Good day, and welcome to the Charles & Colvard Q4 and Full FY 2019 Earnings Call. [Operator Instructions] This earnings call 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 earnings call does not constitute an offer to purchase any securities nor a solicitation of a proxy, consent, authorization or agent designation with respect to a meeting of the company's shareholders.

Accompanying today's call is a supporting PowerPoint slide deck, which is available in the Investor Relations section of the company's website at ir.charlesandcolvard.com/events. The Company will be hosting a Q&A session at the conclusion of prepared remarks. Should you have any questions, you like to summit please email ir@charlesandcolvard.com.

Please note, this event is being recorded. I would now like to turn the conference over to Suzanne Miglucci, President and Chief Executive Officer. Please go ahead..

Good afternoon and thank you for joining us as we summarize Charles & Colvard's results for the fourth quarter ended June 30 and our full fiscal year 2019. Before I begin, as you may know the Research Triangle area in North Carolina is experiencing some increment weather today due to Hurricane Dorian.

In the event we're dropped from the call, we do have contingency services in place and we should be able to rejoin in short order. We thank you in advance for your patience. Let’s begin.

In the fourth quarter 2019, we generated strong revenue growth, excellent gross margins, continued robust performance from our international sector and our fourth consecutive quarter of profitability.

It was a pivotal year for Charles & Colvard as we solidified our direct to consumer model and secured the capital that will help us catapult our business forward. Clint Pete our CFO will begin today's call with an overview of our financials.

Then I’ll return to discuss key highlights from the quarter and year to share with you our vision for fiscal year 2020.

Clint?.

One, we invested in our consignment inventory related to the continued success and expanding sales through our brick-and-mortar channel; two, we have planned higher in-stock inventory to drive increased net sales for our transactional website, charlesandcolvard.com; and three, we are building inventories of our Moissanite by Charles & Colvard product line to support our drop-ship and marketplace outlets.

At June 30, 2019, 79% of our inventory is classified as new inventory, leaving only 21% of our inventory classified as legacy inventory. Legacy inventory is down 37% from December 31, 2017. In summary, we generated strong positive results in our business during the recent quarter and fiscal year.

We continue to be proactive in our outreach to the investment community, conducting numerous investor briefings, including roadshow meetings related to our recent follow-on public offering.

A key benefit of the financing was the addition of more than 25 new institutional investors and a number of new family, office and high net worth individual investors who participated in this financing. This improves trading volumes and liquidity of our stock for all stakeholders.

In addition, ROTH Capital Partners initiated research on Charles & Colvard. We plan to attend additional investor conferences in the coming months, and we'll continue to actively meet with members of the investment community to increase awareness and interest in the company. I would now like to turn the call back over to Suzanne..

Expansion of brand awareness. We are laser focused on expanding the reach of our brand and digital marketing will be the leader - will be leading this charge on a global scale. International sales reach. It's very early days for Charles & Colvard internationally.

We'll be working on our omni-channel presence so there's plenty of places for the consumer to learn about and transact with our brand. Product evolution. We'll continue to listen intently to our customer audience, and deliver products that meet consumer demands. Enhanced customer experience.

The consumers' experience with our brand can make or break their viability as a lifelong customer, so we need to ensure that every interaction is engaging, rewarding and beyond their expectations. We'll be focused on several aspects of the customer journey, including digital and customer service experiences.

And lastly, corporate social responsibility. As mentioned earlier, we plan to work toward 100% recycled metals, improve our environmental footprint, support our local and business communities through philanthropic programs, and create transparency of these activities for our stakeholders.

Over this past year, we've seen the compelling results from our omni-channel distribution strategy, the promise of measured digital marketing efforts, and the impact of market-driven products. We look forward to taking these learnings and our investment capital and applying both to a year of expanding brand awareness and top line growth.

This concludes our prepared remarks. We'd now like to open the call to take your questions.

Operator, would you please poll for questions from our listening audience?.

[Operator Instructions].

So while we're waiting for you to fill the queue, we do have an e-mailed question that we thought we'd begin with. We were asked why we decided to issue equity rather than take on debt given our clean balance sheet. Clint, I'll ask you to address this question, please..

Sure. Thanks, Suzanne. And good question because we've been asked this question several times since our capital raise. In fact, we actually went down the path of taking on debt as was our first choice for capital growth.

But what we learned is that the cost of capital related to the debt wasn't favorable to us due to the aggressive time line on the payback of the debt. And also in addition to that is various potential terms, such as warrants and capital restrictions that small companies such as us face.

So in bottom line, after a very thorough evaluation, the Board and the executive management team actually elected to go with a capital - with the equity raise and that also helped us with continue to be debt-free. And one more other thought.

In addition, executing an equity raise also allows us to expand the numbers of shareholders, and particularly institutional investors, which we did get quite a few participate in the offering and which we believe will benefit all shareholders, as I mentioned earlier in the call, through increase trading volume and liquidity over the medium and long term..

Thank you, Clint. Operator, do we have anyone in the queue..

Yes, it looks like we have Dave King from ROTH Capital. Please go ahead..

Thanks for taking my questions. I guess, first off on the traditional growth you had this quarter. Looks like you guys had a fairly nice lift there.

Just curious how much of the benefit was due to a transition from consignment to asset-light? Or maybe a better way of looking at it, what was the sell-through or rate of sell-through through your brick-and-mortar channels versus that, I think, 30% growth you saw?.

Thanks, Dave. We saw from that standpoint on the Traditional side, the upside, we are seeing excellent results related to our brick-and-mortar channels. We don't disclose - although we don't disclose subchannel type of metrics, except for charlesandcolvard.com, we did see some very strong sales continue through Helzberg as we do the expansion.

As far as - we did not see - we saw very little related to that asset from the conversion - from the consignment model this quarter. And it's going to be quarter-by-quarter basis when they do that flip. But we were actually successful in getting to our partners to actually - retail partners to do this..

And let me jump in. As Clint mentioned, the work that we're doing with Helzberg, and we actually have another question in the queue and it probably all plays into the same question here, so I'll address that, so any update on Charles & Colvard's partnership with Helzberg. We are seeing a continued and very nice relationship with Helzberg Diamonds.

As I think most of you that have been on these calls before know we started in their online channels. And then in October of 2016, we began in stores. It was 25 stores, then it 50 and 100 and then nearly all of their doors which is about a fleet of 200.

But I'm proud to say that we have gone from 1 foot of case line to 2, and now we're pretty much 3 feet of case line in most all stores, and there are some that are taking on a fourth foot of case line.

And what this means is that we continue to grow the footprint in a number of styles that we have in this store, which then continues to address a broader audience preference with this sort of variety of goods. So as Clint mentioned, while we don't necessarily share numbers from individual accounts.

This one is a very nice account for us that's performing well. It's a good synergistic mutual relationship where we are bringing accretive business to Helzberg, and in turn, they are giving us more and more exposure. We kind of think of it as our showroom. Charles & Colvard doesn't have a physical showroom of our own.

But almost any American can get in their car and within 2 hours' time, see Charles & Colvard product in a Helzberg Diamonds store. So we are thrilled with that one..

Okay. That's great to hear. Shifting gears a bit.

On the marketing front, to what extent did you start to lay into marketing subsequent to quarter-end and into July and August? And then I guess more importantly, what sort of ROIs are you seeing there? Have you started to accelerate it at the top of funnel yet? And how the ROI has been there versus what you've seen previously?.

Yes, it's a great question, Dave. So we're only now beginning - and of course, we've got - we did a deal or do the capital raise in June, sort of second part of it, and a little bit into July. So we really didn't start additional spending until the July time frame. And so we're slowly sort of burning it in, and we are careful investors here.

So we want to make sure that the dollars that we are putting in are giving us that return. We are continuing to see a 2x to 8x return on ad spend, so that's not changing much, Dave.

What changes now as we get into holiday and we start to lean in and work more top-of-funnel is that we're spending more in the 2x range than we are in the 8x range because the 8x range is the people that already know us or are predisposed to the brand. And the conversion rate is more in the 2x return ad spend or the people that don't know us yet.

And as we ramp for holiday, that's really where we want to put our efforts. We're excellent marketers when it comes to converting people that know the brand. But we simply need more of those eyeballs in the pipeline and that's what we are going to be focusing on. The things for folks to understand is that, that takes a little bit of time.

So it can take 8 to 16 weeks for somebody that sees us for the first time to convert. So the effort is going into the sort of the quarter that we're in and that we're looking for the holiday quarter to start to really reap those rewards. Hopefully, that answers your question..

Okay, that that helps. And then I got one, I've got one more if I would sneak it in..

Sure..

For Clint, in terms of the - I think it was like $3.1 million or so of OpEx during the quarter, how much of that was outside either related to the capital raise or other items, if anything?.

I'll tell you probably that items that were not capitalized to the balance sheet, Dave, I'd say that estimated between $100,000 and $150,000 that we do spend related to that, maybe a little lighter than that probably under $100,000..

Okay.

So just in terms of trying to think about what a good run rate of expenses going forward then is a little bit under the $3 million a quarter or something? The right way to think about it?.

Can you say that again, Dave?.

Sorry.

So in terms of run rate of quarterly expenses on a go-forward basis then is the right way to think about it, sort of, a little under $3 million then quarterly in terms of core expense OpEx?.

What we ended up, like I said, we were pretty flat the last year or a quarter. But as we continue, you should see the increase in marketing spend as we put some more fuel on the fire related to driving that top line and top of funnel.

So from the standpoint, you've got to factor that in related to start looking at quarter-over-quarter trends related to our OpEx..

Understood, okay..

Okay, Dave, appreciate you calling in.

Operator, do we have someone else in the queue?.

The next question comes from [Mark Scanlin], Private Investor. Please go ahead..

Good afternoon, Suzanne, congratulations on a very good year and a great quarter. Very interested in hearing more about traditional expansion. I definitely have a lot of respect for what you're doing digitally, but it seems like Helzberg is doing extremely well.

Are there any conversations going forward, with larger entities like perhaps the Sterling Signet Corporation?.

So we talk with everyone that will take our phone calls. And then when they don't we try calling them back again. So by all means, we are actively pursuing the traditional sector. In the U.S., going directly to these retailers makes sense and we're building and working on those relationships.

Internationally, we've spent a little more time and effort going to our distributors and asking them to do the job of bringing the brand forward because they speak those local languages and they know those outlets pretty well.

But by all means, we're not throwing the traditional baby out with the bathwater because it has been a very healthy and growing business for us. Certainly, not growing as rapidly as we are in Online Channels. We started from 0 and so it's kind of - it's a net new and shiny object for us and a great way for us to get some growth.

But there is absolutely work for us to do on the retail side of the business, and retail is a vast place. And so I think that you can expect over the coming year to hear more about these efforts. It's a blended effort, and as you'll see right now, 50% of the business roughly is traditional, 50% of the business is online. It's a great balance.

And what we're thrilled about is the fact that we built this omni-channel strategy where we're not relying on a few elephants, if you will, that bring us our revenue. We are now very nicely balanced across these multiple channels. But a nice big additional retailer would be a nice boon to us. So certainly something that we're focused on..

Thank you..

You’re very welcome.

Operator, anyone else in the queue?.

That’s it for the queue..

All right, I think we had one more write-in question here. Give us a second here. What is the most exciting growth opportunity in an online channel? That's a good question. Thank you for writing in on that one. And we love the write-in questions. So please don't ever hesitate to send in your questions to ir.charlesandcolvard.com.

I think the most exciting opportunity in online channels and you're going to maybe be surprised at my answer. It's not landing a new marketplace or a new outlet to sell through. It's the relationship, we're building with our consumer. The most exciting thing is talking to her directly.

And having that dialog and then through the dialog, having her embrace of the brand and then creating her own content and user generated content where she's bringing the brand forward and becomes an ambassador. And the more brand ambassadors we have driving this brand to market.

The less we have to talk about it ourselves and the more the consumer can lead the charge for us. So I would say that's one of the most exciting things and why top-of-funnel marketing activities are important to us because that it gives us a chance to be in front of more consumers and to then to initiate that dialog.

So thanks for the writing question. Operator, I think we have one more in the queue..

Rodney Baber, who is a Private Investor is just out. Please go ahead..

Suzanne, how are you?.

I’m good, Rodney. How are you, it has been a long time..

No, congratulations for you and the team on the progress that you've been making because there's a lot of good in this report and the margin improvements, expenses being under control all those kind of things. For those that have been around for a while, we've been watching that and you've delivered on this. So our congratulation for that.

The thing that's on my mind is you've got the company through a transition and in a pretty good position to grow. And so how are you going to get the revenue growth up? It's going to bring attention to this and one of the things that's been on my mind is when will the Millennials kick in and really wake up to the value of this product.

And so I wanted to ask you for kind of a state of the union update on the Millennials because I have heard with that lab-created diamonds coming down a lot, that they're almost getting competitive with Moissanite and there may be more interest in lab-created diamonds that I was thinking would evolve.

So what is the status of that because it's the Moissanite market ever really takes hold. This will have that J-curve thing, we’re going to look in for. So I'd love to hear what's your recent thoughts are on that..

Yes, sure Rodney, that's a great question and probably something a lot of the other folks on a call would be interested in. So the growth is going to come in the expansion of brands. And that's where that the proceeds are really going to play a role.

So how are we going to do more top of funnel marketing to bring awareness to it, and that's where the Millennial sits, right? She's at that social media intersection where we're going to meet up with her and we're going to present the brand. More than 50% of our online channels revenue comes from this Millennial an emerging Gen Z consumer.

So she's here and absolutely the dollars and the margins that we're making in online channels is coming from that Millennial. So while other retailers may be having challenges, I'm not sure where the data is coming from. For us, it is where we live. The Millennial is absolutely the consumer that is making things happen here.

So I think that on a lab-created diamond side what was happening here Rodney is we're seeing a lift from the buzz and the interest that's happening in the market and lab created diamond. But let me share some recent numbers with you.

So we know that our two carat Moissanite gemstone at our highest possible quality is going to cost that consumer about $1,500. A comparable lab-created diamond is going to be about 21,000. So there's still a lot of space between our product and lab-created diamond.

So what we love is that there's a lot of others and money where people like to be or just talking about lab created products. And then when she does her homework and figures out the difference in price, yet she still gets an ethically sourced stone. I think that's when the interest comes back here.

We do know that De Beers is putting some downward pressure on the overall market, but they're doing it in kind of a segmented way. They are bringing forward some price points that do maybe compete with us but I would say they really don't because they're working in below one carat space.

Most of the jobs that we have, most of the products that we sell into our consumer are one carat and very much two carat and above.

So the value proposition of Moissanite is that you can buy a really big look and get a terrific stone that sparkles more than anything else and you can get it at a greatly reviewed price from what the lab-created producers are bringing to market at one carat and above.

So there's still a lot of room there, Rodney and I'm not too worried about.downward pressure..

I will make sure I'm clear on this. You said one carat Moissanite is $1500 and then you said a lab created was $21,000 and I thought the lab-created valuation which would be more like $2,000 or $3,000 still much ahead of Moissanite but you can buy a diamond for one carat for 21,000. So I want you to clear that up for me..

Yes, okay. It has to do with the quality of the stone. So Forever One, our premium product really has no flaws in it. So we're comparing ourselves to a lab-created diamond that equally doesn't have flaws.

So when we have that perfection of stone, D-E-F which means basically colorless and what's called VVS quality, which is basically flawless gemstone $1,500 for a 2-carat Moissanite from Charles & Colvard and Forever One and 21,000 or so from our lab-created diamond purveyor. So that's again, that's a quality play.

And you can find Moissanite that is a lower quality. And you can certainly find lab-created diamond, that's a lower quality. But that's very much how the consumer knows how to grade a gemstone. It's the same way that we've graded mined diamond for years.

And so when we use that scale, and we're up here with a premium product, and we're at the top of the scale, we're competing handily, with the right price point and the right product..

One final thing real quick, the average ad spend was $220 per customer. Okay. I'm not an expert on digital online, all the marketing and the cost of it.

But that that sounded high to me that that is that where you expected that to be? Will that go down over time as you scale? That kind of thing? Or is that what it takes to get a new customer in using the digital social media approach?.

Yes, so look. Yes look you did good. 220 was the number that we had quoted, we feel pretty good about that number from a comparison standpoint with some of our peers. I think that we're very competitive, if not at a better number than others. I would have you turned to some market research that would maybe validate this for yourself.

But I would expect so you ask the question, I would expect that that number might go up in the short term. And when Dave King asked his question about where we're spending money, the answer was we're going to spend more money at the top of the funnel where the $2 return on ad spend happens.

The more we do that, the more the price is going to go up because she's going to be clicking on ads or she's going to be engaging with ads. So we’re spending more money to get her because we’re spending by the click or by the drink if you will. So I do anticipate it may go up a little bit over time and then it will probably then blend out.

What happens though and for those of you that understand digital ad spend what happens is, it’s a little bit expensive then to bring in those new folks but they may raise the traffic and they may raise our organic traffic into the site.

And so we blend it out and I do anticipate we’re still going to blend out at two to eight times return on ad spend and it’s all going to come out and wash. So we feel pretty good about that investment and again keep in mind our average order value is $1,000.

So we think it’s good math we are spending 220 to get a $1,000 deal, and I will do that all day along Rodney..

Okay, good. Well thank you very much good luck for Christmas and everything..

Thank you very much..

Thanks Rodney..

Operator, do we have anyone else in the queue?.

We do not. That was the last question..

Okay well, let me just say some final remarks here. I want to thank you all for joining us on the call today. I'd like to take a moment to extend my sincere thanks to the amazing team here at Charles & Colvard.

I appreciate everything that these folks have done to deliver this profitable year to our shareholders, and I am looking forward to an exciting New Year focused on growth. To everyone on today’s call, we appreciate your interest and investment in Charles & Colvard and look forward to being in touch to update you on our continued progress.

Thank you and have a good evening..

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