Suzanne Miglucci - CEO Clint Pete - Interim CFO.

John Lawrence - Baraboo.

Good day and welcome to the Charles & Colvard First Quarter 2017 Earnings 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 solicitation of a proxy, consents, authorization or agent designation with respect to a meeting of the company's stockholders. After today's presentation there will be an opportunity to ask questions. [Operator Instructions]. And please note this event is being recorded.

I would now like to turn the conference over to Suzanne Miglucci, President and CEO alongside Clint Pete, Interim CFO. Please go ahead. .

Good afternoon and thank you for joining us as we summarize Charles & Colvard's 2017 First quarter results. For today's agenda, I'll first discuss the strategic rationale that let us to revise our reporting segments, which we've reorganized to better reflect the way we manage our business.

And I'll highlight Q1 outcomes and the ongoing execution of our strategic plan. I'll turn the call over to Clint Pete for a detailed financial review and then I'll wrap up our discussion with the details of our ongoing go-to-market initiatives.

As we've been articulating for the past year, our strategic plan and rebranding efforts are direct-to-consumer focused. Central to this effort is making our product readily available to the consumer everywhere they're shopping.

This omnichannel approach relays heavily on Charles & Colvard online e-commerce presence to bring our product forward to the consumer. Yet it's been difficult for our shareholders to properly assess the reach of our online efforts given the way we historically reported our net sales.

Since 2014, Charles & Colvard reported net sales under three business segments. Charles & Colvard direct, also known as Lulu Avenue, wholesale and Charles&Colvard.com. Let's breakdown each of these segments into their component pieces, then we'll reconstruct how we are going to report our segments going forward.

In the first quarter of 2016, we made the strategic decision to divest our home party business Lulu Avenue, and keeping we began reporting this business segment as discontinued operation in the first quarter of 2016, meeting two remaining business segments wholesale and Charles & Colvard.com.

Historically wholesales included distributors, retailers, television shopping networks, drop ship retailers who promote Charles & Colvard goods on their ecommerce site and pureplay etailers, retailers who sell goods exclusively online. These various customers were grouped under wholesales because they do business with us at wholesale prices.

Charles&Colvard.com was comprised of our own transactional website Charles&Colvard.com as well as market place including Amazon, eBay and others.

We believe that both drop ship retailers and pureplay etailers, historically reported under wholesale are more properly associated with online channels because these channels are exclusively ecommerce outlets.

Therefore, to provide a more accurate measure of our collective impact of our online channels going forward, our segments will now be as follows. Our traditional segment will be comprised of distributors, retailers and television shopping networks.

Our online channel segment will now include drop ship retailers such as overstock.com, pureplay etailers such as Zumbara, market places such as Amazon and eBay, as well as our own transactional website Charles&Colvard.com. Now utilizing our newly tasked segments, let's compare Q1 2017 to Q1 2016.

In Q1 2016, 82% of our net sales were from traditional channels and 18% from online channels. In Q1 2017, 62% of our net sales were from traditional channels, with 38% from online channels, indicating that online channels are a driving and growing outlet for our moissanite gemstone and finished jewelry.

Clint will provide further financial details on our retasked segmentation during his prepared remarks. Let's turn to Q1 highlights. During the first quarter, we began to see positive momentum as the outcomes of our rebranding effort took hold.

We generated $5.6 million in net sales from continuing operations with online channel net sales increasing 5% compared to the same period in 2016. We believe this growth was fueled by our ongoing digital marketing efforts driving strong valentine day sales and overall increased traffic to our many ecommerce outlets.

Our online ecommerce reach grew in the first quarter with the addition of two new market places Newegg and Bluefly. We are continually monitoring and we will continue to onboard new online channels as we believe it will provide meaningful opportunities to place our goods in front of consumers.

Our digital marketing and public relation efforts continue with a focus on both awareness and customer engagements. We are seeing strong growth in emerging social media channels including 34% growth in our Instagram followers and 108% growth in our YouTube views over Q4, 2016 performance.

We continue to receive placements in large publications such as Brides and People, and we launched our largest influential campaign to-date with Baker Tilly, a fashion blogger made famous by their appearance on The Bachelor.

Baker reached over 1 million of her followers with a Charles & Colvard message, and to date over 90% of the visitors from her blog were new visitors to our websites.

We enhanced our management team in January with the addition of Jose Ayala, Senior Director of Merchandising who brings extensive brand management and merchandising expertise having worked with Premier brands including Colombian Emeralds and Tiffany.

Jose is expanding our jewelry assortment with a focus on additional fashion and fine jewelry options to complement our bridal selection. We continue to grow our traditional retail presence to our partnership with Helzberg Diamonds.

During our Q3, 2016 earnings call, we announced the pilot program with Helzberg Diamonds Stores that began as a 26-store test in September of last year.

During our Q4, 2016 earnings call we announced expansion to 51 doors by the height of the holiday season and today I'm pleased to announce that we are now present in 100 total Helzberg Diamonds stores. Our team worked hard to achieve this geographic rollout target in advance of the upcoming Mother's Day holiday.

This expansion and our ongoing growth are evident of the strong performance of our products in this retail environment. The ongoing rollout for Forever One, the world's first colorless moissanite gemstone continues to be met with great enthusiasm from channel partners and consumers.

In Q1 we expanded our Forever One moissanite collection with 4 new sought-after shapes, emerald, pear, radiant and hearts and arrows. This continued innovation is sparking worldwide interest in our upmarket brand with Forever One representing 86% of our total Q1, 2017 sales.

In summary Q1, 2017 net sales of $5.6 million were down 50% compared with $11.4 million in the year ago quarter. We face a tough comp from Q1, 2016 during which we had a one-time purchase of $6.8 million of legacy inventory from one of our wholesale customers. However, excluding that one-time sales, net sales in Q1, 2017 increased 22% over Q1, 2016.

In terms of margins with our focused on Forever One sales and high margin channels, we achieved a substantially expanded gross margin which doubles to 43% in Q1 from 20% in the year ago quarter, which included the one-time sale of the legacy inventory at low margins.

In terms of the balance sheet, we closed the quarter with $6.6 million in cash and cash equivalents and we remain debt free. To provide further details behind these numbers, I'd like to turn the call over to Clint Pete our Interim CFO and I'll return to the call and close this out with the discussion of our ongoing strategic initiative.

Clint?.

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

There were no net sales gross profits or losses related to discontinued operations for the first quarter 2017. And we did not include the net sales gross profit or loss from Lulu Avenue in our results from continuing operation for the first quarter 2016.

Unless otherwise noted, the financial results discussed during this call will be from continuing operations for both the first quarter of 2017 and the first quarter of 2016.

As announced in today's earnings press release, net sales for the first quarter of 2017 were $5.6 million, a decrease of 50%, compared with $11.4 million in the year ago quarter, which included a onetime $6.8 million sale of legacy loose gemstone inventory. Excluding that onetime sale, net sales in Q1 2017 increased 22% from Q1 2016.

Moving on to more detailed analysis of net sales, first let's review our results on a segment basis. As Susanne explained, this quarter we made the decision to revise our segment reporting moving forward with two operating and reportable segments. One is referred to as traditional and a second is online channels.

My discussions today will be based on this new segment reporting. In the company’s traditional segment, net sale decreased 63% to $3.5 million or 62% of net sales for the quarter compared with $9.3 million or 82% of net sales in the year ago quarter.

Excluding the onetime $6.8 million sale in the year ago quarter, net sales increased in Q1 2017 by 36% from Q1 2016. And the company's online channel segment, net sales increased 5% to $2.2 million or 38% of net sales for the quarter, compared with $2.1 million or 18% of net sales in a year ago quarter.

We believe this growth represents the beginning of gains from our investments in online channels. Now let's review our product line results. The company's net sales of lose jewels were $3.9 million for the quarter compared with $9.6 million for the year ago quarter, which included the onetime $6.8 million sales, a decrease of 59%.

Excluding the onetime $6.8 million sales in the year ago quarter, net sales in Q1 2017 increased 37% from Q1 2016. Finished jewelry net sales from continuing operations were $1.7 million for the quarter, essentially flat compared with $1.8 million in the year ago quarter, or a 2% decrease due to less clearance items been sold.

Gross margins in the first quarter 2017 were 43% more than double the level of 20% in the first quarter 2016. Gross margins were higher due to increase in sales for Forever One lose jewels, minimal sales of our legacy loose jewels and higher margin on Charles&Colvard.com due to less clearance inventory been sold.

Operating expenses for the first quarter of 2017 were $3 million flat to the same period of 2016. Sales and marketing expenses for the first quarter of 2017 increased by approximately $390,000 which included approximately $246,000 in onetime severance expense primarily related to the previously announced departure of our Former Chief Revenue Officer.

G&A expenses for first quarter 2017 decreased by approximately $390,000 primarily due to decrease in salaries and related benefits and a decrease in legal fees primarily related to due to the divestiture of Lulu in the prior year.

Net loss from continuing operations for the first quarter of 2017 was approximately $560,000 or $0.03 per share compared with the net loss of $750,000 or $0.04 per share in the year ago quarter. Net loss for the first quarter of 2017 was $567,000 or $0.03 per share compared to a net loss of $1.3 million or $0.06 per share in the year ago quarter.

The company ended the first quarter of 2017 with $6.6 million of cash and cash equivalents on the balance sheet compared to $7.4 million at the end of 2016. The company anticipates continuing to invest some of its cash in marketing, branding and awareness efforts during the upcoming quarters.

The inventory at the end of the first quarter of 2017 was $28.9 million a slight increase of approximately $800,000 from $28.1 million at the end of 2016. The first quarter 2017 inventory level was up slightly from the end of 2016 level.

As we expanded our rollout in the health group stores and continued to add elevated jewelry to our Charles&Colvard.com. Lose jewels inventory at the end of the first quarter of 2017 was $22.9 million and finished jewelry inventory was $6 million as well.

The company has no long loan towards debt and has not utilized the $10 million credit facility we entered into with Wells Fargo at the end of June 2014. The credit facility will mature on June 25, 2017. Accordingly, we are currently reviewing various credit facility options that if pursued may provide a credit [technical difficulty] 2017.

In summary, we were encouraged by the underlying financial trends in the first quarter. the growth in our online channels combined with significantly improved gross margins and tightly controlled expenses provide evidence that our strategic initiatives are gaining traction. I'd now like to turn the call back to Suzanne..

Thank you, Clint. As we noted in our Q4 2016 earnings call, we believe 2017 will be a year of optimization and growth as we live into the new Charles & Colvard brand. We're working on expanding existing channels while discovering new channel partners and new markets through focused sales and marketing efforts.

Let's review our five key strategies for 2017 on what we're working on this quarter and next. Number one, expand our jewelry line and continue to innovate our Forever One gemstone products. In addition to the four new gemstone case announced this quarter.

we continue to innovate for her gemstones and her jewelry, expanding our overall assortment so we can appeal to a broad customer audience. Watch us on Charles&Colvard.com where you can view new product listings as they go live on our new arrivals section.

We're looking forward to our largest trade show of the year JCK which is being held in Las Vegas June 5 through 8. This will be our 17th year of the event and we're planning a present beyond any prior year, attendees will be treated to new styles and offerings never seen before in moissanite.

Stay tuned for our announcement which will issue from the event. Our number two strategy is to intensify our omnichannel sales efforts. In addition to our ongoing expansion in retail with Helzberg Diamonds, we continue to grow our presence with other traditional partners.

Television shopping remains an important medium to exhibit the unprecedented fire and brilliance of our gemstone and we plan to expand our broadcast hour this quarter in addition to our ongoing efforts to uncover new and innovative ways to reach the consumer everywhere they are shopping. Number three, conveying our ecommerce practice to new channels.

We have two new ecommerce channels that just went live, and we intend to spend this quarter optimizing our presence and our selection on these new outlets. At the same time, we continue to grow our reach and net sales across existing ecommerce platform as we expand our assortment with new jewelry style.

Number four, evolve our customer service function. We are continually improving our customer service function with the intension of delivering world class service to our wholesale partners and direct consumers.

We recently deployed a net promoters score function that helps us measure customer satisfaction at many touch points along our customer's journey. This valuable input provides us with insights and opportunities to improve our products and services and optimize our customer's experience. And finally, number five, amplify our global marketing efforts.

As we discussed in prior calls, it's imperative that we not only gain exposure with consumers, we need engage and delight them. In late Q1, we finalized our share your love story social media campaign, a terrific vehicle for migrating customers from awareness to engagement.

We had several thousand entries for this campaign, all of whom willingly shared contact with Charles & Colvard, we collected love stories and photographs and insights into some of most romantic marriage proposal we've ever heard.

And by the way of options and permissions, we can now extend their stories into our campaigning, leveraging our customer story to bring additional awareness to Charles & Colvard and moissanite. Three lucky winners will be receiving prizes, with our top winner being rewarded a moissanite engagement ring and wedding band.

We expect [Audio Gap] stories to rollout over social media [Audio Gap]. Currently we have several initiatives underway to support our continued public relations, social media and demand generation efforts.

For example, in Q1, we joined accessories counsel, a not-for-profit international trade organization established to stimulate consumer awareness and demand for fashion accessory products. Since joining we have already participated in their recent Mother's Day event and have enjoyed meaningful press coverage from our presence.

We also continue to utilize influencers to helps us reach new audiences which is proving to be a highly effective way to engage new followers. In summary, we are executing on our plans to optimize our direct to consumer presence here in the U.S. ensuring our higher supply chain runs smoothly in preparation for future international expansion.

In Q1 2017, 7% of our net sales were related to our international presence. But as we've hypothesized and are proving in the U.S., it's necessary to have a direct relationship with the consumer to convert them to believers. We remained confident that by the second half of 2017.

We will be ready to test the consumer appetite for moissanite in new international markets. Lastly, we are focused on our continued advancement toward profitability We made meaningful strides in that direction in 2016 with our full year net loss totaling $4.5 million compared to $9.6 million in 2015.

And in Q1, our loss from continuing operations was reduced from the same period last year. Rest assured we believe we are making calculated and judicious investments with an eye towards growth and profitability. This concludes our formal remarks for this afternoon. And we'll now open the call to answer -- questions.

Operator would you please open the line for the Q&A session?.

We will now begin the Question-and-Answer Session. [Operator Instructions]. I'm currently showing no questions. I'd like to turn the conference back over to Suzanne Miglucci, for any further remarks. We do have a question from [indiscernible] with Lincoln Financial. Please go ahead. .

Yes, I'm just calling in, I heard a couple of remarks on the call about Amazon. I know year ago how Amazon and everyone got excited.

The other thing international, I know that was something that was very costly and they say that they barely have a little -- lot of market share here U.S., why are now you planned to go international when the sales and the initiative here, you got so much room to grow or haven't grown. Just want to point on those two aspects..

Great Preston [ph], and thank you for calling in, we do appreciate it and we appreciate the question. So yes, we are on Amazon, it's a fairly new recast presence for us on that e-commerce outlet. We were there years ago with a minor presence, we came up off of the site for several months.

There were some news communication, if you will, between Charles & Colvard and Amazon about how you measure moissanite. Unfortunately, Amazon was measuring us the same way you measured diamond and that is an incorrect way to measure moissanite. We had to do some educating, get them up to speed, help them understand how to properly measure our product.

Once we squared that away, we went live again last [Audio Gap], we've been growing that presence since then. And it is actually very significant and I will say, the largest of our online channels in the marketplace of this category. It's growing, we are expanding our presence with Amazon by way of fulfillment by Amazon.

We've talked about that in the last quarterly call, this helps us to win the buy box and to get tagged as a Prime supplier. So this will really help us with our growth efforts there.

What's wonderful about working Amazon, Preston, is that once you establish your presence in the U.S., and you start using your fulfillment by Amazon functionality which is it's from their distribution center.

We can lift that capability, it was just baked if you will, and we can bring it to international market with a very low overhead and a low footprint. So we're going internationally is traditionally right, a very expensive undertaking. Doing so via marketplaces is a very agile way of doing just that.

So we can go out there and test that market at someone else's expense if you will. We've going to use Amazon's eye balls, we're going to use Amazon's real-estate, we're going to use Amazon's presence to gain traction for moissanite.

Only then when we see the consumer raising their hand and showing interest in our products will we determine whether or not we have a more Charles & Colvard specific expanded presence in that particular regions. But marketplaces are very low hanging fruit way for us to actually make that entree to those international theaters.

Hopefully that makes that. .

Okay one last question I just have.

I was on the call last time, but knew there was a lot of talk about the box stores, I don’t hear anything on box gold [ph] store, you said about the jewelry company, still it's hard going like, it's a missed market that people can't go out and see this and I think you said you have social media, people are talking and chatting, but where is the sales of all this stuff? Is there a box store coming or you just have the one jewelry company you are working with, or what's the story there?.

Sure, let's talk about that. We did talk about retail last time we held this call. Retail is going through a tough time, stores are closing at an unprecedented rate and retailers are struggling to get foot traffic in the malls and in their stores. And for that reason, we're cautious about what type of physical retail presence we might have.

That’s said, it's very important for certain consumers to see our product and that’s why a calculated retail presence is important for us.

Helzberg allows us 100 opportunities across the country to actually get in front of those customers and it's a very nice alignment between the Charles & Colvard brand and a Helzberg brand, we very much target the same consumer. And given that we are a part very bridal focused, we lend ourselves very nicely to their stores.

So this expanded presence gives us quite a bit of reach across the United State. I’ll remind everyone that we also have a very significant presence through independent jewelers.

We don’t sell to independents directly, however we go through our distribution channel and our partners there, who then extend the sale of moissanite into independent jewelers. We aggregate various places where people can go and see us a retail, on our website, on our where to buy application.

If you click through there, you will actually see numerous places where you can find moissanite and Charles & Colvard goods worldwide. We will continue to evaluate whether not retailer is the right [Audio Gap] I'm certainly there will be other opportunities for us to be in retail stores and it's worthwhile for us to consider that.

But it's a lot of overhead. So we are making cautious decision about whether or not we are going to make that investment while we are expanding our reach on ecommerce because again higher margins and an easier market for us to push our products..

Next question today comes from John Lawrence with Baraboo. Please go ahead..

When you look at the numbers and then thanks for that detailed sort of comparison of redefining those income statement, can you talk a little bit about, big picture number one is, how you measure the return on investments for just advertising and obviously the metrics you will use and I know it's been early since October if so did you really redefined .com.

But can you give us a sense of how you are measuring that that conversion rates and those 0.5 million people that are on social media..

Sure, so there is kind of two steps John to conversion, one is getting followers and so we measured that by simply people that are following us. How many new followers do we have on our social media sites and so on. We had a 34% increase on our Instagram page, we had a 108% increase in a number of views of videos that we post to YouTube.

So that sort of an awareness number. And then we have the conversion number. Conversion is when you have people come to your website, how many of them actually become paying customers. And so we watch that one very closely as well. With global commerce becoming so prevalent conversion rates are actually down across the entire industry.

Because people are doing more viewing, people are doing more homework, people are clicking on more pages, but not acting, because they're simply they're getting some information.

So we're watching those trends and those conversion rates, but we certainly are expecting them click in the positive direction and see more and more conversions as we're doing more engagement. The other thing we measure John as how many touches we have with these customers that then get them to convert.

And so we're very carefully watching what we call pass-to-close [ph]. So we're watching all the way from when did you start following us and what medium were you on when you began following us.

How many of our campaigns did you interact with? Did you submit to tell us your love story, did you click on an advertisement that we put on Facebook, so what are all those touchpoints and then what pages have you visited on our website and then when do you convert, when do things go in the shopping cart.

The more we understand about each of these measures, the more we can shorten the sales cycles so that other consumers that look like you will have a very streamlined experience from Charles & Colvard to come in and become a buying customer. We're really drilling into these measures so you pass-to-close measures in order to boost our conversions. .

Great thanks. And then just a couple of others. On the G&A expense or the overall expenses of $3 million, I guess in the quarter pretty much flat. Is there anything expense wise as you rollout these initiatives that I know there was a little bit of noise with expenses servants, et cetera.

That makes that number sort to move around or is it pretty much -- I don't know how much variable is in that number.

I guess the point is, when do you start really leveraging that SG&A or marketing number?.

Correct, like you said, I think most of the expenses were flat this quarter. There is not much variable other than items such as advertising.

We're able to come in and look at -- see each of our results, looking at return on investment and that advertising dollars are probably the variable one that we can kind a cool or increase as we kind a go through the quarter based on our performance..

[Operator Instructions]. And we are showing no further questions. I would like to turn the conference back over now to Suzanne Miglucci for any closing remarks..

Thank you, Ryan. Once again, I'd like to thank everyone for taking the time to participate in our call today. I want to thank our team at Charles & Colvard for all of their hard work and continued dedication. And my most sincere thanks to our shareholders for their continued belief in the opportunity we have at Charles & Colvard.

Thank you and good evening..

And as a reminder, a replay of this conference call can be accessed online at the Charles & Colvard events page on the live link. The address ir.charles&colvard.com/events. This now concludes the conference. Thank you for attending today's presentation. You may now disconnect..