Marvin Beasley - President and CEO Kyle Macemore - SVP and CFO Steve Larkin - COO.

Alex Christensen - Craig-Hallum Capital Group Ernest Knighton - Private Investor James Terwilliger - Newport Coast Securities, Inc..

Hello and welcome to the Charles & Colvard First Quarter 2015 Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.

This webcast may contain forward-looking statements as defined in Section 27A 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 qualified -- 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 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 the proxy, consent, authorization or agent designation with respect to a meeting of the Company's stockholders. I’d now like to turn this conference over to Marvin Beasley. Please go ahead Mr. Beasley..

Thank you, Robert. Good afternoon and thank you for taking the time to join us in recapping our first quarter 2015 results. I want to let you know how excited I’m to have the opportunity to transition from an independent Board member into the role of CEO and President. I look forward to continuing to drive Charles & Colvard towards success and growth.

Before I share additional thoughts about our initiatives, I’d like to hand the call over to Kyle Macemore, our CFO, so he can review the first quarter financial results.

Kyle?.

Thank you, Marvin. Good afternoon everyone and thank you for joining us today. As announced in today’s press release, net sales for the first quarter of 2015 increased 38% to $8.4 million compared with $6.1 million in net sales during the same period of 2014.

Wholesale net sales increased 15% this quarter compared to the first quarter of 2014 to $5.9 million and comprised 71% of net sales. The Company’s direct-to-consumer home party business, Lulu Avenue, had net sales of $1.4 million in the first quarter of 2015, an increase of 562% compared to approximately $206,000 in the first quarter of 2014.

The Company’s direct-to-consumer e-commerce business, Moissanite.com, had net sales of $1.1 million in the first quarter of 2015, an increase of 56% compared to $708,000 in the first quarter of 2014.

The Company’s net sales of loose jewels increased approximately 4% to $3.8 million in the first quarter and comprised 46% of sales this quarter compared with $3.7 million or 61% of sales in last year’s first quarter.

Finished jewelry net sales during the first quarter of 2015 were $4.6 million, an increase of 91% as compared to the same quarter in 2014. Gross margins for the first quarter of 2015 were 42% compared to gross margins for the first quarter of 2014 of 40%.

Operating expenses increased to 5.2% in the first quarter of 2015, compared to $3.6 million in the first quarter of 2014. The increase was primarily due driven by the following items. General and administrative expenses of over $500,000 associated with the transition of our CEO.

These expenses included severance, legal fees, equity compensation, and other miscellaneous items associated with the CEO transition.

Sales and marketing expense increased primarily as a result of an increase in commissions of $641,000 for sales to specific customers under which commission plans of sales representatives are based and the direct-to-consumer home party line of business.

The Company reported a net loss for the first quarter of 2015 of $1.7 million or $0.08 per share, compared with the net loss of $1.1 million or $0.05 per share in the first quarter of 2014.

The Company ended the first quarter of 2015 with $5.2 million of cash and cash equivalents on the balance sheet compared to $4 million of cash and cash equivalents at the end of the first -- fourth quarter of 2014. Inventory at the end of the first quarter of 2015 was $37.5 million, which was a decrease from $38.9 million at December 31, 2014.

Loose jewel inventory at the end of the first quarter was $31 million and finished jewel inventory was $6.5 million. The Company has no long-term debt and has not utilized the $10 million credit facility it entered into with Wells Fargo at the end of 2014. I’d now like to turn the call back over to Marvin.

Marvin?.

Wholesale, Moissanite.com, and Lulu Avenue. I am pleased with the results of our Wholesale business this quarter. But I expect to have continued quarterly volatility in this segment, similar to what we’ve experienced in the last few quarters. Our Wholesale business has a lot of qualities in it that I believe can make this portion of our business excel.

We have some very good customers and partners and we plan to work with them to grow our business together. In addition, we need to develop relationships with our new partners to enable long-term growth in this segment. With every challenge comes an opportunity, and we plan to act upon those opportunities as we strive to build shareholder value.

Our direct-to-consumer e-commerce business, Moissanite.com is doing well. And I believe there are many growth opportunities for this part of our business. We continue to assess the ideal strategies that will allow us to connect with our customer base online.

I am very enthusiastic about the potential of Moissanite.com and I firmly believe that as we continue to develop our online marketing and increase our merchandise offerings, we will experience greater performance and consumer response. As of today, Steve Larkin our COO, will now be in charge of both our Wholesale division and Moissanite.com.

I believe this change will reduce some of the confusion between these two channels in the marketplace and simplify our organization and processes. I'm extremely pleased by the performance of Lulu Avenue, our direct-to-consumer home party business.

Michelle Jones, President of Lulu Avenue unfortunately could not join us on the call today as she is leading an important divisional wide meeting of our Style Advisors. She is doing a great job.

The fact that Lulu Avenue is tracking so positively and consistently is a consequence of the planning, and investments that Charles & Colvard has put into this business. Good sales and inventory management and the hard work and dedication from our team.

So in summary, I want to let you know that I'm extremely enthused about our Company, and its prospects. I recognize we have some things that need to be improved, opportunities to exploit and business to do in the quarters and years ahead.

Let me take this opportunity to have Steve Larkin provide further insight on our rapidly growing direct-to-consumer segments, Moissanite.com and Lulu Avenue.

Steve?.

Thank you, Marvin. Our Moissanite.com business continues to grow at a very high rate. First quarter of 2015 net sales were up 56% versus the first quarter of 2014 were net sales grew 68% versus the first quarter of 2013. Traffic conversion, page views, customer lists were all up.

This channel gains us increased awareness, enables us to manage our inventories effectively, captures and utilizes consumer data, while enabling consumers to learn, browse, and buy our brilliant gem stone. As Marvin mentioned earlier, we are very excited about the growth of Lulu Avenue. First quarter 2015 net sales increased 562% to $1.4 million.

Lulu Avenue’s net sales in the first quarter of 2015 almost equaled its net sales from the entire year of 2014 of $1.5 million. We now have a presence in 47 states and the average Trunk Show runs at approximately $600. Moissanite continues to be a key attraction for Style Advisors.

Michelle and her team continue to work tirelessly to grow this business and we’re very excited about its growth potential. I am excited about leading our Wholesale sales organization. We have a lot of very good and dedicated customers that I look forward to working with to grow our Moissanite business together.

In addition, I’m anxious to talk to potential new customers and increase the distribution of Charles & Colvard’s Moissanite. I’ll now turn the call back over to Marvin..

Thank you. I believe it is crucial that we understand the issues and opportunities affecting our industry, both in terms of the overall trends in jewelry, as well as specific challenges of marketing Moissanite.

Although we justifiably pride ourselves on developing this brilliant gem, we must continue to look for ways to stay ahead of our competition, while continuing to innovate. I believe this innovation must come in terms of our product offerings, our partnerships, our distribution, and other relationships with our customers.

This will require a great deal of hard work and analysis of our current business practices. I intend to make this our priority as a Company. This concludes our formal remarks this afternoon. And now we’d like to open the call to answer a few questions that participants in the call may have.

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

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Okay. The first question comes from Alex Christensen of Craig-Hallum Capital Group. Please go ahead..

Hey, guys. Congratulations on the quarter and welcome to this side of the operational team, Marvin. Just a couple questions about Lulu Avenue.

I was wondering what you're seeing in terms of trends in recruiting new Style Advisors and just a little bit of color on growth on the supply side there?.

Hey, Alex. Thanks for joining. This is Kyle. I will take that. As you know we’ve not traditionally disclosed our number of Style Advisors, but we continue to see growth with the number of Style Advisors. Obviously, the revenue trend is very positive and we continue to see that grow.

We had a margin plus the style advisors [ph] as we mentioned, with Lia Sophia picking up quite a few of those Style Advisors into the fourth quarter, into the first quarter. And Michelle and her team continue to be focused on growing the business both from a revenue standpoint and a Style Advisors standpoint.

So we’re very happy with where that stands..

Okay. And then, just one quick follow-up for you guys.

Just -- what you're looking at for, you have got the rest of the year what you're looking at in terms of partnerships, kind of other retail and whole opportunities, what you’re expecting there?.

Well, I think as I said in the text, we’re interested in growing our business and we believe that we can. We are going to do it the right way. We are going to develop better business partnerships, going forward so that we really have a game plan of hand-in-hand making money in the business with our partners and everyone getting along well.

So the change in terms of this channel of marketing with Steve Larkin, being in charge of all sales today excluding Lulu Avenue, we think its going to pay off handsomely, because we think there’s a coordinated effort that’s needed there. And although I’ve learned over the years with Charles & Colvard did not count the chickens until they hatch.

There are some promising signs in terms of real retail activity and the promise of some other folks coming on board. As you know it’s a long, long process to get into retail stores in general. Today its buyers left brain and right brain; sometimes I think they’re more left brain.

They are really driven by metrics and they take their time to make decisions and we certainly are there to help them. But I’m -- as I said before, I’m very enthused about the opportunities here to increase our business in a profitable way..

Okay. Thank you guys very much and then I look forward to hearing what you do in -- with the second quarter. Thank you..

Thanks for the call..

Thanks, Alex..

The next question comes from Ernest Knighton, a Private Investor. Go ahead..

Good afternoon, Marvin. Congratulations on your promotion or shift to say what it is, okay..

Thank you, sir. I appreciate that..

I have been an investor from day one in the company. And my question is about the inventory and it always seems to be a sore subject with everybody concerned with the company.

Do you know when the gem is put an inventory, the day that it was put an inventory the value and what it is today?.

Well, I will let Kyle handle that..

Hi, Ernest.

How are you?.

Fine..

Yes, we have a very good view of the quantities of inventory in shapes and sizes and the qualities of inventory as well as the activity. So, we have a very good view of inventory. I believe ….

How about the areas of inventory? How much of the inventory is old inventory?.

Well, I don’t think it’s a relevant question per say because the quality of the inventory is how we bucketize it. So, if it’s a ….

I’m very familiar with what goes on over there, okay. And a lot of that inventory is old stuff in my opinion. And my opinion is that it, you’re probably carrying value on the books or something that is old and obsolete. And my question is why carry it, why not put it on the market and get what you can out of it and put dollars to the bottom line..

Well, I would tell you this Ernest, let me -- like I said after six weeks on the job, I will tell you this. My number one topic here is top line revenue that’s profitable for our business. We don’t get that. We can't pay the expenses and we’re all in really big trouble. Number two, and right behind it.

Right behind it is exactly what you’re talking about. I bet Kyle and I have talked to it a dozen folks from the investment community in the last six weeks, maybe more Kyle. And I would tell you if there is a consistency there and we hear you, and we hear your concerns.

And quite frankly we are absolutely committed to pulling our inventory down in a reasonable manner as quickly as we can without causing us a lot of pain and without causing our business partners a lot of pain. And I’m committed to it and that is a promise.

But the first thing that was on the agenda when I landed here was a complete look at our inventory top to bottom. And inventory aging is important but I remember this is not fish; some of it just doesn’t start to smell very quickly. It has the market value for a long, long time.

We’re going to slice and dice as sole retailers say our inventory and to probably a dozen different ways and segments to look at it. And we will make determinations going forward about our inventory. It is top of mind and I appreciate you bringing it up. You’re exactly right, we need to look at it and be cognizant of it.

I promise you we will make the right decision for the shareholders of the business and it’s a complicated issue..

I understand that and I’m glad you’re addressing it, okay?.

Thank you, Ernest..

I look forward to meeting you some time. Thank you..

Thank you..

Thank you, Ernest..

The next question comes from Rodney Bader [ph] of Heyland Capital. Go ahead..

Marvin, can you hear me okay?.

Yes, Rodney..

Good. Well, congratulations on giving us all a wake up call on the first quarter numbers, and I want to congratulate you for having such a great time, I guess coming in as the CEO of this company. Timing is everything on something like this and the momentum that you’re starting out was just terrific.

Without the benefit of a 10-Q or which I haven’t seen, I might have a better -- I might already, you have the answer to this.

But can you just address the expense situation for this company, because you’ve got a lot of things going on and not the least of which is having to invest money and to move initiatives like Lulu Avenue and things of that nature.

And so since you don’t capitalize any of that in the expense at all, I’m just curious about how you manage daily with expenses when you have investments like that to make which we’re all very familiar with how much money has gone to the Lulu Avenue over the last several years.

So, just an update on what you think about the expense situation? What you can do with it over time? Any color you can give us on how much of the losses or basically really capital investments to grow your business, and then I’ll just stop with that..

Listen, Rodney it’s a very fair question and I think we’ve addressed this issue as well with a number of folks lately.

I had an interesting call this week from one of our really great business partners, and there was a question on the call that asked quite frankly, did we expect to offset the expensive Lulu Avenue by demanding higher profits out of our wholesale division and e-commerce. And the answer to that question is, unequivocally no way.

When we got into the direct party business, and I speak from my board experience and here again over five years on the board, we understand that this was not a leap of faith that it was going to be really hard, that it was going to have a number of years of significant losses.

But when we got through that timeframe, this business we believe is going to be a very healthy business and it’s going to be maybe a corner stone of our business, very, very important. We don’t expect other businesses to make up for those losses.

And I think we’ve been somewhat forward about the expectation and I think we’ll be able to be even more forward about these things. As we -- this past year I think broke out our ecommerce business from Lulu Avenue so we can clearly look at those two things together.

We are willing to endure the pain because we are believers in it, and you’re right, we expensed a lot of it. Lulu Avenue, and for the last two years I have read everything I can read on home party business because obviously I didn’t come from that segment.

And it seems to me just to be an incredible exercise in human resources and I can tell you, I believe we’re on top of that. I really believe we’re on top of that. We had some excellent style advisors and it’s the heartbeat. It’s the central nervous system of that business. And here again Michelle is doing a great job with that.

Number two, inventory management is critical. First of all you’ve got to be a super low cost provider of inventory or buyer of inventory. You cannot over pay by a nickel because nickels in terms of the mark up in that business ended up being dollars and we’re cognizant of that. We probably made a few mistakes early on flying.

We learned from them and we understand how important that is. And inventory management is a hot button with me, I promise you. So, Rodney I must tell you that, I’m real confident we’re going to do well here. And I said Michelle is doing a wonderful job. The other businesses as I said in the text, I feel pretty darn good about them.

Steve Larkin and I have spent a ton of time on ecommerce and we just see a lot of opportunities there, and we have used ecommerce to sell a lot of old inventory where we mere transition into the more market driven in terms of selling things on this Web site that are really, really hot in the market place and we really think that the future here is solid as well.

So, I don’t know if that begins to answer your questions or not, maybe Kyle can chime in and finish up here..

I think you did a very good job Marvin of articulating the path forward and Rodney as you know we have been very clear that we are making -- committed to making the investments in Lulu Avenue and I think one of the things that we continue to do is make those investments in a measured way to try to anticipate the growth that’s coming and make sure we have the resources and infrastructure in place to make that business successful, because the last thing we want to do is work this hard to get to this point and then not be able to support the growing field of style advisors our there.

So, we’re very aware of that and very focused on that..

Rodney, I think you and I talked the other day and I said, a lot of the businesses we’re in are really simple. They’re simple to describe, but they’re hard as hell to do.

And you know what, that’s a good thing, because I think the direct party business and home party business and so forth is so darn hard to live through that period of time that a lot of people just go, ain’t interested, ain’t going there. I’ll look for something else to do with my money. And that -- eventually that will be a big plus for us..

Well, that’s a great response and I appreciate your enthusiasm, everything you’re doing for this company, it’s going to be exciting to see what's happened so with the next year and I’ll leave it at that for right now. Good luck..

Thank you. Thank you, Rodney..

Thank you..

[Operator Instructions] Okay. The next question comes from James Terwilliger of Newport Coast Securities. Go ahead..

Hi, guys.

Can you hear me?.

Yes, James..

Hi, James..

Great job on the revenue growth, that’s probably going to surprise everybody on the upside, up 38%, that, that was really a real big positive surprise.

Just to verify some questions in my model though, did you say previously in the call because there is a couple of calls going on right now that I need to be on, that the CEO transition expenses were approximately $500,000?.

We did..

And would most of those expenses show up in the G&A line?.

They would. All of them would..

Okay, excellent. So, as you guys look to go into the second half of 2015 and into 2016 with the great revenue growth number like this.

How should investors think about the leverage and acceleration to the bottom line? As you guys grow the business and grow the top line?.

I’ll take a stab at that. I think from a -- a couple of things that you should think about. As Lulu Avenue specifically grows, a big portion of the expense associated with Lulu Avenue is variable in commissions. So, we’re going to have with that business growing there is going to be a growth in sales and marketing that’s variable in nature.

We have a little bit of step function that we have to go through that business as well to provide the infrastructure that we need to support the field although those -- a lot of that investment for the time being is behind us and it becomes incremental with few people each quarter.

From our G&A organization, and our overall overhead more genuinely in a pretty reasonable place from that standpoint. So we hope over the long-term to get leverage there.

So that’s kind of how I would look at the operating expense structure and the last place is probably marketing as we see the need to invest in marketing resource to drive brand awareness we will consider that investment as well as appropriate and based on our overall cash position..

Okay.

And then lastly, did you guys purchase any additional inventory this quarter and when is your next inventory purchase scheduled?.

We did purchase inventory from Cree and we are purchasing inventory on a quarterly basis. We purchased just over $1.4 million from Cree in the first quarter..

And is that -- and I don’t know how much you can tell me.

Is that a good number to go forward? Is that kind of a good run rate for a quarter you purchased?.

The way you should think about that is, it is we disclosed in the contract with Cree the cumulative value of our three year period, it increments quarter-over-quarter a little bit each quarter over time. So it gets bigger in the future as our inventory -- existing inventory goes down.

But its not sizable increases each quarter but there are some increases as we go through time..

Okay. Thanks a lot guys for taking my question and great job on the significant revenue growth, really good to see. Congratulations..

Thank you, James..

Thank you..

Thank you. And as there are no more questions at this present time, I’d now like to turn the call back over to Marvin Beasley for any closing comments. End of Q&A.

Thank you, Robert. Once again I would like to thank everyone for taking the time to participate in our call today. I want to tell you it means a great deal to us. Most of all, I want to thank our employees for all of their hard work and their continued dedication. Thank you..

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