Suzanne Miglucci - President and CEO Clint Pete - CFO.

Rodney Baber - Paulson Investment Company Craig Pieringer - Wells Capital.

Hello, and welcome to the Charles & Colvard Limited. Third Quarter 2017 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation there’ll be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded.

This webcast may contain forward-looking statements as defined in Section 27A of the Securities Act of 1933 as amended, including statements regarding, among other things, the company’s business strategy and growth strategy. Expressions which identify forward-looking statements speak only as of the date the statement is made.

These forward-looking statements are based largely on our company’s expectations and are subject to a number of risks and uncertainties, some of which cannot be predicted or 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 statement -- forward-looking information, rather, 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 meeting of the company’s shareholders. At this time, I would like to turn the conference over to Ms. Suzanne Miglucci, President and CEO. Please go ahead, ma’am..

Thank you, Keith. Good afternoon and thank you for joining us as we summarize Charles & Colvard’s 2017 third quarter results. We’re celebrating the one-year anniversary of the rebranding and relaunch of Charles & Colvard into a consumer-facing jewelry brand.

Therefore, for today’s agenda, I’ll reflect on the strategic plan we’ve been executing since the rebirth of the company, and I’ll share recent outcomes from that plan that have helped us transform the business.

I’ll turn the call over to Clint Pete, Chief Financial Officer, for a detailed financial review, and then I’ll wrap up with discussion of our ongoing go-to-market initiatives.

In 2017, we’ve been focused on five key strategies, expanding our jewelry line and continuing to innovate our Forever One gemstone products, intensifying our omni-channel sales effort, expanding our e-commerce initiatives to new channels, evolving our customer service function and amplifying our marketing efforts.

Let’s begin the discussion of our transformation with a checkpoint on our premium moissanite brand, Forever One. We launched this colorless gemstone in September 2015, and since then have focused our sales and marketing efforts on proliferation of this upmarket product.

In Q3 2017, Forever One represented 86% of all net sales and 93% of all loose gemstone revenue, as compared to 50% of net sales and 70% of gemstone revenue in the year-ago quarter. Demand for this product is high and growing, a testament to both our superior product and our marketing and awareness efforts.

In fact, we’ve increased our gemstone production by over 100% over the same time period last year to meet this growing market demand. Continued product innovation is a cornerstone of our business practice, and we strive to bring net new jewelry featuring Forever One gemstone to market each quarter.

In response to market demand, we invest in product enhancements to bring new gemstone shapes and sizes to market. In Q3, we announced three new gemstone shapes, heart, marquise and trillion.

We also announced the availability of Exotic Gems, a selection of loose gemstones in six shapes that tip the scales from 6 carats to 15.5 carats diamond equivalent weight.

We exhibited these wow factor gemstones in June at JCK, North America’s largest annual jewelry trade event, in order to show what’s possible in moissanite, remarkable options that would otherwise be difficult to achieve in any other gemstone.

Given significant interest from the trade, we’ve elected to release these stones to the market on a special order basis. Accompanying each Exotic Stone is a certificate from Gemological Science International verifying the color, size and authenticity of our Exotic gemstones.

We’ve also launched a limited curation of men’s jewelry to enable our customers to match their wedding bands or to purchase their engagement and bridal jewelry at the same time. In response, we’ve launched a line of wedding bands with some very handsome options for men.

We’ll be carefully measuring the interest in this jewelry line for potential expansion in the future. We bolstered our omni-channel sales by promoting a Charles & Colvard veteran, Tom Bergan, to Senior Vice President of Sales.

And to support our ongoing sales efforts, we hired two industry executives, a VP of Traditional Sales and a VP of Online Channels Sales. Their efforts will be focused on net new revenue across our targeted channels. We believe their expertise will assist us in boosting our sales.

We generated strong growth in the third quarter in both our channel segments. In the Traditional segment, which is comprised of wholesale, retail and television customers, we produced 19% growth in net sales in Q3 compared to the same period last year.

Fueling this, our relationship with Helzberg Diamonds is strong and growing with recent expansion into most Helzberg Diamonds stores. With Helzberg having more than 200 doors, this provides us more locations and opportunities for customer interactions and further exposure for our moissanite gemstones and finished jewelry.

We’re working collaboratively with Helzberg on co-marketing activities and special programs to make a meaningful impact this holiday season. You will note that our continued investments in this channel requires an increase in our finished jewelry inventory, which enables us to deliver a broad assortment to stores.

Our Online Channels segment is comprised of our charlesandcolvard.com website, e-commerce outlets, including marketplaces such as Amazon and eBay, drop-ship customers such as overstock.com, and other pure-play exclusively e-commerce customers, such as Gemvara.

Our net sales in our Online Channels segments also grew 19% in Q3 compared to the same period a year ago. We remain highly focused on our direct-to-consumer touch points, aiming to ensure that our brand and products are engaging the consumer everywhere they’re searching and shopping.

Our own charlesandcolvard.com website is an important element of that strategy and the primary vehicle to tell the rebranded Charles & Colvard story. In preparation for the 2017 holiday season, we spent Q2 and Q3 optimizing our website for speed and mobile performance.

Industry experts predict holiday 2017 to be a pivotal time in e-commerce history where mobile commerce sales are expected to eclipse desktop sales. This means that retailers must present a site that performs equally, if not better, on a smartphone that it does on a tablet or computer. Savvy mobile shoppers expect page load times of 3 seconds or less.

Otherwise, they will be ending their search. In our continued effort to leverage technology and automation to enhance our customers’ experience and to streamline our business processes, we’ve upgraded our website with some of the industry’s latest tools and protocols.

Coupled with that, the assortment of new jewelry, we believe, we’re now well positioned for the coming holiday season. In Q3, we also bolstered our presents on Amazon U.S. site with an expanded assortment of jewelry, including goods that are housed in Amazon fulfillment centers.

This Fulfillment by Amazon or FBA presence provides us with a prime batch that better positions our products in front of more than 41 million households that subscribe to Amazon Prime. This is a top-performing marketplace for Charles & Colvard, and we intend to continue to optimize and expand our presence there.

One of our key strategies in 2017 is expanding our ecommerce initiatives to new channels. And we’ve noted in previous calls that we would begin evaluating potential new geographies in the second half of 2017. International marketplaces provide an agile and low overhead method protecting and validating potential new regions.

Platforms such as Amazon presents such opportunities in many global markets. And now that we’ve fined tuned our presence in the U.S., we’ll be ready for new geographies, as we develop our strategy for the next several quarters. One of the few places that Amazon falls second to any other marketplace is in China.

There Alibaba’s Tmall range is the premier choice for online buying. Our international research have identified China as a logical region for Charles & Colvard growth.

China represents the world’s largest global ecommerce market and is expected to have one of the most significant middle classes in the world projected at over half a billion strong by 2022. These consumers are online savvy. They have disposable income and they are hungry for Western brands.

It’s for these reasons that we’ve decided to pursue a direct-to-consumer presence in China. In Q3, Charles & Colvard struck a partnership with VoyageOne, a leading provider of cross-border ecommerce solutions and a Tmall integration partner.

As of last week and through VoyageOne’s specialty Tmall store called, Liking, Charles & Colvard is now actively selling Forever One moissanite to the Chinese consumer.

We’ve developed the required infrastructure and localized presence to properly serve the customer, and are looking forward to testing our assumptions about the viability of our product for this massive market. Our final key strategy is focusing our marketing initiative on driving brand awareness, customer engagement and conversion.

In Q3, we enjoyed media coverage in Glamour, People Style, RACKED and the jewelry industry publication, JCK Magazine. We strive for additional traditional public relations coverage such as these, but even more important are efforts to engage the consumer directly on social channels.

Since we launched our brand in October of last year, we’ve increased our social media following by 523%. We served over 950,000 video views on our YouTube channel, and our following grows every day.

In addition to daily social activities and to ensure that we continually attract to new customers to our brand, our team runs specialty programs that engage and delight the consumer. For example, in Q3, we launched a bridal sweepstakes.

We partnered with five brands, the Glam, Minted, Jenny Yoo, Casablanca Bridal and Fifty Flowers, that we feel align well with our mission and target audience to offer The Ultimate $10,000 Wedding Sweepstakes. The response was outstanding.

This sweepstakes ran for four weeks and within that time, we received nearly 45,000 entries, driving new followers to the Charles & Colvard brand. We believe our social media followers are progressing down the path to conversion with us.

First learning about our brand in Q4 2016, engaging with our brand in Q1 and Q2 and now converting into buying customers in Q3. Driving this effort are our social and digital marketing efforts. In Q3, they drove 65% of demand dollars on our website, creating new Charles & Colvard converted customers. We want to secure that customer for a lifetime.

The nurturing, upselling and cuddling the customer has become a focus. Therefore, in Q3, we launched Brilliant Rewards, Charles & Colvard’s very first loyalty program. Through this rewards program, customers get special access to promotions, sneak peeks to new trends and earn points for every purchase on charlesandcolvard.com.

They can then redeem these points for dollars on future purchases. Annually, JCK Magazine publishes data about the bridal industry. In this year’s publication, they performed a survey of brides’ gemstone preferences. The survey concluded that 11% of all brides preferred gemstone rather than diamond.

Of their preferred alternatives, the top three are morganite, sapphire and moissanite. We’re thrilled with a third-party validation for our gemstone. With bridal jewelry market valued at $15 billion to $18 billion, we believe that this is a clear indicator of the opportunity ahead of us.

In summary, we’re one year into our transformation and had delivered on virtually all of the benchmarks in the strategic plan that we outlined for our shareholders. We’ve connected directly with the consumer, and they’re engaged with our brand.

We’ve diversified the channels through which we sell, making it easier for consumer to find us everywhere they are searching and shopping. We’ve positioned Forever One moissanite as the premium brand and the industry has validated the market for this unique gemstone.

With these milestones in play, we were able to generate 90% top line growth across both our Traditional and Online Channels segments, while delivering a 44% growth margin. We continue to make careful and calculated investments, which positioned Q3 with the best bottom line performance in nine consecutive quarters, all while remaining debt-free.

To provide further details behind these financial numbers, I’d like to turn the call over to Clint Pete, our Chief Financial Officer. Then I’ll return to close out the call with the discussion of our near-term outlook.

Clint?.

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

There were no net sales, gross profit or losses related to discontinued operations for the third quarter 2017. Unless otherwise noted, the financial results discussed during this call will be from continuing operations for both the third quarter 2017 and the third quarter 2016.

As announced in today’s earnings press release, net sales for the third quarter 2017 increased 19% to $6.2 million compared with $5.2 million in the year ago quarter.

Net sales from continuing operations decreased 20% to $18.5 million for the nine months ended September 30, 2017, compared with $23.1 million in the year-ago quarter period, which included a sale, in a single transaction, for $6.8 million of legacy loose gemstone inventory.

Excluding that onetime sale, net sales in the first nine months of 2017 increased 13% from the same period in 2016. As we’ve explained on the previous quarters’ calls, we had transitioned to two operating and reportable segments. The first is referred to as Traditional and the second is Online Channels.

In the company’s Traditional segment, which consists of wholesale, retail and television customers, net sales for the quarter increased 19% to $4.1 million or 67% of net sales for the quarter compared with $3.5 million or 67% of net sales in the year-ago third quarter.

In the company’s Online Channels segment, which consists of e-commerce outlets including charlesandcolvard.com, marketplaces, drop-ship and other pure-play exclusively e-commerce customers, net sales for the quarter increased 19% to $2.1 million or 33% of net sales for the quarter compared with $1.7 million or 33% of net sales in the year-ago third quarter.

On a product line basis, the company’s net sales of loose jewels increased 14% to $4.1 million for the quarter compared with $3.6 million in the year-ago third quarter, primarily due to the increased demand for Forever One gemstone.

Finished jewelry net sales increased 31% to $2.1 million for the quarter compared with $1.6 million in the year-ago third quarter. This increase resulted from leveraging our omni-channel strategy to drive sales to multiple channels.

This is reflected in our expanded presence in Helzberg Diamonds stores in the Traditional segment and strong jewelry sales in our Online Channels segment. Gross margin in the third quarter 2017 was 44%, up from 38% in the third quarter 2016.

This improvement was primarily due to the high-margin Forever One sales in the quarter and from continued operational efficiencies we have implemented. Operating expenses were down to 8% to $2.9 million for the quarter compared with $3.1 million in the year-ago quarter.

Sales and marketing expenses for the third quarter decreased 7% to $1.8 million compared to $1.9 million in the third quarter 2016. And G&A expenses for the third quarter decreased 9% to $1.1 million compared to $1.2 million in the third quarter 2016.

The net loss from continuing operations for the third quarter 2017 was approximately $175,000 or $0.01 per share compared with a net loss from continuing operations of $1.1 million or $0.06 per share in the year-ago quarter.

The company ended the third quarter 2017 with $5.1 million of cash and cash equivalents on the balance sheet compared to $7.4 million at the end of 2016. The company anticipates to continue to invest some of this cash in marketing, branding and awareness efforts during the upcoming quarters.

Inventory at the end of the third quarter 2017 increased $2.8 million to $30.9 million compared to $28.1 million at the end of 2016. At the end of the third quarter, loose jewel inventory was down slightly to $22.3 million from $22.6 million at year-end 2016.

And finished jewelry inventory was up $3 million to $8.5 million compared to $5.5 million at the end of 2016. This increase in inventory levels reflects our investment in the elevated finished jewelry for charlesandcolvard.com, the Helzberg store expansion and our preparation for the holiday season.

The company has no long-term debt and has not utilized the $10 million credit facility we renewed with Wells Fargo in June 2017. The maturity of this credit facility is in June 2018, providing continued access to funds, if needed.

With respect to our stock listing, NASDAQ granted us a 180-day extension to April 30, 2018, in which to regain compliance with the $1 minimum closing bid price requirement. As part of this extension, we will be transitioning our listing from NASDAQ Global Select Market to its global market tier effective tomorrow November 3.

There are minimal changes to -- related to this transition, which are not expected to impact investors or the trading of our stock. I would like now to turn it over back to Suzanne..

Thank you, Clint. I’ll close out the call with a few thoughts on the coming quarter and a summary of our near-term go-to-market initiative. As is the case with most retail brands, the Q4 holiday season is a key revenue generator. For Charles & Colvard, Q4 is typically our largest revenue quarter of the year.

And we believe, we are in a strong position for peak Q4 performance. Our jewelry is curated, our website is primed, our promotional campaign designed and ready and our customers engaged.

We’re looking forward to this holiday season, which we believe will delight our customers with the world’s most brilliant gem and demonstrate to our shareholders the fruits of the past year’s labor as we turn the corner with our new brand. We are laser-focused on the following near-term go-to-market initiatives.

Closing out the year with continued innovations and expanded jewelry selection featuring our Forever One gemstone. Forging ahead with new omni-channel partners and leveraging lessons from our Q4 experiences to form our 2018 go-to-market strategy.

Assessing our early days in the Chinese market and determining other potential market to spawn Charles & Colvard growth in the coming year. Obsessing over our customers’ every experience and endeavoring to convert each sale into a lifetime customer. And lastly, marketing our brand to drive the top line.

In closing, I remind you that we scrutinize each and every investment decision with the intention to grow this business, while achieving profitability and positive cash flow. We believe that our ability to deliver top line growth and bottom line profits in a sustainable way creates value for you, our shareholders. We believe that goal is now in sight.

I hope to see many of you at the LD Micro Conference in Los Angeles in early December and the Benchmark Capital MicroCap Conference in Chicago in mid-December. And please check out our most recent video interview highlighting our market opportunity and strategic direction. You’ll find it on our Investor Relations home page at ir.charlesandcolvard.com.

This concludes our formal remarks this afternoon, and we’ll now open the call to answer a few participant questions.

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

[Operator Instructions] And the first question comes from Daniel [indiscernible] with Arrowstreet..

I was wondering if you guys could comment on the sales through Helzberg Diamonds during the quarter?.

You want to address that one?.

Sure, sure, Daniel. Glad you’re on the call. We’ve been in Helzberg Diamonds for over a year now, and we and Helzberg had confirmed that expansion is a success. Our relationship with Helzberg is growing strong with recent expansion into additional doors.

We typically don’t comment on individual customer sales and results, but we are all pleased and encouraged with the trend, as we saw a solid performance in the holiday season 2016 and throughout the year to date, 2017..

And Daniel, I’ll jump on and added a few more comments. I think that this recent expansion is simply a testament to our performance here. I think both parties are pleased, and we continue to grow our business..

Got you. Okay. Then maybe could you comment, Suzanne, on the sales and marketing spend? I was happy to see the growth within the sales without much -- or actually a decline looks like in sales and marketing spend year-over-year.

So could you comment on the use of cash in that effort going forward?.

Sure. It’s a good question and one for us to watch very carefully. You’ll notice that social media numbers are up significantly and that’s really a strong place for us to be doing our advertising, Daniel, and it’s also very agile place for us to be doing our advertising.

So while we’re trying to get profitability, we can dial down dollars as we need to and dial them back up at times like right now, as we’re ramping to holiday and we’re looking for conversions. This digital age really allows for that where previous marketing efforts in the traditional days didn’t really allow for that to happen.

I will caution folks on the phone that, Clint mentioned it in his prepared statements, we still do intend to take some of these dollars that we have in the bank and invest them back into the business, and so as we are spending dollars as we go into 2018 and throughout the given quarter that we’re in, we will spend those dollars on marketing because we’re still building a brand.

We have a known brand here in the United States, but it’s still a small following. Despite our 500-and-some-odd percent growth being in our social following, it’s still bit of a nascent brand in the U.S. As we intends to go international, we’re starting from scratch.

And so additional marketing dollars for advertising and for awareness then get poured into international markets, while we’re building the brand there. So it’s a bit cyclical, Daniel, to answer your question, but absolutely, where we can pull a lever and kind of apply it and pull it back as we need to in order to grow the business.

I hope that answers your question..

I actually was hoping maybe for some more quantitative metrics, maybe just specifically for the fourth quarter, kind of how I should think about. I would presume that versus the third quarter it’s going to be higher because of holiday season.

Is that the right way to look at it?.

So we don’t give guidance necessarily, but I can tell you that it’s the most important quarter of the year for us. We spent all of this year gaining traction and awareness in followers.

For example, the bridal sweepstake that we spoke of in prepared statements was all about getting net new followers to the brand, so that now we can advertise to them and promote the season. So I think it’s a logical thing to assume that our marketing spend will be a little more aggressive in Q4..

And the next questions come from Janet Goldstein with [Indiscernible]..

Yes. I want to kind of continue that conversation with the sales and marketing expenses because I see that they are down. Clint talked about that, however, now you’re going to raise up your sales expenses with hiring these two VP level sales executives.

And I’m wondering what the thinking was behind that and when we might see the effects of their efforts? And how soon they might impact sales?.

Got you. Janet, thank you for being on the call and thanks for the question. So one thing I think that’s important to point out. We’ve had some additional questions via e-mail from some of our investors on just this topic. These are not new positions we’re creating.

Our sales team has had these opened roles, and we’ve elevated Tom Bergan, who held one of the VP positions, up into a senior role, and we backfilled him with one and we had one other departure earlier in the year. So we’re backfilling positions we had, however.

What’s unique and different, Janet, about what we’re doing going forward is, we are laser-focusing these two new VPs, one very focused on Online Channels, one very focused on Traditional on net new sales.

In our prior sales regime what we did was we allowed sales to focus a bit on existing accounts, while attempting to bring on net new, and we found that our existing customers required a lot of attention, and so they got the attention.

And a lot of the business growth you’ve seen from us over the past year, even the 19% growth that you’ve seen in both of our channels this quarter, is within existing accounts that we have.

Now if my shareholders on the call want to see more incremental revenue in the company, it’s incumbent on us to open and secure net new channels and that’s what these new sales representatives is all about. I will tell you that our Vice President of Online Channels sales has already moved the needle for us.

She stepped in and, within a matter of weeks, has aggressively pushed us out on to VoyageOne, the Tmall store. That probably would have taken a little more time to kind of get stood up and ready. She opened that channel for us, as well as now our presence on a channel called Frugo, which hit our radar as soon as she hit the ranks here.

And we now have listings that are live on several channels that outlet actually serves. So I think your outcomes are going to be immediate as these two folks are already bringing value to the table, but again, they are filling existing roles that we have. So we are not creating a whole lot work overhead in order to grow the business..

That sounds great.

Is it okay, if I ask a second question?.

Of course, Janet, please..

This has to do with the expansion into China.

Have you ever tried to sell in the Chinese market before? And why do you think now is the right time to expand overseas?.

Sure. You are full of good questions. I appreciate it. So we have attempted to be in China before. People that are long in the stock will remember a Hong Kong entity that we had. In the past several years, we’ve talked about international sales through distributors.

And our market has always been to rely on distributors to do the job of bringing our brand forward into a market. Unfortunately, Janet, that’s not what distributors are for. Distributors are there to take inbound orders and that’s what they do well and they fulfill orders.

Distributors do not necessarily do the marketing of growing a brand, and moissanite is really very much unknown in China. So I think we’re doing things very differently this time.

What you’ll find of us, is that we’re going direct to consumer, and we’re doing so, so that we can stand up the brand, we can bring the authenticity of this brand into the Chinese market, we can represent ourselves to the consumer.

When the consumer knows Charles & Colvard moissanite, they will then go to their retailers and their jewelers, they will ask for the product and those folks go to our distributors and then the supply chain works. But until we build a brand, it’s just not going to fly.

Now, you may say, if you’ve been to China yourself, and it sounds like you may have been there yourself growing business, it’s a challenging place to do business. It’s fraught with business challenges in standing up business entity. It’s fraught with challenges in we getting a banking entity set up.

There are a lot of things, a lot of undertakings you have to do with the business to stand business up in China, and it can be overwhelming. The good news is, not only for China but any of the new market that we’re breaking into, we’re doing so in an agile way. We are going forward in these markets with marketplace solutions.

So in this case in China, we’ve employed this partner VoyageOne who have an existing site on Tmall, and they’re doing the work of bringing our listings forward. For all intent and purposes for us, it looks like we’re drop-shipping to a customer in New York, and then our job is done.

They do the heavy lifting of picking the goods from New York, they patriate them into China, they sell them to the Chinese consumer, they collect the dollars and the dollars come into Charles & Colvard. So there’s a very little overhead for us to dip this toe and attempt a move into the market.

When that consumer comes forward, and they tell us what goods they like by buying them, and we see the volume of purchases, then we can validate that there is a market in China, and then and only then, we do the extra heavy lifting of having our physical presence there, finding new distributors, finding new retail opportunities.

The marketplace is going to validate, think of it as market research -- market research with added benefits because it is bringing in revenue at the same time. That same model is what we can now do with Amazon as well.

So now that we’ve stood up Amazon in the U.S., we can lift that model, and we can take it to all the other places in the world where Amazon has presence. Because we’ve mastered kind of how to do Amazon, now we can take it to other places in the world.

Doesn’t mean that there is not localization and all that other good stuff, that is a challenge going into new market, but using marketplaces is a very agile way to get there. So we believe that we’re being smart with our shareholders dollars by having this very low overhead approach going into international waters. That was a great question..

Thank you. And the next question comes from [Brandon Lausanne with Lausanne]. [Ph].

I just got one really quick question. That’s a follow-up on the two new sales people. Can you tell us one or three things.

How are they compensated? When they get on board? And where they’re going to be located?.

I’m going to backwards to your question. They are located, one of them is right out of Raleigh, North Carolina, and so they are walking the halls and drinking the Kool-Aid here with us. The other one, I don’t want in Raleigh because she is focused on net new retail customers in the U.S. Now we have a brand established in the U.S.

I want her on a plane, carrying the bag, out there knocking down doors. So she is located in a different place every day of the week because she is making sales. So we’re out there in the field, that’s the answer to question number three. Question number two, they all came on board just in a matter of past few weeks.

Now one of them had been working as a consultant part-time for us, this is our Online Channels VP, and so she already greased the skids a bit for the online sales piece and so we’ve had such very early and fast returns from her on her Online Channels. We can close Online Channels more quickly than we can, for example, a retail outlet.

So I expect -- it will take a bit longer I would assume for retail, but we are already, again, seeing returns on online. And then lastly, your first question was....

Compensation..

Compensation..

How they’re compensated?.

[Indiscernible] spoken about that. Yes. There is a base salary associated with this, but the majority of this plan is all based on performance. So these sales reps are paid a percentage of the revenue that’s coming in from the deals they close.

They get a very small percentage from any existing account that they may be managing and larger percentages for those that are net new for the first year that they are net new. Once they pass the 1-year mark, generally we pass them over to an accountant management team, so that those sales people can focus on net new.

We want her to take the year to stand it up. We want to get the best possible configuration with each one of those customers, and then I want her to cut loose and I want her to go find more net new for us..

The next question comes from Rodney Baber of Paulson Investment Company..

I do have a couple of questions. Helzberg -- probably I have to go back in the loop, but Helzberg was 100 stores, and now they are somewhere closer to 200. You are almost in all of them.

Is there anything else going on with your bricks-and-mortar strategy or having stuff and product in Helzberg, it’s a national company, takes care of a lot of the -- the desire people have to go see the product.

This -- will you continue to add to that? And what do you think longer term the bricks-and-mortar part of our business will look like as a percentage of what we’re doing?.

Yes, great question. So first and foremost, I want everybody to know how thrilled, again, we are with Helzberg opportunity. It continues to give us that chance to kind of be everywhere. If a consumer really wants to touch -- and we talk every time on these calls about the consumer needing to see and touch the product.

And being in most Helzberg stores, most Americans can go and -- get in their car and go see moissanite, which is really exciting for us. But we want them to go to more places. The good news is this. We’re in hundreds of outlets in the United States where you can find moissanite.

Those hundreds of outlets are independent jewelers that carry our growth because they buy them from our distributors and then the distributor send it into an independent jewelry and they put it in their jewelry store. So there are literally hundreds and hundreds of places in the United States where you can see our product.

However, we’re never satisfied. So that’s what our new Vice President of Traditional Channels is all about. Her laser-focus is to find new traditional channels, that means new retail, it may be new television, it may be new distributors. It’s really focused on getting into more and more places where the consumer can shop.

It really help us capitalize on what we’re doing here in Helzberg. I mean, Helzberg has given us that exposure. She can now take that exposure and bring it to other places and say, "hey, look what we’ve done here and here is an opportunity for you as well in moissanite.".

Okay. Let me ask you a question about two of the things that are on my mind for some time.

One is the development in China, which you have announced now, and Voyager, I tried to actually look up and find out something about, I mean, and I’m curious about how many eyeballs they have because if they have millions of people already signed up, that’s better than not having that.

And then the second thing, are you seeing any metrics on the millennials that we’re hoping are going to step up and do something, but we’re continuing to read all reports that say these guys aren’t buying jewelry and all these other things. So that would be my -- the joint question. It’s just one question about China and millennials..

Yes. So higher millennials are very strongly represented in this middle-class and it is predicted to be the largest middle-class in the world. They are a little different than the United States middle-class. They’re growing whereas, I think the prediction is always it’s shrinking here. They are a growing middle-class and they are very wealthy.

They like their Western brands, they like their Boeing, but they really, really like a value. So we believe that there is a very strong fit for moissanite there. Now, what the VoyageOne folks do is they plug in and they open a store on Tmall. Tmall is one of the largest of all ecommerce outlets in the world.

And so what VoyageOne does for us is they put us on their store, the store gets exposure on Tmall and then anyone using the search bar on Tmall can search for goods like diamond alternative or Charles & Colvard or moissanite, and they can find our product because we are on store.

That answer -- does that answer your question?.

Yes, any -- can you benchmark how big of an entity that is? I mean, there is 550 million people presumably retail potential buyers over there.

And do you know, I mean, how much market share they have in the bag?.

How much market share Tmall has?.

Yes, what’s their -- yes..

They are the largest ecommerce outlet in all of China. This is Alibaba, and I know you’ve heard of Alibaba..

I’m sorry. You mentioned Alibaba. I missed that. So this is a subsidiary of Alibaba, that works pretty good..

Tmall is Alibaba’s -- they own a lot of properties. They’re pretty much -- I think they own the country, but they own a lot of retail outlets, and Tmall is their largest ecommerce outlet. So the majority of people that buy online in China actually go there and that’s where we are..

Perfect. I understood. A little clarification on the millennials.

Do you have any metrics that show that they are going for moissanite and that they are getting engaged in that kind of things? Are you able to monitor that at all? And it would be nice if they proved out to be what we would like for them to be, but I haven’t seen anything that tells me for sure that, that isn’t in fact the case.

Do you have anything to share about this that would help with that?.

Yes, what I can share, Rodney, is that there is amazing increase in social media following, that we talked about a little earlier in prepared remarks, really getting millennial audience.

So the people that are following us are millennials and all those conversions where marketing is converting people into paying customers, those ultimately are the millennials that are coming through these -- the social channels and converting on our site. So we know that we are engaging that millennial audience. I can tell you exactly that for a fact.

And so we know that they are out there. We know that -- the response to the JCK survey and 11% of them want nontraditional, non-diamond rings, and their top three choice is moissanite. So they are getting engaged because we know too. They are getting engaged a little bit later than they got engaged in prior age groups.

It doesn’t mean that they are not investing in engagement rings or commemorative rings or the promise ring. I think those are all opportunities for us, but they absolutely are buying jewelry. They are absolutely engaged with us as they’re coming to social on sort of the way that we like to hook them, which is fashioned on low-end.

So some of our lower-priced items are catching these millennials and then that creates a customer for life. We can get booked them into bridal and then that lifetime customer that comes back for every other commemorative moment.

So I don’t have hard, fast numbers for you here, Rodney, but I can tell you that the folks that are coming through our marketing efforts are in fact being scoped out as millennials..

And the next question comes from Craig Pieringer with Wells Capital..

Re-numerating the five things, Suzanne, that you’re laser-focused on, I would suggest that getting the profitability is added to your list of laser-focused items. I’m sure it is, but it was absent from your list of five things. And maybe related to that is balance sheet item.

The status of long-term inventory looks like it’s stubbornly in the 20 million, actually up from year end, and I presume that is mostly less than Forever Brilliant type of loose stone’s and we used to be able to liquidate that to JTV and Charles Winston and whatnot.

Can you tell me what your strategy is to get that inventory down or is it not necessary to get it down?.

Great question. We as an executive team are daily looking at ways to kind of definitely monetize our inventory, Forever One is going great, but including the lower-grade stones in the Forever Brilliant and Forever Classic. So we constantly are monitoring ways to, as we can, kind of move that.

So these are the loose stones, which are majority of that, the legacy inventory that we continue to entertain and present to customers and try move that as we can.

One other item we continue to do is put some of the loose stones with legacy gemstones into jewelry where we can go through marketplaces and actually get those on high volume to get some price points that are attractive and we are still making a margin. So we constantly are looking at ways to reduce that inventory..

Is that really why it’s not going down because there’s not much margin there, is that your major concern?.

It’s the legacy now from a standpoint, there is a lot of margin, it’s just a matter of the appetite in getting the customers to actually take that. We got some strategy for the fourth quarter as we kind of initiate to drive some, be the price points as we said before or getting to drive some of that inventory out. So....

And I’ll add in and reiterate the things you [indiscernible]. We brought Forever One forward and we kind of blew away the market with this stone. And so everyone is clamoring about it, that’s the good news, with 93% of our gemstones sales. So the legacy products, they are not flying off the shelf.

We are likely not going to find big bulk purchases of legacy goods and by the way, we have absolutely tried. But the good news here is that we are a jewelry provider, and we now have a lot of online outlets.

So we have smartly begun putting these goods into finished jewelry, which allows us then to bring it to the eBays and the Amazons and all of the other on e-commerce outlets that our VP of sales is going to stand up for us. So that we have a way to bring them to market.

It will be a slower role for us to do that because it is one piece at a time, but we’ve got smart marketing people that can build great programs, that can kind of move products through and work focused on getting that off the shelf, but the most important thing for us, all to remember, is that Forever One is absolutely gaining the eyeballs and the interest that we expected and that will be the future of our business..

And have we severed all relationships to JTV and Charles Winston?.

The last sale that we made to JTV was in Q1 of last year. So it’s been a really long time, almost two years since we sold anything to them. So we sold them a lot over the years. It’s possible that they still have some Charles & Colvard moissanite. We just don’t know..

They’ve got something called Moissanite Fire. I thought that might be yours, but I don’t know..

We believe, Craig, that it is not. And if you listened to some of their shows, they described that they are now bringing their own product forward, Moissanite Fire.

And so -- and given the price point that they are selling it at and from some of the feedback that we had had from peers of ours and the industry folks that sell moissanite, it is as we understand it an inferior product to Forever One, that’s how they can get the price point that they do. It does not have the clarity of our product.

So they’re playing in a little bit of a different pond than we are. Now, should they pick up the phone and have an interest in a onetime buy, we certainly entertain that discussion and it could very well be that, that onetime buy that we did back in January of last year is still in play, we just don’t think so..

And then you have got another 6 months to try to get the stock price above $1. Can you address how you aim to do that? I mean profitability would be one avenue..

Right, right..

But -- go ahead..

Let me clarify a little bit here. So thankfully, we have confirmation from NASDAQ that we’re actually moving, so will be transitioning from NASDAQ Global Select to its capital market here. So you’ll find us now on capital market. For the organization that’s investing in our shares, it doesn’t transact any differently.

The only difference here on capital market is that we as a company has slightly different responsibilities that we need to live into, but one of them is still the $1 closing bid for 30 consecutive days. So that is ahead of us, there are like 10 consecutive [indiscernible] days so we are barely toward that, Craig.

And you’re right, profitability and that’s why it has been a focus for us for the past several quarters and why you’re seeing continuous improvement in that number for these nine consecutive quarters. It will be a focus for us, and we believe that will move the needle.

The other thing that we know moves the needle is insider buying, and we’ve had a really tremendous amount of that. Clint, I’ll just spend 1 minute and give everybody kind of an update on what the insiders look like here..

Yes, sure, insider buy -- currently insiders hold over about 14% and this is just to give you an idea, Craig, the -- to date in 2017, we’ve had about 346,000 shares purchased in the open market and this is in addition to over the 263,000 that were purchased in 2016.

So we’re -- the Board and management has decided about it, and so we’re seeing some active insider buying..

Okay. And in your 8-K, you spoke about reverse split, which I would suggest is not an option, but you put it in there anyway.

Can you talk about that?.

Sure. Actually, Craig -- in order to actually -- when we filed the transfer application form with NASDAQ, that was one of the requirements that they said is that you would consider or it would be -- it’s necessary that you would give us stock spread and that was one of the requirements.

Now we’re actively, as Suzanne said, looking to actually focus on our strategy, executing it and generate revenue. We saw encouraging trends in this quarter and with achieving our initiatives in ‘17, we believe that, that’s becoming the outlook for the company will improve that’s going to be our foremost avenue..

Profitability, have an amazing Q4, get out there and tell the story..

And you say profitability and cash flow positivity is within in sight, but do you know when that may be achieved, not on a quarterly basis, but on like a year-long basis, would that be a 2018 event?.

You’re going to have to model this one, Craig. But the short -- you don’t get guidance.

The short story is we know that if we have about generally $7-million quarters consecutively and consistently, and we’ve got generally the amount of operational spend as we do right now and we’re sitting at the 40%, 44% margin, we’re going to be a profitable company. So I’m going to leave it to folks on the phone to do that modeling.

But it’s in sight, so I feel encouraged about the position that we’re in..

And the next question comes from [John Lawrence] [indiscernible]..

Yes. So I was a little late, but a couple of questions. Just to go back to the gross margin, the stock and all, if you can get 2 or 3 more quarters of 600 bps of gross margin, that will take care of itself..

Yes, sir..

Digging into that a little bit, I mean, what’s interesting to me about the performance in the quarter with 600 bps of gross is the team as you were growing both pieces at the same rate.

Can you help me a little bit, maybe just going back to the puts and the takes of that gross improvement and maybe which -- maybe just a little bit deeper dive into the gross on each side of the business?.

Sure. John, great question. We -- related to the gross margin improvement, the number one is related to the increase in Forever One sales both in gemstone and jewelry, that’s our premium brand, that continues to drive our buck down to our bottom line from gross margin.

But additionally, looking year-over-year compare for that quarter, with the executive team here and our new CEO, that’s been here for Don O’Connell, who’d been providing greater operational efficiencies and driving improvements and taking cost out and they had the people be more efficient.

So that’s also a contributor to that gross margin bottom line. And so we’re pretty proud of that..

So I guess, taking one step further, how much of it is just merchandise margin?.

I have got to answer that. If I look at it from our segment standpoint. But you look at our percentage of sales, right. We -- for this quarter, we had about 67% was Traditional Channel and Online Channels was the balance 33%.

What it was important -- a lot we see like -- our highest margin is in Online Channels naturally because of the retail price that we’re getting and able to get that margin to the -- directly from the consumer, our customer I should say as well as our drop-ship and other retailers that are, they drive a higher margin.

Right now, if you kind of look at the product margin, we’re probably on the -- Traditional side is probably more, there is a product margin at the 45% hit level this quarter compared to like mid-50s for our Online Channels, if you look at them in aggregate..

Yes. So it’s pretty encouraging that your online piece is accretion to the margin..

Yes, yes, that’s where that -- the 19% increase, you hear it. That’s both helped with getting us to the bottom line..

That is exactly why we are so focused on building that direct-to-consumer presence. We can get a higher margin there, we can own the message, we can own the consumer, we can own the experience. We like that opportunity.

It doesn’t mean that we don’t love to be in Helzberg Diamonds Stores and to have that opportunity as well, but the margins are just very rich on the online channels..

And compared to other online platforms, obviously, that’s certainly part of your spiel that I am sure you’re going to tell when you’re on the road is pretty unique in your channel?.

Absolutely, so we’ve got at Charles & Colvard, the channel, but we also have all of our marketplaces as well. So -- and you will see us do more and more of those channels as this new Vice President of Online Channels takes the helm here and makes some hay.

And by the way, most of his work is all in the United States, and we are just one country and it is very large world. And there’s a lot of opportunity out there and a lot of Greenfield..

And I’ll let know -- now this will be my last question, I promise. But a lot of people are trying to expand their SKUs on their online presence and I assume that’s what you’re talking about. There’s a lot of these people whether it’s Walmart, Amazon or whatever.

And that’s the discussion I assume that you’re having in a lot of these marketplaces is how do you feel that SKU expansion that all of these guys want to have.

Is that fair?.

That is absolutely right.

And it’s a great opportunity and that’s where our operations and merchandising team are really tasked to come with net new jewelry and new look and feel and what are the coming trends and how do we bring jewelry forward that’s interesting to the consumer and reacting to consumer wants and needs and then we bring those to all of these outlets.

So it goes on all of the marketplaces that we’re in and then we’ll turn on more marketplaces as well. So not only in that new outlets, but also in expansion of SKUs on the ones that we’re currently in. And so it’s -- this is where omni-channel really comes into play, right.

You want to be in all those places the consumer is when they are doing their searching, so that’s a lot of proliferation of our goods. The good news is there are technology solutions on the back end here, right.

I sometimes joke and say that we’re a technology company selling gemstones and jewelry because we’re using technology to do that proliferation so that it’s not such a heavy lift to be in all those places. It’s not a lot of overhead, which is a smart way for us to test those waters out there in the market..

There’s a large retail in Arkansas that’s really trying to expand SKUs.

Any discussion there?.

So we are online with that large retailer that is interested in expanding SKUs. Whether that was fit in for store, I don’t know. I don’t know the answer to that. And Forever One is very much an upscale and premium brand, and so I’m not sure if that fits.

I think a lot of the work that we do online with the large retailer is a lot of our legacy goods because they are lower-cost goods set in lighter-weight metals and smaller pieces of jewelry that get the price point right. So you really have to know what your outlet is and you have to give it the right....

So then the question would be would Jet be the fit?.

So Jet is a fit and we are on Jet. We are on both Jet and Walmart, right now. They are both important. We believe they will eventually merge.

I think that the acquisition of Jet was to properly power what Walmart has been trying to do through its dot-com strategy, but right now they are two separate entities or two separate presences and we’re about -- again, I want to be everywhere where the consumer is bringing their eyeballs and so we’re in both places. Thank you, John.

We really appreciate it and always for your continued counsel, we’ll make sure that we bump up profitability as something we always talk about..

And next question is a follow-up from Rodney Baber with Paulson Investment Company..

I’ve got a question on your favorite topic, omni-channel, okay. You said in the presentation that for the business to grow, you need to get net new channels, okay. The omni-channel business model that you’ve moved into over the last two years continues to grow and it has different segments that are coming into play.

I’d like to understand when you say net new channels, are there hundreds of those, or you’ve got the major ones now, but you may be talking about just different venues that you go through and that’s a net new channel.

But anyway, jump in if you want to, but I want to understand the average spending time worrying about competing with your customer base by going into certain channel that it could have a negative impact on him if you’re online and selling some people that are buying out of a retail store or anything like that.

Does the omni-channel thing presents concerns for you or is it just a wide-open market you just got to do a good job of executing?.

Yes, I think it’s more B than A, Rodney.

What we have learned over the past year or two now, and what I learned in my prior work as ChannelAdvisor, is that the brands that succeed are those that have presence, and if we do a good job of bringing forward the Charles & Colvard brand and we speak to it and we tout it, then others that sell our brand will benefit from the awareness in the market of the brand itself.

And we have kind of a limited assortment of goods and these other partners are out there bringing very different pieces of jewelry and, so will there be overlap? Yes. Stud earrings or stud earrings right? And so as long as we’re working on price parity with our market, then we can manage to that.

If the consumer like Charles & Colvard, they want to do purchases there, that’s great. If they want to go to one of my reseller partners that sells online, that’s cool. We’re okay with all of that. But we think it’s incumbent on us to bring the brand forward and that’s part of this whole underpinning of the omni-channel strategy.

Now there are net new and as you go internationally, it becomes a very different play. Amazon, you’re going to find is in most places other than significantly in China. They do have a China presence. It’s just not working so well.

But there are other regional outlets that become net new opportunities for us as we decide to go land and expand into different regions of the world and that’s what we’re learning right now. We’re doing our homework on which ones are the best ones for jewelry and so we can figure out the best presence.

But again, the good news is it’s really a lightweight lift for us to take our listings, localize them and to push them into the sort of online channels down. Keep in mind omni-channel is not just online. Omni-channel is retail stores and omni-channel has other sort of alternative ways that you might shop. Imagine that you are shopping on television.

Imagine that you’re shopping on a cruise ship. There’s so many different ways we could be bringing this brand to market. We’ve not explored the breadth of the myriad channels we might go to. And so we think that there’s a lot of greenfield still left for us.

Now yes, we’re on all the major ones and that’s good news, right? The team has done a great job of checking the box to be on the major channels and now, there are some new ones and some big opportunities. Imagine if we can get into a really meaningful big box retailer store that’s significant for us.

So lots and lots of work still to do, but think of it this way. We’re brushing on the edge of a profitable business in the existing channels we’re in and now that we have two very strong leaders of our sales team, and we can bring incremental on top of that, then we get to the point that Mr.

Lawrence was just talking about and we’re all drinking champagne..

Can I ask you a philosophical question, then I’ll be done..

Okay. One more..

This is it. Based on the two-year transition that you’ve been executing on and now have proven out to -- in my way, if I could. The question I have for you is this thing changing and growing and all the things you’ve got going on.

When I look at Charles & Colvard in a couple of years, what kind of company am I going to own? Is it going to be what it is now, just bigger? Do you have other things that you’re going to bring into play here that could take this thing into a much bigger opportunity.

I mean, do you have -- you want to share any thoughts you and the board might have on Phase 2 after the initial transition?.

So the short story is this. We are a U.S. brand. And we’re just now growing into a jewelry brand, Rodney. We’re really a gemstone brand in the U.S. And we’re finally doing a good job of becoming a jewelry brand here in what is the United States. We are absolutely intending to be a global jewelry brand in the coming years.

So this company that you will own will have presence in all quarters of the globe. Whether that’s direct to consumer or sales, whether it’s through channel partners, we want to be again -- and when I say everywhere the consumer is shopping, I mean, everywhere. Not just here in the U.S., I mean, around the world.

Now that said, the board are very strategic people and every time we get together, which is frequently, we talk very specifically about what other innovative way we could be growing this business. Are there strategic things we could be doing to change the game? I can’t expose any of those here.

I just want all of my shareholders to know this is the level of conversation that we have each and every quarter. So stay tuned. I’m not sure which of these will become strategies that we act on, but the one I can guarantee you here and my employees are now going, ah, she’s guaranteeing.

I guarantee that we are working to be this global jewelry brand in a greenfield. The international revenue is only 7% of our business after 22 years. There’s a lot of room to grow, Rodney. And we’re very excited and very well positioned to get there.

So with that, once again, I just like to thank everyone for taking the time to participate in our call today. We greatly appreciate all of our shareholders, all of our customers, and I really appreciate the hard working and dedicated team that we have at Charles & Colvard.

Everything that we’ve reported to you here today would not be possible without the team that we have built here. And I am just incredibly proud of them and thankful for them. We look forward to being in touch and updating you on our continued progress in future calls. Thank you so much, and good evening..

Thank you. The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect..