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

Rodney Baber - Paulson Investment Company.

Welcome to the Charles & Colvard Third Quarter 2016 Earnings Conference Call. [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, consents, 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. Please go ahead..

Good afternoon. Thank you for joining us as we summarize Charles & Colvard 2016 third quarter results. For today's agenda I will cover financial highlights the release of the new Charles & Colvard website in jewelry line and a new product introduction.

I will turn the call over to Kyle Macemore, our CFO for a detailed financial review and then I will wrap up our discussion with a details of our current activities and upcoming initiatives. We closed the third quarter of 2016 with $5.2 million in net sales from continuing operations compared to $5.1 million in Q3 2015, an increase of 2%.

Year-to-date 2016 net sales totaled $23.1 million compared to $18.3 million for the first two quarters of 2015, a 26% increase over the prior year period and representing positive momentum as we head into the holiday season.

Q3 wholesale net sales was $4.2 million or 80% of net sales and our direct to consumer business charlesandcolvard.com had net sales of $1 million.

From a financial perspective our performance in the third quarter was on track given this transitional period in which we’re investing and marketing and product redesign depleting inventories sold at our previous site and preparing to target a new audience.

In the first three quarters of 2016 we generated positive operating cash flow of $4.4 million compared to $1.7 million in the same period of 2015. Our cash position was $9.7 million at the end of the third quarter providing continued flexibility and funding for our strategic transition which will involve further investments in sales and marketing.

Also notable is the stability we’re seeing in our margins. As for everyone dominates our sales we are experiencing less volatility in margins with Q3 2016 gross margins at 38% compared to the 40% margins we saw in Q2, 2016.

As we expect for everyone to be a primary driver of our business going forward we anticipate leveling out inconsistency in our margins. Q3 was a milestone quarter for Charles & Colvard as we delivered on several elements of the corporate transformation we have been discussing for the past three quarters.

Here is what we have accomplished, we rolled out our new corporate brand platform which is comprised of a fresh look and feel and a robust profile outlining who we are as a company, the principles the govern the way we operate our business and a value proposition of our created Moissanite gem stones and jewelry.

We consolidated our eCommerce platform and messaging to the market and delivered them through our new charlesandcolvard web presence. On October 11, we announced a launch of this combined site which mirrors our transactional website Moissanite.com with our corporate web presence.

This new site delivers an improved shopping experience with educational content about our company and gem stones all targeting the millennial customers delivering high quality and environmentally jewelry options that break from the traditional mold.

We introduced new jewelry products at our site focused on our Forever One gem stones and you will find those gem stones set in an elevated and expanded collection of bridal and fashion jewelry.

As discussed in previous calls we intend to raise the quality of our jewelry products and with this new collection we’re setting higher standards and compete with high quality fine jewelry. We extended the limited lifetime warranty of our gem stones as a reflection of product quality.

We now cover usage damage such as chipping, scratching or breakage of our stones.

We want every customer to understand our commitment to customer satisfaction and product quality which we believe is a differentiator for Charles & Colvard and now with our extended warranty channels, customers can rest assured that they can enjoy their Forever One gem stones forever.

We continued our gem stones product line expansion, as you may recall market penetrations for our Forever One gem stones has been a key initiative for the company.

This revolutionary product is a result of recent technological advances and a production of our core Moissanite base which enabled us to produce Forever One and bring it to market in September of 2015. Since then we have seen it grow to over 60% of our new gem stones sales.

It's completely covered with gem stones grade by DEF on the Gemological Institute of American Diamond Grading Scale and with a superior optical properties we are in a better position for the head to head with diamond and content more effectively for a share of higher end jewelry sales.

We announced in early October that the availability of a second grade for everyone in the GHI near colorless grade. In the process of research and development work for everyone over the past year has produced a by-product from the colorless stone revealing a near colorless product that has a slightly color hue.

We are now offering the second grade for everyone to the consumer on our new transactional website. Similar to our approach with our initial for everyone roll out this offering will be a limited quantities and shaped.

As we learned with the market interest in for this product and determine our capacity to deliver this new grade and sufficient volumes to meet demand we will consider further roll out of this product into our broader distribution network.

For those of you who are familiar with the breadth of Charles & Colvard product you will note that Forever Brilliant product [ph] also grade and the GHI near colorless range. So let's take a moment and discuss the difference between Forever Brilliant and Forever One GHI.

Forever Brilliant and Forever Classic are constructed from the original Moissanite based material that we have worked with for the past 20 years. In 2015, we began working with a new material and that has created Forever One. When set side by side the difference in hue is visible.

It's for this reason that we have chosen to separate the product so they are paired with light stones made of the same base Moissanite material when produced in jewelry with multiple gem stones.

Charles & Colvard plans to continue offer us Forever Brilliant and Forever Classic products through outlets other than our transactional website and we have plenty of opportunities to bring these goods to market through our diverse channel network including a wholesale partners, on marketplaces and through our dropship network.

We have continued to expand our online presence. At the cornerstone of our strategies to be everywhere the consumer is as we are searching products to buy. I'm pleased to report that Charles & Colvard now has a presence on Amazon.cm, eBay, Jet and Wal-Mart.

We believe these are great outlets for us to sell Forever Classic and Forever Brilliant products as well as for everyone in limited quantities as they allow us to clear discontinued goods and items we have in limited quantities while reserving our Charles & Colvard web presence for the high end new release and trending pieces.

To view our presence on these online partner channels visit charlesandcolvard.com, scroll to the bottom of any page and click on where to buy. Select online and click through to our various partners to view product selection. We’re also making headway with specialty online retailers that are closely aligned in the fine jewelry space.

On our August 17, we announced a partnership with Gemvara, a Berkshire Hathaway Company. Gemvara is a revolutionary leader of fine jewelry with an online engine that allows the customer to configure their jewelry which Gemvara then hand craft the order.

Moissanite can now be selected as a preferred gem stone as bride [ph] their custom building their dream engagement ring. We’re excited about this opportunity with Gemvara and exploring similar adjacent online partners that complement our go-to market strategy.

This is another example of our strategy to diversify our distribution channels and be everywhere the consumer is when they are shopping. So, let's summarize Q3 accomplishments before I hand things over to Kyle for a detailed review of our finances. We have rebranded the company with a new focus on the millennial consumer.

We have rolled out a new web presence off offering the consumer and improved shopping experience and educational content that describes Moissanite and it's virtues.

We introduced an upscale line of One Fashion jewelry, we have begun offering a second grade of Forever One and GHI near colorless grade in limited shapes and sizes directly to consumers on our website. And we expanded our online presence through a new relationship with Gemvara as well as the presence on Amazon, eBay, Jet and Wal-Mart.

Lots of accomplishments for one quarter. Now Kyle will review our detailed financial performance for Q3 and then I will conduct by summarizing our near term initiatives.

Kyle?.

Thank you, Suzanne. Good afternoon everyone and thank you for joining us today. As a reminder due to the divesture of assets associated with Lulu Avenue in the first quarter of 2016 we are presenting Lulu Avenue and discontinued operations in our financial statements.

We did not include the revenue, gross profit, or loss, from Lulu Avenue in our results from continuing operations for the third quarter or first nine months of 2016. We also reported Lulu Avenue's results from the third quarter first nine months of 2015 in a comparable manner as discontinued operations.

Unless otherwise noted, the financial results discussed during this portion of the call will be from continuing operations for 2016 and 2015. As announced in today's earnings press release, net sales for the third quarter of 2016 increased 2% to $5.2 million compared with $5.1 million in net sales during the same period of 2015.

Net sales for the first nine months of 2016 increased 26% to $23.1 million compared to net sales of $18.3 million in the first nine months of 2015. In our previous earnings, we mentioned that during Q1 2016 we had a net sale of $6.8 million of loose jewels to one customer.

We had no sales for that customer in the third quarter of 2016 compared to $700,000 in net sales to that customer in the third quarter of 2015. For the first nine months of 2016, net sales for that customer were $6.8 million compared to $5.9 million during the first nine months of 2015.

Wholesale net sales were $4.2 million and comprised of 80% of net sales in the third quarter of 2016 and the increase of 7% compared to the third quarter of 2015. As of September 30, 2016 the company changed the name of it's wholly owned direct consumer subsidiary Moissanite.com LLC to charlesandcolvard.com LLC.

We will refer to Charles & Colvard.com when discussing the results of this segment. The company's direct-to-consumer e-commerce business, Charles & Colvard.com had net sales of $1 million in the third quarter of 2016, a decrease of 14% compared to $1.2 million in the third quarter of 2015.

The decline in net sales at Charles & Colvard.com was due to lower conversion rates which we believe relates to the shift in our dot com presence including the discontinuation of clearance inventory on the website.

We expect this trend of lower conversion rates to continue into the fourth quarter as we have been promoting our updated brand platform, deliver an upmarket jewelry selection and position Charles & Colvard with a new audience.

The company's net sales of lose jewels were $3.6 million in the third quarter and comprised 69% of net sales, an increase of 25% compared with $2.9 million or 56% of net sales in last year's third quarter. Finished jewelry net sales were $1.6 million in the third quarter of 2016, a decrease of 28% compared to the same quarter in 2015.

Gross margins for the third quarter of 2016 were 38% compared to gross margins for the third quarter of 2015 of 34%. Gross margins were higher in the third quarter of 2016 due to increasing sales for Forever One loose jewels and higher gross margins on Charles & Colvard.com due to less clearance inventory being sold.

Operating expenses increased of $3.1 million in the third quarter of 2016 compared to $2.3 million in the third quarter of 2015. Sales and marketing expenses increased by approximately $720,000 primarily related to investments in our new brand platform and website.

G&A expense in the third quarter of 2016 was $1.2 million which was relatively flat to the third quarter of 2015 despite approximately $410,000 of G&A expense that was allocated to discontinued operations in 2015 and is now being absorbed into the remaining continuing operations of our wholesale in Charles & Colvard.com businesses.

The Company reported a net loss of $1.2 million in the third quarter of 2016, including in this net loss was a loss of $10,000 from discontinued operations. The Company reported net loss of $2 million in the third quarter of 2016, included in that net loss was a loss of $1.4 million from discontinued operations.

The Company ended the third quarter of 2016 with $9.7 million of cash and cash equivalents on the balance sheet compared to $5.3 million of cash and cash equivalents at the end of the 2015. The Company anticipates investing some of this cash in marketing, branding, and awareness efforts during upcoming quarters.

Inventory at the end of the third quarter of 2016 was $27.2 million which was a decrease of $5.1 million from $32.3 million of inventory at December 31, 2015. This inventory level was up slightly from our Q2, 2016 inventory level mainly due to the preparations we made in finished jewelry for the launch of our new website in the coming holiday season.

Loose jewel inventory at the end of the third quarter of 2016 was $22.2 million and finished jewelry inventory was $5 million. The company has no long-term debt and has not utilized the $10 million credit facility 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 reviewed earlier, we made excellent progress on our strategic initiatives and we’re pleased with the delivery of our new brand, website and product lines, but there is plenty more to do. Let's discuss what you can expect from us over the next few quarters.

First and foremost the launch of our new website is only the beginning of our journey. From here we plan to carefully measure how [indiscernible] navigate the site where they click, when they abandon pages and their pathway to purchase. With the knowledge we gained from these data points we intend to evolve our site to optimize the user experience.

At the same time we plan to measure how our new product line is performing with so many new jewelry pieces being introduced, it will be important for us to measure what selling and to which audiences.

From there we believe we can make informed decisions about the products put forward what will discontinue and how to align targeted customer promotions to the right audience segment. In order to remain relevant and entice customers to return to our site we anticipate introducing new product throughout the holiday season.

You can expect to see new product on a regular basis and refresh features on our website as we expose what's new and trending. We are in the process of rolling out a multi-quarter digital marketing campaign designed to pull existing and new patrons to Charles & Colvard.com, that’s really to our [indiscernible] program is all about.

According to Global Web Index, in 2015 the average internet users spent approximately 1 hour and 45 minutes a day on social media sites. So social media is central to our campaign. We are posting daily on Facebook, Instagram, Twitter and Google Plus.

We’re active on Pinterest each week and direct followers to our videos on YouTube, but our strategy goes far beyond maintaining our Facebook page or Twitter account. Social media sites especially Facebook gather extensive information about their user such as age, occupation, general interest and location.

Using a detailed information we’re able to segment and pursue our audience in a targeted fashion. We believe a key success after for our demand generation and awareness campaign will be our focus on compelling content. Moissanite is beautiful is see so we believe it's important for our content to be very visual.

We are now publishing quarter of the videos to show the brilliance and sparkle of our gem stones. These posts are highly engaging and are rapidly garnering new followers through likes and shares.

This increased exposure is enticing these visitors to click through our website which ultimately is expecting is expected to lead new subscribers to our email database.

So we have also developed a strong email marketing program as dedicated introducing new products, sharing the Charles & Colvard story and educating our customers about Moissanite on a weekly basis. Our market research has shown that millennial consumers care about how products are made and how companies operate.

So in addition sales oriented promotion we’re also speaking to the market about our products and principles and we invested in dedicated phase in our new website to share our mission, to create the world's most brilliant gem are leading the way for environmentally and socially responsible choices in the jewelry industry of a revolutionary value.

By detailing how our gem stones and jewelry compared to other refined jewelry options in the market, a consumer is able to make an educated decision of purchasing Moissanite. We believe we’re actively building trust with our audience as we are offering this level of transparency about our product and business.

We’re also exploring other ways to use digital space to create greater brand awareness, for example influencer marketing is replacing many traditional advertising options and keeping more powerful and celebrity endorsements. For millennial social influencers offer word of mouth credibility which we believe is very important to this demographic.

Each magazine recently published an article on this topic and shared that influencer marketing delivers 11 times the ROI of traditional digital marketing. With this mind we are carefully evaluating where we spend our marketing dollars and how influencer marketing may enhance our digital marketing campaign in the coming quarters.

We welcome you to follow us on social media. Links to our social media sites are located at the bottom of the homepage of our website and please opt-in to our email program so you can see the emails we send out on a weekly basis. You can find the link to sign-up on the Charles & Colvard.com community page.

In addition to our online channels we also plan to work on expanding business through our traditional channels. Our wholesale distribution partners continue to grow their businesses at a healthy pace. Our largest distributor grew their Moissanite business by 132% in the first three quarters of 2016 compared to the same period last year.

They attribute this growth to new awareness in Forever One and increasing interest from independent jewelers. We’re also making some interesting headway in the retail space. One of the most common suggestions we hear is that it's important for the consumer to see Moissanite in order to fully appreciate expire [ph] and brilliance.

While videos on YouTube will achieve this to some degree there is just no replacement for putting a stunning three carat Moissanite ring on your hand. So I'm pleased to report that in September Charles & Colvard kicked off a 26 store test at Helzberg Diamonds. As you may recall we are long standing partner of helzberg.com.

Moissanite has performed well on Helzberg's web property and springboarding from that success we’re now testing an in-store presence throughout the upcoming holiday. We’re about seven weeks into the test and the program has been well received. In fact just last week we in-house mutually agreed to extend the test to an additional 25 stores.

We are thrilled that consumers will now have 51 Helzberg locations, where they can see and experience Moissanite over the holidays. [Indiscernible] Helzberg are each promoting this in-store presence.

We believe our mutual social and promotional presence will draw meaningful awareness for our product and that this product placement will be at boom to our holiday presence. If you’re interested in locating a Helzberg store near you please visit Charles & Colvard.com, scroll to the bottom of the webpage and choose Helzberg Diamond stores.

In summary we’re now live with several elements of our strategic plan and are positioned for the holiday season with a new website, and elevated line of fine jewelry and extensive presence across online channels and now we’re showcased in Helzberg stores.

We will stabilize our inventory, our cash position and our gross margins and we remain debt free.

Near term we intend to adjust and optimize our new web presence as we learn more about our customer and our digital marketing and public relations activities will roll-out and evolve as we teach the market about Moissanite and the value and drive customers to the many outlets where Moissanite can be purchased.

As always I will remind you that we’re carefully managing the strategy, [indiscernible] our gross and investments. While we’re currently focused on growth as we launch our new brand and drive interest Charles & Colvard.com our intention is to continually March towards profitability.

This concludes our formal remarks for this afternoon and we will now open the call to answer few questions that participants may have.

Nicole, would you please open the lines for Q&A session?.

Certainly. [Operator Instructions]. Our first question comes from Mark Wright [ph], a Private Investor. Please go ahead..

Looking at the Buy [ph] section of your website, I see [indiscernible] has some shows coming up in November can you tell me about any other shop channels or shows coming up or is there any expansion in the shop channels? Thank you..

Yes we do have upcoming shows with EVINE. In fact we have had shows with EVINE each quarter of this year. We have some coming imminently in the next two weeks and that we’re also scheduled for some nice placement during Black Friday so we’re very excited about those opportunities and look forward to that.

We don’t have any other imminent television shopping schedules to talk about at this time..

All right. If I can ask another question in previous call we talked about some kits that were being sold to independent jewelers. Can you tell is that still going on? Or is that going well? Any information about those because I do like the idea of having customers actually see Moissanite in person..

We like it too Mark, and yes let's address that. So the kits are actually sold through our distribution partners.

So I can't tell you who they are being sold to because we don’t have visibility into their sales but I can tell you that we just met with one of those partners and they are telling us that the interest in the kits is very high, that they just did a training session with a number of their independent jewelers and they were very excited about the kits putting them in store, they asked a lot of questions about how they can use those kits to expose Moissanite as they are selling into their customer base.

So they are well-received and it's a great opportunity to put some Charles & Colvard branding onto Moissanite and getting it in-case alongside all the other fine jewelry option..

Our next question comes from Rodney Baber of Paulson Investment. Please go ahead..

Couple of things, I wanted to go out after the millennial for a second till you mentioned Helzberg, so I do want to ask you a question about that too. But do you’ve any metrics for somewhat the millennials are buying.

I mean we have been all hoping that they would go for the engagement rings and that’s since a huge market potential if they don’t have to own down and that’s where get engaged.

Do you know a percentage on our sales for everyone, that kind of thing are going to engagement rings, that kind of thing?.

I don’t have exact percentages for you Rodney, and we don’t really break it out quite that far but here is what I can tell you.

Bridal continues to be a very important and growing segment of our dot com sales and because we are now just beginning to very proactively go out and speak to the millennial consumer and we’re making those sales on our website we can make certain assumptions that we’re driving millennial sales to bridal and that’s probably about as deep as I can go on statistics and numbers.

We’re certainly seeing likes on our postings in social media and we know that the majority of those are in fact coming from millennial customers.

And I will say this as well, there was a recent survey that was put up by the [indiscernible] and what they say is that 43% of bride still purchase their engagement rings from independent jewelers so that to Mark's question it's super important that we have things like our gem stone kits out on there in the stores because while they are exploring online and are doing quite a bit of investigating online.

They go into those stores which is why having a presence in Helzberg is so attractive for us to validate that purchase..

One is going to Helzberg again with -- remaining question, that appears to be quite an hot spot.

I remember we were excited about it at the last time and happened a few years ago and just didn’t pan out, you didn’t get the Helzberg sales staff early focused on Moissanite when they had much more expensive product that they can sell and then you put it in a 25 stores and you brought in 26, so something must have changed.

I mean is that a good piece of news is I think it is or am I over exaggerating potential from that but to me that they found out again says a lot again says a lot about opportunities to get this thing more widely distributed throughout the jewelry industry. So there was question in there somewhere, please try not to--.

So we’re very excited about our presence at Helzberg. I think it's reflective of how well we have done with them in business on their dot come site and it's really again as I said before a springboard from what we have done online to bring that in-store. Many of their in-store personnel have been asking to carry Moissanite.

They have customers that walk in to their store, I have been on your website, I would like to Moissanite and previously where we were not in store. So I think it's fair to say there is some customer demand there that’s driving it and we’re just pleased that we have place where people can go and see this outstanding [Technical Difficulty]..

In a number of SKUs you have in there, what kind of pricing do you have? Just anymore -- to help us understand what the offering is there?.

We have to be handful. So we have about -- it varies by stores. So we have a couple of different quantities they are building out, 12 to 14 pieces. We’re focused very much on the large solitaries so there is a bridal bench to what we’re bringing there but then there is everyday studs and pendants that anyone can wear for any occasion.

So there is a breadth of product but certainly a representation of bridal so that we can make sure that we’re capturing that customer. Of course Helzberg being a diamond store, [indiscernible] on the side of a bridal customer, so we’re anxious that we will be able to garner some of those..

[Operator Instructions]. Our next question comes from [indiscernible]. Please go ahead..

I’ve a question on gross margins and fourth quarter guidance. I didn’t hear any fourth quarter guidance but I was pleased with the stability and the gross margins that was helpful. And it does appear to be quite seasonality in the third quarter standard, historical partners but I didn’t hear any guidance going forward..

We do not issue guidance. We’re obviously excited about all of the things going on but we don’t issue specific guidance. As you know the key selling days are still ahead of us as we get closer to mid to like November into the Christmas holiday season.

So we are feeling like our margins are stabilized somewhat and so that was the reason we made that comment because that’s the question we get fair amount..

Is it for some strategic reason that you don’t offer some kind of guidance that you can grade your performance on? I mean why wouldn’t we start now that we -- I mean granted that’s a shift in the business model but at some point it's not like no other company has offered that thoughtful idea I don’t know why you don’t..

The company has a longstanding policy of not offering guidance.

There are a lot of companies that offer guidance but there aren't companies that do not and we just feel like given some of the volatility with our business as we transform it and some of the orders we get from some of our distributors guidance which are not something that we have chosen to do as company.

So always something we may consider down the road but for now we had a past practice and are retaining that practice of not offering guidance..

[Indiscernible] standard Fortune 100, 500 companies that don’t but one day you might graduate..

Yes..

We seem to have no other questions at this time. So I would like to turn the conference back over to Suzanne Miglucci for any closing remarks..

Thank you, Nicole. Once again I would like to thank everyone for taking the time to participate in our call today. We’re excited about our recent progress and are looking forward to the holiday season in 2017 for our continued transformation.

We have a great team at Charles & Colvard and that has been doing an amazing job year-over-year and I'm so proud of everyone's contributions to our new brand and presence. And my most senior thanks to our shareholders, their continued belief, and the opportunity we have at Charles & Colvard. Thank you and good evening..

The conference call will be archived for review on the company's website at www.charlesandcolvard.com/investor-relations/events. To access the digital replay of this conference you may dial 1-877-344-7529 or 1-412-317-0088 beginning approximately one hour from now. You will be prompted to enter a conference number which will be 10094633.

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