Good day everyone and welcome to the Charles & Colvard Q2 Fiscal Year 2020 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] Please also note today's event is being recorded.

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 as 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, 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 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 the prepared remarks.

Should you have questions you would like to submit, please email ir@charlesandcolvard.com. At this time, I would now like to turn the conference call over to Ms. Suzanne Miglucci, President and CEO. Ma'am, please go ahead..

Good afternoon and thank you for joining us as we summarize Charles & Colvard's results for the quarter ended December 31, 2019, the second quarter of our fiscal year 2020.

In the second quarter, we delivered our 6th consecutive quarter of profitability, net sales of $10.7 million, net income of $814,000, or $0.03 earnings per diluted share, and a strong blended gross margin of 48%. Our direct-to-consumer channels lead our net sales performance with 12% growth over the holiday period.

Clint Pete, our CFO will begin today's call with an overview of our financial. Then I'll return to discuss highlights from the quarter here inside from our digital marketing and brand expansion efforts, and discuss our plans for the quarters ahead.

Clint?.

Thank you, Suzanne. Good afternoon, everyone and thank you for joining us. Today, I'll highlight the key financial results for Q2 2020. Additional details can be found in our Form 10-Q for the quarter ended December 31, 2019, which we expect to file tomorrow.

Beginning on Slide 5, we reported net income for Q2 2020 of approximately $814,000 or $0.03 per diluted share, compared with net income of approximately $1.2 million or $0.05 per diluted share in the year ago quarter. This was based on 29.2 million diluted weighted average shares, compared to 21.7 million in the year ago quarter.

Slide 6 summarizes net sales of Q2 2020, which increased 5% to $10.7 million, compared to the year ago for us.

In our online channel segment which consists of e-commerce outlets, including Charles &Colvard.com, third-party online marketplaces, drop ships retail, and other pure play exclusively e-commerce outlets net sell for the quarter increase 12% versus a year ago quarter, representing 57% of total net sales.

Our transactional websites charlesandcolvard.com increased 12% in net sales versus a year ago quarter. Sale through our cross border trade platform increased 19% versus a year ago quarter.

In the Company's traditional segment was consistent wholesale and retail customers, net sales for the quarter decreased 2% to $4.6 million versus a year ago quarter, representing 43% of total net sales. It's all solid performance in our brick-and-mortar channel, which was offset by softness in our international distributed sales.

Finished jewelry net sales increased 24% for the quarter and indicators that are direct to consumer initiatives are continued to produce result. Finished jewelry sales are up across multiple channels including our charlesandcolvard.com websites, third-party online marketplaces and drop ship retailers.

Loose jewel net sales decrease 15% for the quarter mainly due to a decline in demand for loose jewels from our international distributors. International sales decreased 20% versus a year ago quarter reflecting lower orders from our Asian distributors that we believe are related to the continued impact of the tariffs and geopolitical issues.

On Slide 7, our gross margin performance in the quarter was again strong. The Q2 2020 gross margin was 48% compared to 47% in the year ago quarter. Our margins have been consistent due to our healthy online channel sales including strong sales of our Forever One product on our transaction website charlesandcolvard.com.

Forever One net sales of finished jewelry and Loose jewels represented 84% of total net sales in Q2 2020. On Slide 8, we show operating expenses as a percentage of net sales at the top of each bar. The dollar level of operating expenses for each quarter is presented inside each bar.

For Q2 2020, operating expense as a percentage of net sales was 41% compared to 35% a year ago quarter. Overall, operating expenses increased 21% versus a year ago quarters.

G&A expenses decreased approximately $46,000 and sales and marketing expenses increased approximately $814,000, primarily due to the increased marketing investments as we expanded our digital marketing spend and brand awareness initiative for the quarter. Slide 9 presents a snapshot of our balances.

At December 31, 2019, we had $13.3 million in cash, cash equivalents and cash, compared to $12.6 million that's September 30, 2019 and $13 million in June 30 2019.

Since we plan to provide the proceeds from our recent equity raise over several years, we have invested the unused funds in short term investment grade interest bearing securities, and continue to do so. We recorded $45,000 of interest income in the quarter. We continue to have no long term debt and have not accessed funds through our credit facility.

Moving on the Slide 10, inventory at December 31 2019 total $35.8 million compared to $36 million at September 30 2019 and $33.7 million at June 30 2018. Loose jewels inventory was $25.3 million, compared to $24.3 million at June 30, 2019. Finished jewelry inventory increased to $10.4 million compared to $9.3 billion at June 30, 2009.

This overall increase reflects our continued invest in consignment inventory to support the growing success in our brick-and-mortar channel.

The current level also reflects the strategic decision to maintain higher end stock inventory for the recent holiday season and for the upcoming Valentine season, for channels that required immediate shipping including our transactional website, charlesandcolvard.com and for marketplaces, and drop ship retail channels.

As of December 31, 2019, 82% of our inventory is classified as new inventory, leaving only 18% of the inventory classified as legacy inventory. I would like to conclude by highlighting our upcoming proactive investor outreach efforts.

We will be presenting at several events in March and April including the 32nd Annual Roth Conference in Orange County, California, the Investor Summit in New York City, and the Planet MicroCap Showcase in Las Vegas. Please see our website for details. I would now like to turn the call back over to Suzanne..

Thank you, Clint. I'll begin with a summary of notable highlights for the quarter on Slide 12. Starting with our online channel segments, we generated 12% growth of solid performance from the year ago holiday quarter.

Online channels represented 57% of our total revenue and were fueled by new additions to our jewelry assortments and high end stock rates across all e-commerce channels. These in-stock rates were key to serving the chaotic buying patterns that we and other retailers experienced due to the compressed holiday shopping window.

As we're hearing across our customer and peer channels, having 6 fewer days in the selling season caused entirely different shopping behaviors than we've seen in recent years. Through this change in customer behavior and shortened holiday season, we were pleased to see the continued and encouraging trends of interest in lab creating gemstones.

This rings true through or selling channels including our transactional website charlesandcolvard.com where we experienced 12% growth. Our website continues to deliver more than 50% of our online sales, and the most immersive direct-to-consumer brand experience.

We initiated new and creative top of funnel awareness campaigns designed to introduce our brands to new audiences. We expect to be arrived between your introductions and the customer's first purchase. This will require us to continue to touch these customers overtime as we move them into and through our conversion funnel.

Through these digital marketing efforts, we drove a double-digit increase in web traffic over the prior year in a competitive environment where the cost of advertising and many of our key traffic driving outlets increased substantially.

New enhancements to our website such as new payment methods and self-service functions that empowered the user with visibility into order status and delivery date, enhance the customer experience, encourage sales and increase hang time on our web pages.

Throughout the quarter, we experienced new and interesting mobile shopping trends through our e-commerce site, which has helped us learn more about our consumer profiles. Mobile traffic transactions and revenue were up significantly over last year consistent with overall retail industry trends.

Leading into the holiday season, we made improvements to our mobile experience including mobile navigation optimization, search capability and category presentations.

Dovetailing these insights with consumer demographics revealed that for engagement ring shopping, women are using their phones to look at options and they're visiting our site multiple times before making a purchase decision.

Men, however, are arriving from desktop sources and often one visit, which we believe tells us she's making this selection and he's making the final purchase. This valuable device and shopping insights will influence our site development roadmap and digital marketing investments going forward.

Lastly, from our website results is cross border trade, we saw a 19% increase in sales on our U.S site from international shoppers for whom we shipped purchases internationally. Our highest performing regions remain English speaking countries including Canada, the United Kingdom, and Australia.

That said, we continue to engage new consumers from around the globe and are enjoying an influx of customers from new countries each quarter. Moving onto Slide 13, I'll address our other online channel. Marketplaces continued to be a strong contributor to our online success with Amazon being our leading performing channel.

Our marketplaces gross merchandise volume roughly doubled from that of the year ago quarter. Average order value is up 80% due to the expansion of Charles & Colvard branded jewelry and the digital marketing spend, we're applying it to boost in marketplace awareness is netting a very attractive return on ad spend.

In addition to groundwork, we laid over the course of 2019 to place Charles & Colvard on various marketplaces across the globe including Italy, France, Germany, Spain, Australia and Japan has borne fruit. These outcomes contributed to our overall Q2 performance and position us for future workplace growth.

We also saw meaningful performance across our drop ship partners to high quality placements and our partner's holiday promotion, the introduction of new products and are ready to ship status outlets such as overstock and Macy's experienced significant increases in sales over the prior year, launching just ahead of the holiday season, newcomer Belk also made significant strides introducing and selling Charles & Colvard jewelry to its loyal customer base.

Turning to Slide 14, there were several contributing factors to our online holiday performance including expanded product selection and website enhancements. We're focused on listening intently to the market demand and delivering a product the consumer is asking for.

With that mantra driving our activities, we delivered a broad selection of new finished jewelry leading up to the holiday season including bridal sets, the introduction of platinum into a full line of fine hypoallergenic jewelry and lab created ruby and sapphire options into our drop-ship program.

We delivered a substantial selection of new products into our marketplace and drop-ship program, which played a meaningful role in our attractive margin rate. We also continued to introduce new options to our signature collection, Charles & Colvard's exclusive jewelry line that features our floret logo.

This collection represented 8% of charlesandcolvard.com Q2 sales and continues to be a driver of consumer interest. We believe the continued popularity of Forever One our flagship moissanite gemstone solidifies our position as premium gemstone jewelry rebrand.

At the same time, we're pleased with growing consumer interest across the entire span of our fashion, bridal and fine jewelry with our finished jewelry sales increasing 24% over the prior year, quarter.

Prior to the holiday, we performed a significant system upgrade to our charlesandcolvard.com website with the intention of delivering the best possible consumer shopping experience. These enhancements included a store credit program for exchanges and enhanced mobile experience and new payment methods.

After credit cards, Affirm is our most popular payment method and a solution that commands the highest average order value given that approved customers can now pay for their purchase over a 36 month period as of course, they're qualified.

We're also quite excited about the launch of Afterpay, an innovative online payment method that caters to the millennial audience by allowing installment payments. The traffic we're receiving from Afterpay is creating positive lift to both traffic and revenue.

The other aspects we appreciate about these various alternative payment methods is that our partners take on the financing risk. Now, let's transition to traditional channels. This segment represented 43% of our overall revenue in the second quarter. Revenue from the segment was down 2% compared to the year ago quarter.

In brick-and-mortar we were pleased with our outcomes during the holiday season. In Helzberg diamond stores our expansion to a third foot of pace line was complete prior to holiday. And we've entered into a fourth floor in select stores.

We continue to value our relationship with retail partners as a place for consumers to become acquainted with our brand, and to have the opportunity to touch feel and try on our standard assortment. Across our brick-and-mortar partners, some of our top selling items have been bridal set, halo settings and the ever popular stud earing.

These positive outcomes were offset by a decrease in international revenue compared to the year ago quarter. While international sales contributed 10% of our overall revenue, we experienced process in our international distributor sales, particularly in the Asia Pacific region.

Due to continued tariff issues and estrange geopolitical environment, sales through our international distributors were down 36% for the quarter. We're hopeful that recent improvements in trade relations will alleviate some of these challenges.

That said, our Hong Kong-based and China-based distributors are currently being impacted by the coronavirus and we believe this may impact ongoing international distributor relations. Let's discuss the takeaways from the quarter and the key initiatives that will be our focus for the balance of the fiscal year, we'll turn to Slide 15.

As we've been describing for several quarters, we're laser focused on expanding the reach of our brand. In the September 2019 timeframe, we began activating the funds from our 2019 capital raise, leaning in on our digital marketing efforts to drive awareness of Charles & Colvard and sales over the holiday season.

Awareness begins that will be called at the top of the marketing funnel. These are efforts to impress our brand upon more consumers, so they become familiar and comfortable with the brand. Outcomes from these efforts can sometimes be hard to measure as any simply be an advertisement that doesn't require action.

But in the digital world, we do know how many impressions were making, meaning we know how many consumers saw our ads, whether they were served on a streaming video channel, popular consumer websites or social outlets. Over the quarter, we made over $60 million impressions with our top of funnel investment.

We also leaned in on the types of advertising that encourage clicks that bring consumers to our website. This gets into the territory of mid funnel or more conversion-based marketing spend. These efforts come in the form of paid search, social affiliates and programmatic ads.

Success in these mid-funnel investments could be measured by traffic to our website, which has double digit growth over last year. Increases in net use social media follower, which was up 95% over last year, and channel specific measures such as the increase in YouTube video views, which was 160% to the prior year quarter.

We're particularly pleased with this last measure as video is an excellent way for the consumer to fully understand and embrace the quality and brilliance of our finished jewelry without having to see it in person. Also, an important to us is our increase in direct traffic to charlesandcolvard.com.

This measure tells us the degree to which consumers are aware of our names and proactively comes directly to our site without the aid of an advertisement. Direct traffic on charlesandcolvard.com was up nearly 90% over the year ago quarter, a clear indicator that we're making a lasting impression.

One of the channels that had historically served us well is paid search. This is where we bid on keywords or terms on Google with the intent of winning the bid and having the ability to either have a test ad shown at the top of the consumer search results for Google Shopping ad presented.

These are the visual ads with product pictures and prices that are shown under search results page, an example of what you can see on Slide 15. This holiday season we saw increased activity and cost and paid search within the lab created gemstone space.

Including bids from moissanite-related terms on jewelry companies that primarily sell either mind or lab created diamonds, but don't carry moissanite products, and a similar strategy we also bid for created diamonds and gemstone terms, even though we may get customers who click through watching a lab created diamond products.

Simply stated, during a holiday promotional cyber time frame, it caused us more per click for key terms such as voice and I and we were able to make fewer impressions on terms that we've previously dominated.

We've learned quite a bit about the competitive paper space over Q2, and have already deployed some key changes in our advertising spend to direct consumers to our brands. In some cases, that means migrating spend to higher performing channels such as social advertising.

We can be quick and agile and pivoting our paid search strategy to ensure we're maintaining our whole position as a premium voice and brand while taking advantage of the same keywords our competitors are bidding on to win impression share.

It's still very early days as we deploy digital marketing strategies to grow long-term brand awareness, all at the same time driving near term sales and net income. We will keep you apprised of our learnings and tactics as we progress. Turning to Slide 16, I'll highlight our other areas of focus.

We remain optimistic about opportunities for expanding our international sales reach. As mentioned earlier, we're seeing meaningful traction on marketplaces with some of this growth from international region. We're activating brand awareness dollars globally and adding to our understanding of international consumers by region.

We plan to continue utilizing marketplaces as a testing ground for future Q2 investments in those regions that perform well. Product evolution is a daily focus at Charles & Colvard from our new platinum products to our standard signature collection.

A breadth of assortment is key to having something in the mix that will appeal to every consumer and having it ready to ship needs to demand are savvy and often impulse driven online shopper. We strive to deliver the most immersive brand experience and frictionless shopping environments to our customers.

This means being a proactive technology oriented company that delivers solutions at the industry's leading edge. We have a team of professionals whose dedication is focused on an exemplary online shopping experience and an exemplary customer service experience. And lastly, it's our corporate social responsibility efforts.

We continue to focus on our goal of using 100% recycled metals and our products and reached 97% over the holiday. Our new platinum and recent cancel them offerings are fully recycled and contribute to these efforts.

Based on a recent analysis of our carbon footprint and the overall impact of our business on the environment, we believe we now have a baseline from which we can improve on our practices and impact.

All of these initiatives are the focus of a company that is committed to managing its spend prudently, governing its activities with integrity, and has shareholders best interests top of mind, we're pleased to have expanded the reach of Charles & Colvard brands, made significant strides in our direct to consumer business and having delivered our sixth consecutive profitable order.

Operator, at this time, we'd like to open the lines for questions from our listening audience..

Ladies and gentlemen, at this time we will begin the question-and-answer session [Operator Instructions]..

Folks while you're queuing for live Q&A, we've had a question come in via email. Please feel free to email us at ir@charlescolvard.com, if you'd like to send in your question. So our first question relates to our digital marketing discussion and this was so noted.

In the past, you've spoken about the cost to acquire a customer and I think your numbers were in the $260 range last time. Given your discussion about increased competition, has this gone up and are your costs still within reason? Thanks for writing in as a completely fair question.

The last time we discussed what we call average ad spend per new customer was in 2019 and we were in the upper $200 range. At the time we were highly focused on mid funnel marketing and we were not yet investing in top of funnel awareness activities and those are the ones that tend to deliver a far lower return on ad spend.

So over the holiday season, our average ad spend per new customer was in the upper $300 range. So we've gone up about $100 in total costs to bring in a new customer.

This number takes into account all of the top of funnel awareness investments that we've been applying and all the efforts sticking in those 16 million new impressions that I talked about in prepared remarks. This was offset by an increase in our average order value, which is now about $1,100.

So, average order value is up a $100, the cost to acquire the consumer, it's up about a $100. So for a company focused on growing awareness in the top line, in a highly competitive space, um, I believe this is still a reasonable investment, but of course we're constantly seeking other cost effective means for acquiring new customers.

And there was a second question that came in very related, um, almost the same question, but this person also asked, how do your numbers compare to last year. As I mentioned at the top of funnel, it's really about impressions. And I had mentioned we have 60 million new impressions over the holiday season.

That is a number that is more than doubled over last year for some perspective. So, thank you very much for that question.

Operator, anything in the queue for us?.

We do. We have a question from Dave King from ROTH Capital Partners. Please go ahead with your question..

This is Gus stepping on for Dave. Thank you for taking our questions. So I'm trying to unpack the deceleration in online.

How much of a drag was the short and holiday season? And did you do kind of help us think about the split between average order values and volume?.

Between average order value and volume, okay. so thanks for calling Gus, we do appreciate it. I do believe that the compressed holiday season impacted us and it certainly impacted other retailers we are hearing exactly that from our channel partners and all of us kind of did the same thing. We started our sales early.

What we saw from the consumer is that they did not buy early. So they bought in a compressed timeframe. It did drive up traffic. So we saw more people coming in a compressed time period, but I do believe that that absolutely had an impact on our overall revenue achievement in our online channels. I will also say this.

We are doing an excellent job Gus of getting the brand out there the overall Charles & Colvard brands. We have ultimately more omni-channel places where we are selling online. And so what we're doing now is we are sharing our traffic and we're sharing our awareness across many of our channel partners.

And you can actually see some of the outcomes of that I believe it was Slide 15 in the deck, where we show some of our partners and their promotion of our brand on their site. And so what we've done is we've shared that across the others.

So the other thing that we're pleased about here is that this is a very high margin business for us or for selling online. While the number is a deceleration over last year, we're pleased with the increase in traffic. We believe this is an indicator of future transactions to come.

We're very early days in our top of funnel work to ultimately get those new eyeballs to us. But I will say this, we are still figuring out when that conversion of that net new customers to happen. As I mentioned, we believe there'll be a lag, we've not completely put our arms around what the timelines were that lag is.

It's something that we study each and every day. You get asked the question about average order value, which right now is running about $1100 compared to volume.

Clint, is that something that you can answer for Doug?.

Sure. So, the higher order value despite we've given some higher ticket items being purchases. It's just a plan. So, we continue to expand our creation of goods particularly in the fine jewelry side it and some of the offerings platinum and other jewelry selection, but it has popped up slightly on average order value..

Okay, thank you. That's helpful. And I had a couple on the sales and marketing piece.

So how much of the increase year-over-year was spent on digital versus other marketing? Was all that increase like your mark for the top of the funnel? And when should we expect that to start moving towards the bottom of the funnel? And yes, and if you could, you mentioned that you had kind of a timeline to conversion now.

Could you share how you guys are thinking about that?.

Yes. So, we actually do not know or just sensitive time to conversion. I think we saw early signs of that specifically from a traffic standpoint, less from a conversion standpoint, within the quarter. We really begin deploying those funds in September timeframe. To answer the question about how are they deployed, it's a blend across mid and top funnel.

We want to make sure we remain spending dollars in the mid funnel range. This is conversion specific ad spend, but we want to make sure that we're not just talking to people already predisposed to brands. And so that's where top of funnel remains very important for us.

If we're going to play in this highly competitive space that is lab created, we may need to make sure that we're gaining significant eyeballs and that we're just as visible to the consumer. In order to do that, we need to be in many new places where she will discover us. And so for that reason, it was a blend from top to middle.

But I will say the increase in sales and marketing was materially toward digital ad spend. It was really about helping us build the brand and to convert to consumer. But back to the very first question here, we do not yet know the full timeline to convert, Gus.

So, I can tell you it is not wholly within one quarter because that was the timeframe that we're working in here. We believe it will take longer than one quarter.

And as we learn and we go into the Valentine's Day season will learn far more about the people that began their journey with us in our Q2, and then continued their journey with us in just Q3. Hopefully that answers your question..

Yes.

And if you could kind of give us an idea, so how since the last time you've disclosed or discussed the ROIs for top of funnel versus final funnel? How are those doing now?.

So, because we're doing more spend at top of funnel, we have more people converting in that two times return on ad spend range, it blends with our mid funnel. But we're pleased to say that we're still in the 4 to 5 times return on ad spend blended.

So you look at the blend as the overall sort of benchmarks to make sure that we still are seeing returns for the dollars that we're putting in that still very healthy, but leading us enough room to continue to put those dollars at the top of funnel in order to get more eyeballs..

And one last question on the international distributors, just trying to quantify it a bit more.

If you can share like the size, can you kind of clarify what brick-and-mortar would have been up excluding that distribution customer? And related to that what has changed, I guess in the turbulent trade environment right now that's causing this? And is that something that we should be considering/baking into the third quarter?.

So, yes, we've been talking about sort of the turbulence in the Asia-Pacific market for a few quarters now. And so, we have been experiencing it and it continues here. There are certainly issues in Hong Kong, especially now with the coronavirus. I do absolutely believe that. That will continue along with the ongoing that we're seeing there.

And so we are calculating for it and expect that I could potentially have an impact going forward. Clint, how would you like to answer for the question specifically around the dollar figures for purchase order versus distributor, which we don't typically right now..

We don't, but you do have the fact that we have 10% of our revenues is internationally.

And the reason, from a standpoint of find that other detail, I mean, we kind of mentioned the decline in distributors, and as a distributors that was also planted in news and increase in cross border trade, but as far as give you extra dollars other spoke with that..

Okay. We have a question in the queue..

We do. We have a question Pete Enderlin from MAZ Partners. Please go ahead with your question..

Hi, Suzanne and Clint. It's a very interesting discussion. I recently visited a nearby Helzberg store and a couple of observations, but you had a very nice display, 4 feet, but I noticed there was especially almost all engagement rate.

So is that typical review your brick-and-mortar business generally?.

It's a great question, Pete. Absolutely, it is. So, Helzberg diamonds stores in general, really cater to a bridal customer.

And what we do each and every quarter with this partner is we go back and we look at what's sold and what is the assortment isn't matching, what is selling, and then we adjust situation that's in the case line to match the demand of the customer.

I would say in general 50%, 60% of our business is bridal across the board, whether it's in a brick-and-mortar store or on our.com site charlesandcolvard.com.

But as I've talked about sometimes here on this call, we want to make sure that we don't have just one chance to sell her a product, right? Hopefully you only get married once if you're me you got married twice. That's still only twice that we get a chance to sell you a product. And so what we're doing is we're expanding the assortment.

And if you, if you go back to that Helzberg store, what you'll find is some stud earrings, you'll find some stacker rings, you will find anniversary bands. And what this starts to do, Pete, is it builds out a lifetime value that we can create with this customer.

Not only do we want her as a bridal consumer, but we want to make sure that for every commemorative moment she or her husband is coming back for anniversary gifts, birthday gifts, a push presence for having their first child and so on.

And so the assortment is very heavy bridal because that's where we sort of meet that customer in those Helzberg stores. But the rest of the assortment is balanced and really very closely aligned with the breakout in the revenue that we generate there.

Is there a following question there?.

Well, right next to that, there was about several, the shelf space for lab grown diamonds and the store manager said, over the Christmas business, it's that -- he said, during the Christmas season, his perception was that lab grown had more momentum than moissanite.

Now the question is, is that a sort of a general phenomenon? You positioned lab grown as sort of an umbrella over the whole lab grown gem category, but do you think that had more momentum than you guys did? Or were they as affected as you might've been with some of these factors we just talked about?.

I think, let's start with the umbrella terms here, Pete. Absolutely, lab created is a movement. We have a consumer today, this, especially the millennial consumer, that is not interested in taking things out of the ground. And so there's that very much a groundswell in lab crate in general.

And as I reflected on our, how we were competing for eyeballs over the holiday, we found it far more busy and buzzy. There were other people bidding on even the moist and I term in order to bring eyeballs over to their lab created products, many of them being that created diamonds. So it's a movement, which is great news for us.

We think it's a rising tide lifts all boats. Everyone has some benefit or advantage to this movement. That said, lab created diamond and the industry is doing a terrific job of doing education out to the market and creating business and sort of interests around that created diamonds. So absolutely it's competing for eyeballs with us.

It is right alongside us and Helzberg diamonds case line. And what we've found, they've done very craftily is if you walk the full case line, you'll find they're mined diamonds, they're lab created diamonds, and they're moistened. And so for this Helzberg customer, she has three entire choices that she can make, she's in those stores.

And that allows Helzberg to not walk the customer meeting. She's going to buy something because all of the choices are under one roof. It's an exciting and interesting space to be in. we listened really carefully to the consumer and make sure we're bringing together the product mix that she wants.

And that's actually what's reflected in that case line that we have there..

Perfect. Thanks. And then I have a follow-up on inventories. Um, it looks like the legacy inventory was about track down a little bit. I would've thought that it would go down faster. And then the third is the related question, what can you do to reduce the inventory? Does it, they still seem too high to me.

And then related to that is another question, which is. Is your product line too broad? I mean, do you have -- if you're doing 60% and engagement rings, why do you need so many other different things? And wouldn't it be easier to reduce your inventory, if you didn't have so many SKU? I'll wrap with the one follow up..

Thank you. That fine. From a standpoint of the inventory, I feel like have made -- you got to realize that also we paid significant investments in our -- is what you saw the consignment inventory out of Helzberg.

If you look at where we're at 18 months ago, about 600,000, right now we're back for about 2.2 million related consignment inventory with them, and we also have loose gemstones that we introduced as well. So total consignment inventory for both of our retail partners, about $2.8 million.

We also plan to have some increase in our in stock -- we've made some strategic decision to continue to provide additional inventory in stock orders, because the requirement of the need that our transactional website as well as our drop-ship partners mean that we have to immediately shifted within a day or two so we won the deal and get those close those sales --close those sales and those customers in the holiday season.

Then your question about reduction of legacy inventory, we did reduce some kind of depends on the timing of the quarter. We're kind of focused on focused the holiday season more on the Forever One product in our moissanite by Charles & Colvard product, so that we could focus on that.

So, we will continue to -- we look at it every day from the standpoint of trying to understand making sure it has the right inventory. And then in fact that may include we feel so good on the legacy inventory that that was about 18% or $6.4 million, compared to December 31, 2017 It was already that 30% rates of our total inventory.

And then on the product line, as far as being two questions is too broad. We continue to analyze the inventory net sales. We and something that's not selling and we continue to discontinue those skews.

So we feel like, like Suzanne said in the prepared remarks, we continue to expand our signature collection which is our premier line is doing on Forever One introduce platinum. So, there is still some of those are major order, but we continue to kind of carry some of those bids in stock that we had a best knowledge..

Pete, thank you for dialing in for your question, we had another email question come in. How do your customers tell their friends about the brands and products? I love this question. Thank you. We really appreciate this millennial consumer because she absolutely knows how to share.

She passed kindergarten and she shares everything and she does her primarily on social media. So, what we love about our consumers as they become very much brand ambassadors, in fact, we don't mind selling -- sending our digital ad dollars on her because she will very vocally turn around and share with her network of friends.

Her satisfaction with the product, the quality of the product, and why she's choosing this lab created gemstone moissanite over any other choices that she has in the industry. Those voices and that customer content, we believe weighs far more heavily than Charles & Colvard telling his own story. We love it when the consumer is validating us.

So social media is a really big place where she does that. The other place where this message is sometimes proliferated is through influencer marketing.

So if we are engaging an influencer and not just paying someone to tell our story, but truly finding influencers that love what we're doing in an ethically sourced product and love what we're doing, because we are not a mind gemstone, we have that alignment. And then we can work with that influencer to tell their audience what it is we're doing.

Very recently, we did a promotion through an organization called Babble Box and they brought it up into I think it's proximately, 20 different influencers. Each of these influencers can be what's called micro influencers.

They may have 15,000, 20,000 people in their network, but when you have 20 of them and you add up then it becomes meaningful things. And so we work through organizations like Babble Box that do the heavy lifting of bringing the right influencers to us. And then sometimes there's a few organic when that happens.

I think last time we were in our earnings call, we talked about JWoww, who is Jenny Farley, one of the housewives from New Jersey. She had reached out a few quarters ago. We worked together with her on a beautiful hoop earring. She loved them so much. She came back and we do further work with her. She has a network of over 7 million followers.

So this type of proliferation of message is really well handled through influencer marketing and social media. So you will see us continuing certainly to do more of that and leaning in on customers who are happy to share their story. Thank you for that.

Operator, do you have any other calls in the queue?.

We do have an additional question from Mike Schellinger from MicroCapClub..

Yes, I have a question related to the drop and loose jewelry sales, which were mostly attributed to Asia. I'm kind of interested in more color.

I guess, was there a change in tariffs? Or was it you know, related to the tariffs, the tariffs and groceries? And I guess sort of furthermore, I don't think there's my understanding is there's a lot of men a lot of sources of noise and a lot of turnover.

Doesn't like, I don't think it's like there's a lot of sources, they could have gone to China, but maybe I'm wrong..

Clint, do you want me to take that or do you have it. Okay, I'll go. First of all, Mike, thank you for dialing in and thank you for the question, we appreciate it. We went off patents here at Charles & Colvard, we had at one time then the global resource for taking silicon carbide, shaping it into gemstones and bringing it to market.

We had a worldwide patent for that. We want off patent about 3 years ago, here in the U.S., 2 years ago in Greater China. Since that time, we absolutely haven't seen Chinese voice and I coming to market. There's a few other sources around the globe better that are trickling some in.

So we're not the only source anymore, we are still, we consider ourselves we believe with a premium source. Certainly as we buy other materials off the market, which our supplier contract allows us to do. We're reviewing and testing and evaluating what is coming to market.

To date, we've not seen very high quality forever one equivalent products coming to market. But what is coming to market mind is a lower quality product at a lower price. So as you search for voice and identity and you find it on the internet, whether it's on Amazon, eBay or otherwise, you'll find a variety of choices.

Some is from us, some is from our resellers, and there's absolutely a collection out there that is from other third parties coming out of China. That said, the question about why is loose gem numbers down in general? It is because loose gems are sold primarily through distributors.

Those are third parties in the jewelry space that then sell those goods into independent jewelers. And the independent jewelers will take the gemstone put it into a finished jewelry piece and sell it to a consumer. The overall distributor business is down and the area of the world that is most down is in greater Asia Pacific.

We reported it last quarter. This is the second quarter in a row where we're seeing those numbers down. And so that's driving down the sales of loose gems in general. It's simply an outcome of our overall traditional channels, experiencing some headwinds..

Thank you..

All right. I think that we have another question here. Let me go to -- let me see here. This lister asked. What type of joint advertising and promotional agreements do you have with your partners? This is a great question and if you go to back to Slide 13 in the accompanying deck, you'll see some examples of that.

In these specific examples, Charles & Colvard is featured prominently on our partner's websites, during the holiday season.

And these are the types of opportunities that are typically co-funded and we put together with co-op dollars, but every one of our partners will sort of certified a marketing investment knowing that we will be afforded opportunities to have great placement on website or to co-promote into our partners network.

And that's very much a network that may be new to us, use the example of a Macy's that you have here. Macy's is just a little over a year old with us. It's a customer that is still very new to us. We love the opportunity to get in front of her.

So we have these dollars set aside, these collect dollars per account so that when these opportunities arise that we can take example advantage of them. Another example we just talked about social media. There are social media activities. We can do email activities; we can do even direct mail campaigns. Direct mail is still a thing.

We have certain partners that will create a brochure at holiday time. We get the chance to be featured in that brochure it goes in the mail. We don't get to see that mailing list, but our partner then mails us out and we create an exposure opportunity. And that's when the partner will feature us and we get, again introduced to the network.

But, these are not always monetary investments. What we can do at times is co-marketing with our partners. Very often we'll have a partner that will come forward. We had an example last year where we did some trunk show.

When we were promoting those trunk shows, we actually went out to our social media channel in that region to promote that we would be in a store or partner promoted into their existing customer base that we would be in the store collectively. We both marketed to an end that brought people into the trunk show in order to create traffic.

So there are lots and lots of ways that we're leveraging our partner networks in order to create better exposure for Charles & Colvard. Let's see another writing question here. I think we have time for a few more. What have you learned with the introduction of lab created ruby and sapphire? This is a great question. It has been successful.

Two quarters ago we talked a little bit about beginning to introduce color into a very select collection of our channel partners. We put this in our drop ship program so we go to very specific places. What we have found is that there's absolutely a customer for lab created rubies and sapphires.

These gemstones are exactly the same chemically as the ones that come out of the ground. They just happen to be made in a laboratory. So they are sympathized or called a synthetic. Much like moisten eye is a very rare mineral. There's not enough of it in the ground. So we created in a laboratory and our stone is a synthetic.

We began to sell through this product in our online structure channels over the holiday to a level of success, where we are actually ready to expand that program. We will expand not only the style as we went out in a very careful test. She said yes, with the product sold, and we are now introducing that into additional channel partners as well.

So expanded products and expanded channels. This is just yet another validation that lab created is now a very accepted things. And that we're certainly on the right track to introduce a breadth of products to our customers.

Do we have time for one more? Operator, do we have anybody else in the queue?.

At this time, I'm showing no questions through the telephone lines..

Okay. Well then let's go to final remarks here. We want to thank everyone for being with us this afternoon. We greatly appreciate your interest and your investment in Charles & Colvard. And we look forward to updating you on our progress next quarter. Thank you and have a good afternoon..

Ladies and gentlemen, that does conclude today's conference call. We thank you for joining today's presentation. You may now disconnect your lines..