Marvin Beasley - CEO Kyle Macemore - CFO Neal Goldman - Executive Chairman Steven Larkin - COO Michelle Jones - President, Lulu Avenue.

Mark Rosenkranz - Craig-Hallum.

Good afternoon and welcome to the Charles & Colvard Third Quarter 2015 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions].

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 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 a proxy, consent, authorization or agent designation with respect to a meeting of the company's stockholders. Please note this even is being recorded. And I would now like to turn the conference over to Marvin Beasley. Please go ahead..

Thank you, Anne. Good afternoon and thank you for taking the time to join us in recapping our third quarter 2015 results. Let me just say at the onset that we are proud of our performance in the third quarter and I believe the company is well positioned for continued success in the future.

Kyle Macemore, our CFO; will provide you an overview of our financial results. And then I will discuss our progress on some of our business initiatives. In addition to Kyle, I'm joined by Neal Goldman, our Executive Chairman of the Board; Steve Larkin, our Chief Operating Officer; and Michelle Jones, our President for Lulu Avenue.

I’d like Kyle to review the second quarter financial results and then I will share some thoughts about our initiatives and our performance. All four of us will be available to answer questions at the end of the call.

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 third quarter 2015 increased 44% to $6.5 million compared with $4.5 million in net sales during the same period of 2014.

Net sales for the first nine months of 2015 were $22.4 million, an increase of 21% compared to the first nine months of 2014. Wholesale net sales increased 13% this quarter compared to the third quarter of 2014 to $3.9 million and comprised 60% of net sales.

The company's direct-to-consumer home party business, Lulu Avenue, had net sales of $1.4 million in the third quarter of 2015, an increase of 255% compared to approximately $400,000 in the third quarter of 2014.

The company's direct-to-consumer e-commerce business, Moissanite.com, had net sales of $1.2 million in the third quarter of 2015, an increase of 77% compared to $676,000 in the third quarter of 2014.

The company's net sales of loose jewels increased approximately 23% to $2.9 million in the third quarter and comprised 44% of sales this quarter, compared with $2.3 million or 51% of sales in last year's third quarter.

Finished jewelry net sales during the third quarter of 2015 were $3.7 million, an increase of 66% as compared to the same quarter in 2014. Gross margins for the third quarter of 2015 were 40% compared to gross margins for the third quarter of 2014 of 28%.

Gross margins improved from the prior year primarily due to the launch of our new color gemstone, Forever One, and through a higher percentage revenue mix to our direct-to-consumer business, Lulu Avenue, and Moissanite.com which traditionally have had higher gross margin percentages in their wholesale business.

Operating expenses increased to $4.6 million in the third quarter of 2015, compared to $4.3 million in the third quarter of 2014. The increase was primarily driven by an increase in sales and marketing expense of $345,000.

The company recorded a net loss for the third quarter of 2015 of $2 million or $0.10 per share, compared with a net loss of $3.1 million, or $0.15 per share, in the third quarter of 2014.

The company ended the third quarter of 2015 with $5.6 million of cash and cash equivalents on the balance sheet compared to $4 million of cash and cash equivalents at the end of the fourth quarter of 2014. Inventory at the end of the third quarter of 2015 was $34 million, which was a decrease from $4.9 million from $38.9 million at December 31, 2014.

Loose jewel inventory at the end of the third quarter was $29.3 million and finished jewel inventory was $4.7million. The company has no long-term debt and has not utilized the $10 million credit facility it entered with Wells Fargo at the end 2014. I'd now like to turn the call back over to Marvin..

Thank you, Kyle. As I mentioned in my opening remarks, we are very happy with the progress we made this quarter and this year.

During the course of the third quarter and throughout this year, we focus on several key areas and I will be reviewing our progress on the following; one, increasing sales and opening new channels; two, enhancing awareness through branding and innovation; three, improving our balance sheet by reducing inventory and increasing cash.

As Kyle mentioned, our overall sales grew in the third quarter by 44% compared to the third quarter of 2014 and we showed growth in all three business segments. Sales for the first nine months grew by 21% compared to the first nine months of 2014 led by growth in our direct-to-consumer channels, Lulu Avenue and Moissanite.com.

Sales for Lulu Avenue for the first nine months of 2015 was $4.1 million which was an increase of 358% over the first nine months of 2014. Moissanite.com's $3.6 million of sales through the first nine months of 2015 exceeded its sales for the entire year of 2014.

As I stated in the press release, we are also very excited to announce that in the third quarter of 2015 we shipped Forever Brilliant jewelry to a nationwide U.S. retailer for a 50-Store test. In addition, in October 2015, we shipped an expanded assortment on Moissanite jewelry to a regional U.S. retailer.

We anticipate that the retailer will carry Moissanite in all 44 of their retail department stores. We believe these shipments marked a significant step in developing a retail presence with Charles & Colvard Moissanite. The second primary area of focus is enhancing awareness, branding and innovation.

In September, we started shipping Forever One, our first colorless grade of Moissanite which we believe is a game changer in the industry. Forever One because it is colorless, for loose one of the historical complaints about Moissanite that sometimes had a green tinge.

We believe Forever One with this DEF color grade is a revolutionary gem that is socially responsible and offers great value for the consumer. This gem was produced as a result of the innovation from our amazing team working with Creed.

We are marketing Forever One in limited shapes and sizes and it has been very well received from our business partners and consumers. During the third quarter of 2015 more than 10% of our total sales were from Forever One. We held our launch party in New York City with 17 different style, fashion and jewelry industry organizations in attendance.

Those organizations are promoting awareness of Charles & Colvard Moissanite through articles, blogs and other forms of social media. In conjunction with the launch of Forever One we also took the opportunity to refresh the overall branding of Charles & Colvard.

In addition to updating the look and feel of our corporate website and Moissanite.com, we published clearly defined grades and clarity of our Forever family of gemstones which of course includes Forever One, Forever Brilliant and Forever Classic. We believe there is a customer and a market for each of these qualities of stones.

We also created a web portal with current marketing materials and information to make it easier for a business partners to sell Moissanite and create marketing collateral.

We believe these efforts to create awareness and highlight the unique features of the Charles & Colvard Moissanite family are helping to increase sales and we'll continue to be a key driver of our success in the future. The final focus area is improving our balance sheet by reducing our inventory and increasing our cash position.

We spend considerable time and effort reviewing our inventory. The inventory balance is $4.9 million lower than when we started the year and contains more of high quality grades than it did at the beginning of the year. The third quarter of 2015 marks the six consecutive quarter the company has reduced its total inventory balance.

The reduction in inventory along with our accounts receivable collections allowed us to continue our investments while increasing our cash position from $4 million at the end of 2014 to $5.6 million at the end of the quarter of 2015.

I assume all of you have seen the press release we sent out announcing my retirement and the selection of Suzanne Miglucci as our President and Chief Executive Officer effective on December 1, 2015. As I mentioned in my previous remarks, I believe the company has made progress in several key areas that were a focus for me and the Board during 2015.

Now is the right time for the next CEO to lead the company into the future. I greatly appreciate the opportunity to be a part of this great company. And I am very thankful for the wonderful people at Charles & Colvard.

I wish Charles & Colvard great success in the future, and I will do everything I can to help Suzanne and the company during the transition and beyond. I will now turn the call over to Neal Goldman for a few comments.

Neal?.

Thank you. I want to start by thanking Marvin for his service as a Board Member, and as President and CEO, the ability to have Marvin to step-in as a CEO last spring allowed management and the Board to work together to evaluate where the company was operationally and what the company needed strategically for its next phase of growth.

Marvin fortunately was interested and willing to stay on as long as we needed. We started implementing our plan with an expansion of our Board with two new members in August as we identified marketing branding, e-commerce and technology as areas in which the Board needed assistance.

The Board recognized that retail is undergoing a monumental transformation, for the company to compete successfully the Board believes the company needs an only channel strategy focused on increasing consumer awareness and acceptance of Moissanite. Our search for the next CEO send us finding someone with deep marketing and branding experience.

We engaged in a robust search for Marvin's successor and found the ideal candidate was Suzanne Miglucci who joined our Board in August. Prior to accepting this role Suzanne was Chief Marketing Officer for publicly-traded Channel Advisor, an e-commerce software and service solutions provider.

She has also held executive marketing positions with SAP, Cyquest, MicroMass and Arsenal Digital. I am excited to work with Suzanne as Charles & Colvard moves into its next phase of growth. This concludes our formal remarks this afternoon and we'd now like to open the call to answer a few questions that our participants in the call may have.

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

Thank you. [Operator Instructions] Our first question is from Mark Rosenkranz at Craig-Hallum..

Hi, this is Mark in for Alex Furhman. Congrats on the great quarter so far..

Thanks, Mark..

Just wondering to ask a quick question, I'm wondering if you could discuss the inventory levels, you mentioned that this was the sixth quarter in a row now you've been able to reduce debt, where are you in terms of how you're trying to manage that size and maybe the opportunity to move product at a lower margin versus kind of keeping that momentum going and lowering inventory, if you could just add a little color there?.

Hey Mark, this is Kyle, I'll take the first stab. As you pointed out and we mention in the prepared remarks we have been driving our inventory down consistently and utilizing it as a source of cash.

We have about $29 million in loose stone inventory, of which $17 million is in finished stones, of that $17 million about $3 million is in Forever Brilliant, Forever One, so we still have a fairly reasonable amount of Forever Classic.

And our primary focus is to deny the correct channels and opportunities to sell each type of gemstone and we believe that as Marvin said in the prepared remarks that there is an opportunity out there for each type of gemstone, and they each have their own value proposition.

Obviously Forever One, our newest town has been very well received but there are customers that love Forever Brilliant and customers that love Forever Classic.

And so we'll continue to focus on inventory and driving it down but I think our inventory is in a much better position than it was six quarters ago and will continue to focus on it every day to try to help drive sales and get it to the right places..

It's Marvin, thanks for the question it's a very good one from the crow's nest here back to the last March, we really took this on because it was an area of concern for - I guess one out of two folks that I've talked to. And we really dissected the inventory, we sliced in and diced at hundred ways.

We took action on the things that we felt did not fit our assortment plan going further. We did that first, we scrapped and melted some complete jewelry inventory and we also took steps to mark downs significantly several million dollars of loose jewels and what have you - and to make sure that we move that inventory first.

We still have too much inventory, we know that but as I mentioned in the remarks, we believe the quality of that inventory is pretty darn good. And going forward, quite frankly if we don't move all of the distressed inventory this year, we feel we have adequate reserves against it to move it next year without hurting our gross margin.

The other point, the last point and this is significant. When you look at our obligations from creep next year for purchases, it fits in very nicely with our open to buy. So nicely that we should see inventory reductions through 2016, on paper it works very nicely. So we're very comfortable with where we are..

Okay, great. Thank you very much for that color, that's very helpful. I'm wondering - switching gears just a little bit, you talked about in grades of start to BF Forever One series which is very encouraging to see.

Could you maybe talk about the ramp you see going forward and how do you kind of balance the marketing efforts and sales efforts regarding Forever One versus maybe Forever Brilliant and how you see both those kind of ramping going forward?.

Yes, we'll have to do that very carefully. We feel that the production of the new F4 material which we began to receive in the last quarter of last year is producing just a gorgeous gemstone to the degree of depending whether it's a fancy shaped or round, we're seeing 60% to 70% easily falling into F1.

Most of the balance is falling into Forever Brilliant and I guess you could say Kyle, out liner is actually very, very small amount that is going into the Classic which means that over time the Classic quality will begin to go away. And we're already seeing some pressure on some sizes there.

We have to merchandise our way through Classic and we have to make sure that that's done in an orderly fashion. We decided on the cutting of F1 that we would take our time, that we would be very, very targeted in terms of the sizes and shapes, and it was a very limited introduction.

And we're glad we did because it's really a haphazard thing that just go flying out there and cut a hundred different shapes and sizes without understanding it, too much of a commitment and immature.

2016 is going to be exciting year because we believe every quarter we will be able to introduce a new shape and size to our inventory assortment plan and we think that our distributors and retailers are going to be darn excited about it, and most importantly, our customers. So when you look at the future it's really very exciting.

We will end up with two qualities, we will certainly look at Forever One as we get into 2016 and certainly the time horizon of 2017 to make what might be some strategic changes in how we go to market with Forever Brilliant and F1. We'd like to see a little bit more spread between the two qualities in terms of price.

Forever One is giving us today an enormous opportunity..

Okay, great. Well, I appreciate the color guys and grabs on the quarter and congratulations to both, Suzanne and Marvin as well for the new roles..

Thank you..

[Operator Instructions] At this time I show no further questions. This concludes our question-and-answer - actually, we do have a few more questions coming into the queue. Our next question is from Craig Porringer [ph] at Wells Capital..

Good afternoon. You mentioned about the 50-store test and I forget or I didn't catch, what brand of stone you were sitting there, was either Forever Brilliant or Forever One? And then the other shipment of 44 stores, I think that's the most exciting news and addition to the inventory any further penetration of the wholesale channel.

So can you just elaborate on that please?.

Yes, I'll do it very carefully. I wish we could tell you the retailer but we don't have their permission yet and maybe in one we will in the future.

We are very excited too because it's been a very long time since our company has had a presence in a store, in a freaking mortar where our customer is 18 inches across from taking a look at it and saying wow, this is really incredible. That is very excited.

I'm telling you the truth it sometimes keeps me up at night from the excitement because I can't fall asleep. I really think it's going to be tremendous. And you can bet that this company will do a 100% of what's necessary to support these two retailers and the sales through with this product..

Craig, this is Kyle. Just to clarify, one of the retailers - the nationwide retailer is carrying Forever Brilliant and the other retailer is currently carrying Forever Classic but honestly, depending on sales we hope to even broaden this assortment and they may also carry additional stuff online as well..

And by the way we currently have around $11 million to $12 million still of Classic inventory. So we've got a lot of inventory to go through before it becomes a problem..

Okay.

And the timing on some sort of 50 store test would be what?.

The retailer has told us that they will run the test for a period of months and then they'll get back to us with feedback on next steps. So it's - that's what we know right now..

Okay. Thank you very much..

Our next question comes from Dennis Dove [ph], Private Investor..

Good afternoon. I have - happy to see the bricks and mortar placement, I hope that is leading to much more in the future I know you can't say much about it now. I have a question probably for Neal and that's in the bigger sense.

I'm wondering what the goals are for this company, it seems like we need to grow orders of magnitude in terms of sale and yet we talk about small percentages every quarter as a good thing but are we still aiming to make this company what it should be with this jewel?.

That was my goal as an investor before I joined the Board and our whole focus is making this a unique - it is a unique gemstone but it's something making it something that's really out there in the real world in demand.

We have a lot of opportunities, you're reading about the collapse of the diamond business where people are no longer buying the sites from to DeBeers [ph] as they were forced to in the old days.

You're reading about manufactured diamonds coming to market, and you're also reading about the millennia's which have a whole different viewpoint on their purchasing and what kind of product lines they want to buy today.

A lot of that goes back to our decision to hire Suzanne as our new CEO, she really has experience in branding and marketing, she is a great leader, and I think her talents will really help this company get to the next level.

And we still have an enormous opportunity but as she vows the strategy for us as a Board, we will listen to her thoughts and we're going to allocate the resources going forward..

I'm looking at the stock price that as an investor you're also looking at the same thing here and hopefully Suzanne can - welcome to her, and hopefully she will get us on the right track.

Do you see any big roadblocks or you do you see things that we're doing now that maybe need to be eliminated, they are interfering with the chance to go after the bigger sales?.

No I don't see anything right now. I see that long term as we really create this new strategy, obviously there will be decisions made about allocation of resources but I'm very excited about the prospects for the company, the products line, the inventory reduction and more importantly, the management team that exists here.

I think we have a unique talented team that really has the capability of taking this company to a much higher level of sales..

Okay, that sounds good to me. I look at the inventory and I don't see it being too small, I see the sales not being big enough to make that seems small. So I'm looking forward to a lot of help. [Multiple Speaker]. To still have you on the call and Neal, it would be nicer if you could be on some future calls answering more of the general pressings..

I'd be happy to do that..

Thanks..

[Operator Instructions] There are no further questions. Mr.

Beasley would you like to make any closing remarks?.

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

I will now turn the call back over to the operator, Amy?.

Thank you. This conference call will be archived for review on the company's website http;//www.charlesandcolvard.com/investor-relations/events. To access a reply of this conference, you may dial 1877-344-7529 4141-2317-0088 beginning approximately one hour from now. You'll be prompted to enter a conference number which will be 10073837.

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