

We are very confident about Forever Brilliant growth on the long-term mean. Like everything, Lenny, we are going to have mix between various products quarter-to-quarter depending on which customer we are talking to. So we are very confident with Forever Brilliant and all of our products, and we continue to sell both.

So this quarter was from a loose jewel standpoint was a very high quarter for Forever Brilliant and those that bothered are very excited about it.

We continue to see our business in general moving more and more towards Forever Brilliant as we have discussed in the past, but like I said, we are going to see some volatility as we go quarter-to-quarter depending on who buy us..

Okay. Just two quick ones and a follow-up one; you had mentioned the progress on inventory this quarter. What specifically makes you confident that you will be able to reduce it particularly in the classic area this quarter? Is it just the order flow or is it -- is there something that ….

Yeah, I think its combination of things. 1) I think we have instituted a very strong internal management system. 2), we see opportunity in business. 3) We have dialed back our raw material purchase with Cree a little bit as we discussed that we have enough raw material right now. So we can work through some of this raw material that we have.

So, it's a combination of all the factors. Also, we are now in stock in many shapes and sizes, and we have kind of started getting more feedback on which sizes and shapes you are selling, which piece of jewelry you are selling. So we are learning as we go, as we work with some of these retailers with some of these products.

So we are tweaking our min/max and adjusting accordingly based on that analysis in real-time information..

Okay..

So to be clear, Lenny, it's going to be -- it will take a while. We said that last quarter. It's not going to happen overnight. But we do expect it to decline and we are very focused on making that happen..

Okay. Just one last follow-up; Randy, a lot of the criticism on investors and frustration of the last decade even before your time has been the lack of marketing focus of the company.

Can you specifically describe the changes that you think going forward are going to be put in place, so that occurs with the company as a consumer products company because it's more focused in marketing and makes it more of a priority?.

Before that I have to say, Lenny, is we work with several agencies and they kind of get it, is not the same as being inside the building. So we started looking, and I think I went through this last quarter. But we started looking for that person who is in women's consumer product. And we were fortunate to be introduced to Sarah.

Sarah comes out of cosmetics, over two decades in cosmetics. The last decade with L'Oréal who is as you know is one of the biggest brands out there. I can tell that she has been on board with us a couple of weeks, and she is making some huge inroads. I can't get into the details.

But I witness a presentation today, is probably one of the best marketing presentations I have seem in my life. So I am excited about it absolutely..

And why haven't you replicated the success of Charles Winston and Jewelry TV and the methodology you used to sell at your most successful channel. And I will leave it up to the rest of the callers. Thank you..

Yeah. No, we are constantly speaking -- we have tried Charles in England. We flew him over to England. We told you we were having conversation and continue to have conversation with Canada. We can't use Charles in the U.S. other than JTV as part of our agreement with JTV.

To the extent that we do Forever Brilliant with ShopHQ formerly ShopNBC, we are looking for someone -- it's hard to find someone as passionate and strong as Charles is..

The next question comes from (indiscernible) with Orca Investment Management. Please go ahead..

This is (indiscernible). I just want to say – I just heard some different parts of questions that people said and started. The 800,000 resell in return is that you recorded in the quarter; I saw that on the cash flow statement as well.

So when you book that, do you just net that against revenue or how do you learn that through?.

So [Shawn] (ph), we actually book the return provision in fourth quarter and reversed it as the product caters return in this quarter. So it was net entry, yes..

So that makes up 95% of the decline in the margin from last quarter to this quarter..

When we book the return provision we also book an estimate on cost return as well..

Okay.

So that brings up the question, then what happen to the margin beyond that?.

Yep. So the margin this quarter was driven by a couple of things. One, our mix in jewelry was higher and as we said our jewelry mix impacts gross margins as that business is higher. The second thing is as our overall revenue was less than it has been, so we did have fixed infrastructure that cost that we had to absorb the impact at our gross margin.

So as our revenue grows we should get some leverage on that. But right now in this quarter we did not obviously have as larger revenue quarter as we had in the past..

Okay. And then back to the topic, a hand-off cash increasing because of sensibly higher revenues and therefore reduction in that inventory.

What minimum number do you need per quarter to start generating a significant change in your cash flow? So here if it's six million, your fixed cost start having a meaningful impact on your gross margin 7.5 million before you start to materially move the needle..

Well, I think it's conceptually you are in the ballpark side. I think the thing to think about there is some of the inventory that we sell that we will turn into cash, we will not replenish.

So depending on what we sell and our inflows of material, it will impact our cash over time, but yeah, I mean I think we view this business running at -- we need to run at 7 million plus on a long-term basis and that would jive at what Randy said earlier about his expectations for a long-term growth.

We build up inventory in certain areas and spend the cash for that that some of that inventory we will not replenish whether it's some of the sizes in classic and some of the jewelry. So selling that inventory and collecting that money will then not need a jive in inventory level to support the business going forward and thus spend cash on that..

In last quarter I think -- correct me if I am wrong. I maybe off by a little bit on the timing on this, but if I remember correctly, Randy, you said that the purchases that you are going to make with Cree were going to be reduced through the first half of this year. Given what you saw in Q1 and less on large quarter unexpectedly comes down the pipe.

Do you think that you will starting ramping back up at the end of June or do you think that that probably gets pushed out a little more..

Yeah, [John] (ph), we were committed to first quarter. And what I said was we will take first quarter, the commitment, but the second and third quarter, we had negotiated to reduce sales significantly. So second and third quarter we did reduced which is what Kohl is saying.

The inflow and compared to the sell off of the older classic material will result in positive cash..

Okay. And one last question; and you and I have talked quite a few times as well as Kyle about the difference between long-term inventory and short-term inventory and all that. But what it seems to me is if on the new product you have roughly 70% yield that's the high end product that you want, 30% yield that's the lower end product.

By the time you get done cutting and polishing and chipping and fractures and what have you -- you wind up with this residual inventory. Is there some outlet of significance even at a lower margin that some of this old inventory could be moved out through an industrial channel.

So for example, a lot of the -- for lack of their terms, I don't know if the industry will or not, but the tailings that are done off of diamond and sapphire cutting is used for industrial purposes for embedding and cutting materials.

Is there some other avenue that you can start dumping off inventory that has a marginal value to it to start increasing cash flow?.

John, there is not. We have looked at it, now we use some of that or we kind of splurge ourselves. Anything that's a whole piece like end pieces, we use that. We re-polish that into the stone of some description. The only thing that goes away is what literally the solids turning to dust as it's making the cuts..

Okay, thank you..

(Operator Instructions) The next question comes from Neil Cataldi with Blueprint Capital Management. Please go ahead..

Hi, guys, a quick follow-up.

As it pertains to the lack of traction that we have heard on the call, is station issue at all in terms of your warehouse and in growing some of these fulfilling relationships?.

Well, it is. To the extent that we take on more fulfillments it becomes an issue. And then that becomes a bigger issue as you look out into late 2014 and 2015. And when we looked at where we are currently and those of you that's been in our building, you understand that in order to get speed efficiency, scale, it -- we need to make some adjustments.

We had a choice, which is stay here, the least ramp through 2017 or we had a one time opportunity that kick out, and we made the choice that it was more prudent to kick our especially in as much as we had a facility that on a per square foot basis was actually less than we currently had that we could go in and correctly size our fulfillment, because vast majority of the increased base being allocated to our fulfillment.

And then which is what we are doing go after the fulfillment business in a large way in all of the major e-commerce businesses. And there is a ton of them out there.

I mean you can look at any major retailer who has an e-commerce business in excess of 100 million a year who primary consumer is women, age 30 to age 60, middle to upper middle income, that's what you're talking to. I don't have to make the list. You can figure out the list really easy. And I think it's going to be a big opportunity for us.

This is something we were not doing the prior four years. We didn't have the ability to do it. We've just gained the ability to be able to do that..

Okay.

And when is that move happening?.

In June..

Okay.

So then it's a fake assumption that you're running on a fulfillment side, you're running close to capacity now and that once you move that, that gives you the ability to explore some of the relationships further?.

That's absolutely true..

Okay.

A second question on different topic, I was wondering if you could talk about the .com a little bit more -- your .com that is, are there any metrics or any type of performance that you can discuss in greater detail as to traction that you're seeing there, customers coming back, are you seeing more orders that are of specific zip codes, where word-of-mouth is maybe catching on a little bit?.

Yeah, I'll take that. This is Steve Larkin. We sell out divulging too much competitive information. The key takeaway is once a customer hits the buy button and receives the goods, they're inordinately satisfied, and customer satisfaction is real, real high, and consequently re-buy, and repeat purchases are very, very high.

It's paramount to us to get to goods in as many people's hands as possible, because once they get it they become an advocate, they become a believer. From a word-of-mouth perspective they are very, very happy and satisfied with the product.

So without getting into any other specific metrics, customer satisfaction and repurchasing is very, very high and loyalty consequently becomes very, very high..

Okay. Thanks, guys..

The next question comes from Marc Robins, Catalyst Research. Please go ahead..

Thank you. I hope I have the two questions here that are -- correct. When you're talking about the inventory I'd like to know little more about the composition of the inventory.

What's the breakdown between the Forever Brilliant aspect of it and the legacy stones?.

Hey, Marc, this is Kyle. So at the end of Q1, I'll give you a little bit more information. So we had about $34 million in loose jewel inventory, and about 9.5 million in finished jewelry inventory. That's in all kinds of various stages of raw materials versus working process of finished goods..

I'm sorry. That does not include the Forever Brilliant. That's included in jewelry. So, some of the jewelry also includes Forever Brilliant..

Okay. And I'm still confused on one issue, you -- it looks like the direct-to-consumer business was up 90%, so that would be Lulu Avenue and .com. And interestingly any other retailer or to-consumer kind of entity in the first quarter was having a heck of a time due to the weather, [U.S. is up] (ph) 90%.

On the other hand, we have this rather substantial return, and that's roughly equal to the decline quarter-over-quarter, year-over-year.

I'm confused with the sale and the re-booking done both in the fourth quarter, was the sale done in the fourth quarter and the re-booking of the subtraction of that sale done in the first quarter?.

So let me try, Marc, to clarify. The return that we booked was actually last year. So we recorded revenue last, we recorded a return last year. What everyone is seeing is the cash flow statement impact..

Correct..

So what happened is when that return we booked a return, when that return came in we physically got the goods back in Q1 and we adjusted the sales return allowance accordingly for those goods that came back in. So the return didn't have any impact on the current quarter's revenue. It was booked in Q4 of last year..

And I hope this is okay with everybody, the [pull] (ph) monitor, but what -- it appears to me and I apologize whether it appears to me like there might have been a little channel stuffing or what happened? What's -- Can you give us a little more of the story behind what that was about?.

Well, I wouldn't use that word..

Okay, that' fine. I'm glad you wouldn't..

We had a customer who purchased product and we felt like that customer was not paying us on time for their agreement. And so we told them to return the product once we get it ….

Okay, thank you. Thank you for the clarification..

We wanted our product back because we know we can sell the product. So we proactively ask them to return the product, because they were not paying..

That's very helpful, thank you..

Yeah, okay..

Marc, they did pay for about 200 of it..

The whole thing is just confusing to me because of the number seemed to be floating around, and it is very helpful to understand why it was returned and there wasn't stuff that didn't that they may not have sold, but why you demand at the back and etcetera, etcetera. Thank you..

Okay..

The next question comes from [Preston Fox] (ph) with Primecore Financial. Please go ahead..

Yes. I hope you can hear me on the mobile phone, and today there is raining. But I just have a quick question as I got half way on the call, you might have answered my question before, but we're trying to get in the store like I think I called you guys and I said that metro New York City area, that's now one I can go.

Look at this, I don't shop online or I don't plan to go on shop on TV, but if anybody this Saturday wants to shop for this, giving them big box stores and the problem we have this last time as (indiscernible) sales staff that weren't after familiar with try to push your product, and you consider if you don't get (indiscernible) setup your own kiosk stores yourself and see how this takes off in the malls every weekend people go shopping and I'll just stay at that.

That's my question..

Yeah, Preston, that is something that we look at, but it's a long process. I mean if you open 40 or 50, you can get 40 or 50 a year, not out of the onset. It would take an eight-year strategy to even get to New York. So that would be one of the -- as a ratio on ROI, based on the cost of the real estate it would be one of the last markets you went into.

I'm speaking from heaven, remember, I had about 200 stores, I know that market..

Okay. So my last thing is as begin the box stories you're confident that maybe the sales staff will be trained how to market it or show it off to customers, that was a big failure last time..

I think it's a combination. I think one is the training, but the other is we would include in the patching and the display, somewhat of a sales fellow. That's something that they were constantly looking at..

Okay. Well, hopefully I see some developments later in the year or maybe next I guess..

Okay..

That's all I have..

Sure..

The next question comes from Rodney Baber with Newport Coast Securities. Please go ahead..

Hello?.

Mr. Baber? Okay, it seems we have lost Mr. Baber. So the next question will be from Israel Iskowitz with (indiscernible). Please go ahead..

Good afternoon, gentlemen.

My question is at the tradeshow in Hong Kong few months ago, Moissanite was (indiscernible) selling from two different suppliers obviously coming out of China as prices which are about half of the price of what Charles & Colvard is offering about these days in the market for the better quality for the writer for their Forever Brilliant.

Any comments?.

I'm not aware of that. Now, (indiscernible) I'd like to see it..

Well, couple of my colleagues saw it and it's available in Hong Kong, so I'm sure it will be available again in the coming shows.

And just a side comment regarding the coming show in JCK, Vegas I saw (indiscernible) trade magazine and you have the dates from the show starts the whole day earlier than what you've specified in your advertising, when I am sure probably just being the typo or maybe I have the wrong base..

The show starts on Friday. We will be there. We actually get there on Wednesday..

I see, because your ad show that it starts on the 31st, actually best starts on the 30th, but again my main concern is regarding the Moissanite is not going at a better quality and half of price what Charles & Colvard is offering.

And let's say you will see that, how is Charles & Colvard preparing to deal with it?.

Well, we are at the show. We had people at the Hong Kong show. And we are constantly in communication with SRCC and the other large producers of silicon carbide in China. I have their samples, I have their slabs, and they know we are close to the quality that comes out of Cree; they are using (indiscernible). You are familiar with moissanite.

You understand what that is. And these are, I am telling, I got stones here, I am showing you literally dozens of stones, and it all looks -- I mean it looks like moissanite Charles & Colvard years ago..

Well, I'm sure times fill..

Yes, it will..

One more follow-up question, I think it was about three years ago, you have mentioned that there was a big sale in the Russian market, I think over a million dollars.

And were there any follow-ups within the far –- in the Eastern market as far as Russia? And what are the forward possibilities with its Russian market?.

We are constantly talking to different jewelry manufacturers in Russia, but currently we don't have a distributor that I am aware of in Russia..

So that particular deal was a one-time deal?.

Yes, it was..

I see. Thank you very much, no follow-up questions..

Sure..

The next question comes from Rodney Baber with Newport Coast Securities. Please go ahead..

Rodney?.

Mr. Baber, please go ahead. Your line is open. Currently Mr. Baber is having technical difficulties. This concludes our question-and-answer session. I'd like to turn the call back over to Randy McCullough for any closing remarks..

Once again, I'd like to thank everyone for the time to participate in our call today. And most of all, I thank our employees, all of their hard work and continued dedication. I'd also like to remind everyone that our annual shareholders' meeting will be on May 21, 2014 at 10 a.m. at the Sheraton Imperial here in Fordsville.

The shareholders' meeting will also be webcast, so if you are not able to attend, definitely catch it on the webcast. We have some exciting things to show you. And you won't want to miss it. I look forward to seeing you there. Thanks, operator..

To access a digital replay of this conference, you may dial 1-877-344-7529 or 1-412-317-0088 beginning at about 6:30 p.m. Eastern time today. You'll be prompted to enter a conference number, which will be 10038563. Please record your name and company when joining. The conference has now concluded. Thank you for attending today's presentation.

You may now disconnect..