Suzanne Miglucci - President and CEO Kyle Macemore - SVP and CFO.

William Mills - MPW Properties Craig Porringer - Wells Capital Management.

Good afternoon and welcome to the Charles & Colvard Fourth Quarter Earnings Conference Call. All participants are in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions.

[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 we provide will 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 event is being recorded. I would now like to turn the conference over to Suzanne Miglucci, President and CEO..

Thank you, Laura. Good afternoon, everyone and thank you for joining us, as we summarize Charles and Colvard's 2015 fourth quarter and year-end results. I'll begin our dialog today with a few highlights from the fourth quarter of 2015.

Fourth quarter is historically one of our biggest quarters of the year, given the holiday season, and 2015 did not disappoint. Our fourth quarter net sales of $8.4 million was our highest quarter of net sales since the fourth quarter of 2013.

Also noteworthy, our transactional site Moissanite.com produced $1.9 million of net sales, which was its highest quarter of net sales since we launched the site in 2011. Looking at the full year 2015, we have the following highlights to share. 2015 is the first time we've exceeded $30 million in net sales in nine years.

We've achieved this by expanding the channels through which we sell. In fact, in 2015 our single largest channel customer represented 21% of our net sales, compared to 28% in 2014. We're pleased with the expansion of our channels and we'll continue to pursue a diversified multichannel approach to grow our business.

Our Moissanite.com e-commerce business grew 59% year-over-year, from $3.4 million of net sales in 2014 to $5.4 million of net sales in 2015. Related, we saw 115% increase in 2015 mobile net sales over 2014.

Concurrently, we continue to develop new wholesale and retail partnerships and develop existing affiliations, such as our relationship with Boscov's Department Stores to carry a Moissanite collection in all 44 of their brick and mortar stores.

We also made meaningful progress on the reduction of our inventory, from $38.9 million at the close of 2014 to $32.3 million at the close of 2015, a 17% overall reduction. This has contributed to our improved cash position. We closed 2015 at $5.3 million of cash, a 32% improvement over our 2014 year-end position of $4 million.

Our most significant announcement in 2015 was the release of our first colorless Moissanite gem, Forever One. We delivered a limited release of the product in September to a very receptive audience and created meaningful demand that we believe will help drive our 2016 revenue. We'll talk more about this product and its feature later in the call.

In summary, I'm pleased to say that Charles and Colvard's 20% year-over-year net sales growth outpaced global retail, which grew at 1.4%, the U.S. fine jewelry industry which grew at 1.1%, and e-commerce retail which grew at 14.5%, all according to the U.S. Department of Commerce 2015 annual retail sales data.

Earlier today, we issued a press release announcing that on March 4th, 2016, we signed an asset purchase agreement to divest certain assets of our Charles and Colvard direct LLC business, also known Lulu Avenue. I am sure there is significant interest in hearing about this decision, and how it plays into our overall strategic direction for 2016.

I'll spend time discussing this later in our call. But first let's turn our attention to Kyle Macemore our CFO, who will provide you within overview of our Q4 and 2015 financial results. Then I'll return to discuss today's important announcements and our strategy for the year ahead.

Kyle?.

Thank you, Suzanne. Good afternoon, everyone and thank you for joining us today. As announced in today's earnings press release, net sales for the fourth quarter of 2015 increased 16% to $8.4 million, compared with $7.2 million in net sales during the same period of 2014.

Net sales for full year 2015 were $30.8 million, an increase of 20% compared to full year 2014. Wholesale net sales increased 4% in the fourth quarter of 2015, compared to the fourth quarter of 2014 to $5.5 million and comprised 66% of net sales. Wholesale net sales for 2015 were $20.3 million, compared to $20.8 million in 2014.

The Company's direct-to-consumer ecommerce business, Moissanite.com, had net sales of $1.9 million in the fourth quarter of 2015, an increase of 41% compared to $1.3 million in the fourth quarter of 2014. As Suzanne mentioned earlier, net sales for 2015 for Moissanite.com were $5.4 million, compared to $3.4 million in 2014.

The Company's former direct-to-consumer home party business, Lulu Avenue, had net sales of $1 million in the fourth quarter of 2015, compared to $560,000 in the fourth quarter of 2014. For the year, Lulu Avenue's net sales were $5.1 million, compared to $1.5 million in 2014.

The Company's net sales of loose jewels increased approximately 60% to $4.7 million in the fourth quarter and comprised 55% of net sales, compared with $2.9 million or 40% of net sales in last year's fourth quarter. Loose jewel net sales for 2015 were $15.1 million, compared to $12.9 million in 2014.

Finished jewelry net sales during the fourth quarter of 2015 were $3.7 million, a decrease of 13% that’s compared to the same quarter in 2014. Finished jewelry net sales for 2015 were $15.7 million, compared to $12.7 million in 2014. Gross margin for the quarter of 2015 were 36%, compared to gross margins for the fourth quarter of 2014 of 20%.

Gross margins for 2015 were 33%, compared to 30% in 2014. Operating expenses increased to $4.9 million in the fourth quarter of 2015, compared to $4.2 million in the fourth quarter of 2014, due to an increase in G&A expenses.

The increase was primarily due to higher compensation cost associated with CEO transition that occurred in the fourth quarter of 2015, and an increase in bad debt expense. Operating expenses for 2015 were $19.8 million, compared to $16.7 million in 2014.

Operating expenses increased primarily due to $2.1 million, and increased net compensation expense in sales and marketing. The biggest driver of this increase was $1.4 million increase in commissions expense due to Lulu Avenue's increase in net sales.

Another driver of the increase in operating expenses in 2015 was approximately $1 million in G&A expenses associated with our CEO transitions in 2015. The Company recorded a net loss of $1.9 million in the fourth quarter of 2015, compared to a net loss of $2.8 million in the fourth quarter of 2014.

For the full year, the Company recorded a net loss in 2015 of $9.6 million, compared to a $13.1 million loss in 2014. The Company ended the fourth quarter of 2015 with $5.3 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 fourth quarter of 2015 was $32.3 million, which was a decrease of $6.6 million from $38.9 million at December 31, 2014. Loose jewel inventory at the end of the fourth quarter was $28.2 million, and finished jewelry inventory was $4.1 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 June 2014. I'd now like to turn the call back over to Suzanne..

Thank you Kyle. As we segue to a conservation about Charles & Colvard's go forward strategy, I thought it fitting to spend just a moment to share my background with you, and why the Board of Directors selected me to lead Charles & Colvard into its next chapter. I come to Charles & Colvard with over 25 years of marketing expertise.

Branding, packaging and go-to-market strategies are my strengths. Given the lack of awareness of the Charles & Colvard brand, there is much work to be done on these marketing fronts and I’ll be working closely with the marketing team on our market presence this year.

I also bring a deep background in ecommerce, prior to join Charles & Colvard, I was with ChannelAdvisor, a global Software as a Service provider that helps retailers and manufacturers scale their ecommerce business.

During my tenure I led their marketing, product management and services teams, who helped over 2,000 companies grow their businesses online. I look forward to applying many of these learnings at Charles & Colvard. And finally, I bring to the table of strength in guiding companies through times of change.

For example, while at ChannelAdvisor, we went through an IPO, and then artfully navigated a shift of market to larger enterprise customers. Today the retail market is experiencing significant change, in large part due to the shifting expectations of the consumer.

In order to stay relevant and to engage that elusive customer, Charles and Colvard needs to embrace these changes and deploy new and innovative strategies in order to grow.

I am honored and thrilled to step into the role of President and CEO to help Charles and Colvard navigate these changes in the retail market, so we can capitalize on what I believe to be an incredible opportunity. With that, let's begin our strategy discussion with today's announcement of our divestiture of Lulu Avenue.

Charles and Colvard entered the direct selling business in 2011. Our intent was to leverage social settings where women gather to introduce them to our Moissanite gem sell and jewelry. We've grown Lulu Avenue through organic efforts employed by our staff and the acquisition of style advisors when Lia Sophia closed their doors in December 2014.

These efforts were funded by Charles and Colvard Limited. Our strategy was to introduced a new line of low cost fashion jewelry to draw interest to our home parties, with the intent to upsell the consumer to a Moissanite product.

In the course of business, we've made significant investments in the development of personnel and product lines, catalog production and product launches and deployment of a transactional e-commerce website specialized for the direct selling business.

Unfortunately, our outcomes have been less than expected, with Moissanite recently representing only 15% of Lulu Avenue's revenue. In 2015 a Lulu Avenue subsidiary generated $5.1 million of revenue with an operating loss of $4.5 million. In 2015, we saw a shift in the direct selling model, one wherein online social media driven sale is on the rise.

This changing landscape would require a retooling of our current methodologies and infrastructure in order for Lulu Avenue to compete and remain relevant, meaning additional investment to grow the business, and a much longer timeline to breakeven.

After careful analysis of our core competencies, go-to market strategies and intents to advance toward profitability, the management team and Board of Directors determined it would be in our and our shareholders' best interest to divest the business.

Along with the sale of a specific asset fee on [indiscernible], we had eliminated staff and specific overhead costs previously associated with the Lulu Avenue business. I ask that you please refer to our 8-K for more details of the transaction.

While this divestiture was a difficult decision, we know our core value and strategic advantage is in our Moissanite product. So let's turn our attention to Moissanite and our future. I'd like to share with you our outlook on the industry and our strategy to gain market share for this brilliant gemstone.

As I noted earlier, the consumer market is changing and rapidly so. Seemingly overnight millennials have gained buying power and they're sending shockwaves through the retail sector with their bold unconventional approach to selecting brands and buying goods.

Here's what we know; known for a disdain for traditional industries, millennials have been the driving force behind upending several industries. Think Netflix versus broadcast television, Uber versus Taxies, and Airbnb versus hotels.

They have fierce devotion to socially responsible companies and products and products, and they seek out products that are effectively sourced. They are digital natives, who have an insatiable appetite for new ways of doing things. They're not tied to old fashioned equations that dictate what they should spend, or who they should buy from.

They seek their own truth from the Internet, and a crowd sourced buying decision through their social networks. They don't shop at malls; they shop on their smartphones or their tablets. They're compelled by innovative ways of shopping and fully embraced e-commerce purchasing models, and they love a bargain.

In part driven by the significant student loans that burden this demographic, millennials are judicious about how they spend their money. They know how to research prices on comparable goods and carefully make purchases with an eye toward value.

While this consumer shift has been going on, Charles and Colvard had been hard at work perfecting a new gemstone. In September 2015, we introduced Forever One, our first colorless gem stone. It is stunning, it's ethically sourced and it exceeds the brilliance of diamonds at a fraction of the cost.

2016 is a year these two forces will converge, social and value conscious millennial meet Forever One, the world's most brilliant, ethically sourced Moissanite gem from Charles and Colvard, and we are ready to make a splash. We're ramping up for a forceful go-to market push, combining a finely honed message with a dynamic strategy.

Let's talk about the four core elements of that strategy. Number one, we're ready to unleash Forever One. We introduced it late last year at a limited launch and it's received an enthusiastic response from channel partners and customers.

Throughout 2016, we intend to expand our footprint with additional shapes and sizes in a series of scheduled releases. Number two, we're making a move up market. As our product gets better, our ability to compete in the fine jewelry market gets stronger.

Working with a network of new and existing partners, we believe Forever One will enable us to contend more effectively for a greater share of high end sales. We believe this unmatched stone also seats us well ahead of any competition that may emerge as Moissanite goes off patent.

We know quite well, how hard it can be and how long it can take to develop even low end Moissanite stones, and we're confident that with Forever One, we've created meaningful distance between ourselves and any competition, making their way to market. Number three, we plan to expand our jewelry line.

Our decision in 2010 to move beyond supplying gemstones to also selling jewelry has borne fruit. We already have a royal following of extremely satisfied buyers who return to us again and again.

We intend to build on our offering this year by introducing new curated collections that will brand our own Moissanite jewelry with products from select artisan jewelers. And finally, we plan to continue to grow traditional channels, 20 years of partnerships with industry leading wholesalers and retailers that served us well.

Continuing our presence in traditional retail channels, in particular allows consumers to see the beauty and brilliance of Moissanite for themselves. Now let's talk about how we execute on that strategy. We believe it's all about branding and awareness.

We plan to build a direct relationship with millennials, connecting with them on their terms, educating them about our products and making them Charles & Colvard advocates for life. And we'll make some noise by rolling out our most expensive go-to-market program ever, and letting everyone know we're a force to be reckoned with.

In 2016, we intend to do the following. First and foremost, we plan to educate consumers. We believe Charles & Colvard is one of the best kept secrets in the jewelry industry.

This year will help the market understand Moissanite, our expanded selection of our unbeatable gemstones and jewelry and our commitment to corporate social responsibility in our products and business practices.

We'll help consumers understand the ethical standard we maintain, which lead to products unchanged by human right abuses, environmental degradation or wartime conflicts. Second, we intend to get aggressive on social media. That's where millennials are starting their buying decisions and we need to be there.

Leveraging both our own and third party platforms, we plan to create a pull strategy, initiating a dialog that draws consumers to learn more and to start shopping. Next, we intend to increase our online presence. We are planning an aggressive direct-to-consumer push across online marketplaces, comparison shopping engines, affiliate networks and more.

We intend to support this with a significant digital marketing presence, delivering online advertising and search engine results to consumers at just the right time in the right places.

We believe all of these efforts will raise awareness of Moissanite and Charles & Colvard, and ultimately will drive consumers to purchase our goods through the multiple channels where we will have a presence. Our time is now. Charles & Colvard is in an enviable position.

We're able to offer superior products to a millennial audience trying to embrace it. We are not wasting this opportunity. We are executing a go-to-market strategy that we believe we will cement our jewelry and gemstones at leaders in the market and create an unbreakable bond with the largest cohort of consumers this country has ever seen.

And we'll do this by balancing growth with an eye toward profitability. Charles & Colvard has had significantly losses over the years. We believe today's announced by divestiture, and our refreshed focus on the core Moissanite business, put us squarely on the right financial pathway.

We look forward to executing on the strategies discussed today and to delighting our shareholders in 2016. Kyle and I will be attending the annual ROTH Conference on Monday and Tuesday of next week in California. I’ll look forward to sharing our vision with potential investors and hope to see some of you there.

For those of you unable to attend, we invite you to tune in to our webcast. This concludes our formal remarks for this afternoon. And we would now like to open the call to answer a few questions of participants may have, Laura please open the phones for the Q&A..

Thank you. [Operator Instruction] And our first question will come from William Mills of MPW Properties..

You mentioned the significant losses in Lulu Avenue. Is there a way to quantify what those have been? And now that we know that those could significantly go away? And the second part of that question is you mentioned earlier about significant expenses also going away.

Can you give us a little bit of color on that?.

Hey, William this Kyle. I’ll take the first shot at that. So we started reporting in our segment with notes, the results of Lulu Avenue last year, and we reported 2013 to 2015 results. During that period, our fully allocated losses for Lulu Avenue were $10.7 million.

That loss includes some corporate allocations, but I believe -- very comfortable saying that we've invested as a company well over $10 million in that business since it's started in 2011. Let me try to answer your next question, which is sort of what does the business look like going forward, and I’ll start with 2015.

And again we filed our 10-K earlier today, and I would encourage you to look at the footnote 3, which is our segment information in the 10-K. In 2015 Lulu Avenue, as Suzanne said had $5.1 million of revenue, and had a fully allocated loss of $4.5 million. That loss included as I said various allocations from support groups throughout the Company.

I'm very comfortable saying that had we not had Lulu Avenue in 2015, I would easily estimate that our profitability would have improved by $3 million or more. It's a little difficult to estimate exactly, because sometimes it's difficult to tie specific support group cost to a business. So we will definitely see improvement in that area.

The other thing I would like to say is we had some other items in 2015 that were separate from Lulu Avenue, that were a bit unique and we mentioned one of these in the prepared remarks. We had a couple of CEO transitions during the year, and that was about $1 million of G&A expense that we don’t expect to repeat as we go forward into 2016.

And then the last piece is we’ve obviously been focused on reducing inventory, and during the course of the year we sold some inventory, some stones below cost and took some higher reserves, and that was about another $1 million of profit impact in 2015.

So I think it's safe to say that those three things in aggregate are well in excess of $5 million or more of bottom line losses that were a big piece of our $9 million in losses in 2015.

I can tell you that the management team, and Suzanne said it earlier, and the Board is very focused on investing in appropriate areas, and removing costs where it's not appropriate as we move this business towards profitability..

And the next question will come from Chuck Lee [ph], a Private Investor..

Good to hear from you. I have my typical question. We can’t do a lot forward looking, but in understanding where we were and where we are, we have a wonderful product, and it's refreshing to know that we’re going to focus on the core competencies and core customers.

And Kyle, if we go back to the beginning of time where we got into the home party business, what was the total cumulative loss or total cumulative net investment in that enterprise? Just give us a point of reference beyond 2013 to ’15, which you just provided?.

So Chuck I would say, again, we didn’t report all those segments in prior years, but it's in excess of $10 million. [indiscernible].

Between 2013 to ’15….

But those were -- that’s right, those were fully allocated. And if you look back and add the other years, it's probably -- it's less than 15 million but it's in excess of $10 million, probably closer to $15 million..

Okay. You don’t need to hear a philosophical thing from an old guy. But I admire the courage that we had to step out of the box, but I also admire the courage to say, this isn’t working and we got to make money. And I think that’s what’s going to happen now. Great product and I'm encouraged by your comments. Thank you so much..

The next question will come from John Lawrence of [indiscernible]. He has dropped from the queue. Our next question will be from Craig Porringer of Wells Capital Management..

Can you comment on either the make-up of the remaining inventory, your ability to sell it at cost or below as you just mentioned and strategy to just lower that inventory?.

Craig, thanks for the question. This is Kyle. I’ll take a shot at that. I just want to point out that our inventory peaked at $43.7 million in Q1 2014, and has been reducing every quarter since then, down to the $32 million that we ended this quarter with, well over $32 million. I think the best way to look at it is break it into different buckets.

So we have $28 million of loose stone inventory. Of that there is about just under $7 million that’s in raw materials puts, another $5.5 million in with that’s in process. We have about $15.9 million in loose stones, of which about $3 million is Forever Brilliant and Forever One. That classic inventory of Forever Classic has been reduced drastically.

And then we have about $4 million of finished jewelry. Most of the raw material and with, we’ll convert to Forever One, and to some degree for Forever Brilliant. So in addition to reducing our inventory, the inventory that we have remaining is of a higher color grade than what we had historically.

So I think, the year back in 2014, we didn't have as much -- we didn’t -- obviously didn’t have any Forever One, we had some Forever Brilliant, we had a lot of Forever Classic. And so now that mix is shifting. We feel confident that we can sell the inventory.

We do have some reserves on both the jewelry and gem stones, and we feel like those are appropriate and we're going to try to make good decisions in the marketplace without upsetting the price structure of the business..

Excellent and speaking of higher color grade, there's still a persistent perception in the marketplace that Moissanite is somehow off color, and although you have a brilliant stone going forward, what can we do to reduce or clarify that perception that remains in the marketplace about Moissanite?.

Sure, Craig. I'll take that one. That's really where this big marketing push comes in. There's a few things we need to speak to the market about. One is that we have a DEF quality gem stone that we brought to market in Forever One. So we'll talk about the purity of color.

We'll certainly talk about why it's a socially and ethically responsible stone, which is going to be very important to that millennial audience, and we'll just educate folks about Moissanite and its overall qualities. The market simply doesn't know about this.

I've just -- my first few months here have done some extensive market research to understand the perception of Moissanite in the market, Charles & Colvard in the market, and it was astounding to me just how little people know.

It was also very interesting how little people know about the mining of gemstones in general, and what that does to our environment and so on. So these are all things we need to talk about to educate that audience, so they can resonate with a stone that's ethically sourced and pure in color. .

Okay, then I'll move on the second bit.

If you're going after millennials, have you thought about a millennial spokesperson?.

We certainly have. They can be a little bit expensive, and we're watching the books here, and we're working to move our way toward profitability. But those are -- that's one of the many things that we're talking about here from a go-to-market perspective. Great to have a spoke person, we just have to find the right one at the right price..

Finally, this is a technical question but various Wall Street sources says, there was a negative to price versus expectations. To the best of my knowledge, there was is Wall Street coverage right now.

Is that correct, Kyle?.

Craig Hallum covers us. They are the only firm that covers us. .

Craig Hallum does?.

Yes. Craig Hallum, yes..

And this concludes our question-and-answer session. I would like to turn the conference back over to Suzanne Miglucci for any closing remarks..

Thanks, Laura. Once again, I'd like to thank everyone for taking the time to participate in our call today. It means a great deal to us. I want to thank our associates for all of their hard-work and continued dedication, and to our shareholders for their continued belief in the opportunity we face in Charles and Colvard.

Thank you all and have a good evening. .

This conference call will be archived for review on the Company's website at http://www.charlesandcolvard.com/investor-relations/events. To access a digital reply of this conference, you may dial 1877-344-7529 or 1412-317-0088 beginning approximately one hour from now. You will be prompted to enter a conference number, which will be 10081720.

Please record your name and company when joining. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect..