Good day, and welcome to the Charles & Colvard Q4 Fiscal Year 2020 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions.

[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 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’d like to submit, please email ir@charlesandcolvard.com.

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

Good afternoon, everyone. Thanks for joining us today. I hope you and your families are doing well as you navigate these trying times. Today, we're going to report Charles & Colvard’s 2020 Q4 fiscal year-end results. Before I summarize things for you, I'd like to take a moment to introduce myself as the new President and CEO of the company.

It's important to note that, I've been with Charles & Colvard for the past four and half years, most recently as Chief Operating Officer and Senior Vice President of Supply Chain. In this role, I was responsible for all goods and services from concept to creation, while overseeing every aspect of operations and order fulfillment.

I spearheaded the teams that drove innovation and product design, implemented efficiencies and transform business processes that led to six quarters of profitability prior to COVID-19 pandemic. As CEO, I'm leveraging this experience, plus the expertise I've gained over 30 years in the jewelry industry, serving in multiple capacities.

I've owned and operated large-scale jewelry companies, led global supply chain businesses and managed a jewelry television shopping network.

I spent seven years as Vice President of Operations and Procurement, both foreign and domestic with the Richline Group, a wholly-owned subsidiary of Berkshire Hathaway, and served on Richline's Executive Steering Committee and acquisition team.

What does this mean? It means I'm confident that I have the experience and the ability to lead this company to the next level. Now let me speak to the business highlights. First of all, let me address the impact COVID-19 had on the fourth quarter.

Without a doubt, the pandemic hindered our revenue performance in Q4 and impacted how we finished the year. Even though, we had limited business operations throughout April and May, in June, we were able to capitalize on the growing e-commerce demand by expanding our in-stock product offerings with our online channel partners.

This shift helped us generate $4.4 million in revenue by the end of the quarter, even though our traditional segment was severely impacted by the global shutdowns. Although this decrease was from last year, our margins remain healthy at 41%.

After taking over as CEO on June 1st, my primary goal was to address near-term challenges and capitalize on our core strengths. We had to define business requirements to better position us for our future state.

How do we do this? We focused on fortifying our foundation in order to weather the immediate effects of COVID-19, and we acted quickly to stabilize the business in order to strengthen our position heading into our new fiscal year.

We immediately began to right-size the business across the board from personnel to expenses, to contracts, to obligations. We had to contract in order to expand. These actions helped us generate a positive cash flow from continuing operations of $1.8 million for the quarter, increasing our cash balance.

This enabled us to end the quarter with a strong $14.6 million of cash, up from $11.9 million at March of this year, giving us what we believe to be sufficient liquidity to sustain and scale the business accordingly. As for the downsizing, we defined and executed a go-forward resource plan that was more suited for the size of our business.

This reduction in force included executive and senior level employees, along with some employees who had previously been furloughed. Next, we secured and closed on a $965,000 PPP loan to help absorb the impact COVID-19 had on our cash position related to salaries and expenses.

Additionally, we worked with our partners at Cree to restructure our supply agreement. This allows us to level load our existing obligation into the two-year option period of our supply agreement. Giving us the flexibility to better balance our raw material against our demand throughout the next five years.

And then we were able to focus on our core strengths, making data-driven decisions to generate revenue on our direct-to-consumer channels. Here's what we did. We shifted our advertising dollars away from top of funnel campaigns to focus on targeting consumers who are more likely to convert.

We ramped up our virtual consultation services after recognizing its immediate success by allowing us to connect with our customers in a more personal way. We shifted our social media strategy to become more active and to further engage with the consumer across multiple social channels and platforms.

We believe this is crucial to growing our brand and capturing the additional market share. I'm confident that our efforts in these areas drove the positive trends we saw in June, despite the quarterly decreases we are reporting. At this time, I'd like to turn the call over to Clint Pete, our CFO, for an overview of our Q4 financials.

Then I'll return to lay out the strategic initiatives for the coming year and define the company's plans to manage through our anticipated recovery.

Clint?.

Good afternoon, everyone and thank you for joining us. Today, I will provide a summary of key financials for our fourth quarter and fiscal year ended June 30, 2020. Additional detail can be found in our earnings press release that will be issued this afternoon and our Form 10-K, which we expect to file tomorrow. Now let's get to the numbers.

Please note that all percentage comparisons are to the year-ago fourth quarter, unless otherwise specified. We will start with revenue, which was primarily impacted by the COVID-19 environment, including the closure of our corporate headquarters in early April, due to the mandated North Carolina stay at home order.

As Don mentioned, we had some limited e-commerce business in May – April and May. And then as we are able to reopen operations in June, we began to see increasing revenues in our online channel segment. In total, net sales for Q4 2020, totaled $4.4 million, or a decrease of 42%, primarily due to the closures and the disruptions in the supply chain.

In our online channel segment, which includes charlesandcolvard.com, online marketplaces drop ship retail, and other pure-play outlets, net sales for the quarter totaled $3 million or a decrease of 18%, representing 68% of total net sales. Net sales from our transactional website, charlesandcolvard.com, decreased 22%.

In the company's traditional segment, which consists of wholesale and retail customers, net sales for the quarter were $1.4 million or a decrease of 64%, representing 32% of total net sales. Finished jewelry net sales decreased 20% for the quarter.

We saw declines in our direct-to-consumer sales, as well as with our brick-and-mortar partners whose retail locations closed in March and had limited openings in June.

Loose jewel net sales decreased 63% for the quarter, mainly due to a decline in demand from our international distributors during the entire quarter related to COVID-19 and then from our domestic distributors who continue to feel the impact.

International sales decreased 86%, as we continue to have limited orders from [Asian] [ph] distributors, combined with a 48% decrease in cross-border sales on our transactional website due to global closures put in effect.

Moving on, we delivered solid gross margin performance, primarily driven by improved pricing in our drop ship and marketplace channels. Our gross margin for Q4 2020 was 41% compared to 44% in the year ago quarter. As Don mentioned earlier, we took swift actions to reduce dramatically, as we adjusted for the impact of the COVID-19 pandemic.

For Q4 2020, total operating expenses decreased 11%. Sales and marketing expenses decreased approximately $549,000, primarily related to the significant reduction in the top of funnel digital marketing ad spending.

G&A expenses increased approximately $190,000, primarily related to the non-recurring impact of severance and stock-based compensation costs from our CEO transition and severance cost for the reduction in staff. That reduction decreased our active work force by approximately 25%.

These actions increased expenses in the quarter by approximately $580,000, but this will result in a lower expense base going forward. We have reductions in other expense categories, including bonuses, Board retainer fees, travel and entertainment and bad debt allowance.

Next, we reported a net loss for Q4 2020 of approximately $1 million or negative $0.04 per diluted share compared with net income of approximately $160,000 or $0.01 per diluted share versus the year-ago period. The net loss for Q4 2020 was significantly impacted by the previously mentioned non-recurring severance and stock-based compensation expense.

For the full fiscal year of 2020, we reported $29.2 million in net sales, a 9% decrease from fiscal year 2019. There were two noteworthy trends for the full year that I'd like to highlight today.

First, in our online channel segment, net sales for the fiscal year 2020 increased 2% to $16.6 million or 57% of total net sales, up from 51% of total net sales in fiscal 2019, highlighting our positive shift in e-commerce driven business.

Second, finished jewelry net sales for the fiscal year end 2020 increased 9% to $16.8 million or 57% of net sales, up from 48% of total net sales in fiscal 2019, highlighting our continued growth in direct-to-consumer sales. Now, let's move on to a snapshot of our balance sheet.

Our liquidity continues to remain strong as we ended the year with $14.6 million of total cash compared with $13 million at our last fiscal year ended June 30, 2019. Our cash flow from continuing operations was a positive $1.8 million for the quarter. That's before the proceeds we received from the Payroll Protection Program or PPP.

This favorable performance is the result of aggressively managing costs and cash outlays to match the current trends in the economic and retail environment. As Don discussed, we closed on an SBA loan in mid-June due to PPP under the CARES Act with total proceeds of $965,000.

With these proceeds, our total increase in cash, cash equivalents, and restricted cash for the quarter was $2.7 million. In terms of other sources of liquidity, we currently have a $5 million asset-based credit facility with White Oak Commercial Finance. As of June 30th, 2020, we have not accessed funds to this credit facility.

Inventory at June 30th, 2020 totaled $30.6 million compared to $31.7 million at March 31st, 2020 and $33.7 million at June 30th, 2019. Loose jewels inventory was $20.8 million compared to $24.3 million at June 30th, 2019. Finished jewelry inventory was $9.7 million compared to $9.3 million at June 30th, 2019.

In summary, we feel confident in our financial strength and our ability to navigate the current environment so that we are positioned for growth and profitability. With that, I'll turn the call back over to Don..

Thanks Clint. I'd like to speak to the future state of the business and outline some of our strategic initiatives for fiscal 2021. Our focus is on growth and increasing shareholder value.

We plan to execute on our strategic vision and expand in multiple waves to become a globally recognized fine jewelry brand with quality products and beautiful designs that appeal to the masses. How do we do this? We do this by expanding our digital presence.

We plan to be more visible to our customers on social media platforms and on our website, through live streaming and live events. This will allow us to showcase our product in real-time. We plan to increase our digital properties through acquisition or by building additional direct-to-consumer websites.

For example, we're developing moissaniteoutlet.com as part of our disposition strategy to sell our more value-oriented products. Next, we plan to increase our customer engagement. We intend to continue to scale our virtual consultation services for the holiday season. We want to capitalize on what has proven to be a viable revenue driver.

And we're planning to develop a digital ambassadors program to incentivize our loyal customers to promote Charles & Colvard to their friends and family. We're also going to regain our focus on our product offerings.

With that said, we intend to concentrate on and elevate our innovative product brands such as Forever One in our patented signature collection. We believe we will achieve this by doing a better job of educating our consumers on the premium quality, while showcasing the value-add that Charles & Colvard brand encompasses.

We intend to bring forward new products that align with our core values that help diversify our current assortment, thus, expanding on our opportunities. And lastly, we're going to focus on disciplined growth.

We plan to continue to engage in strategic partnerships within the industry, to be able to capitalize on market opportunities where and when it makes sense. We intend to define and develop a strategic acquisition growth plan that will create sustainable long-term value for our shareholders.

We plan to expand on our omnichannel reach by securing additional retail partners, giving our customers additional opportunities to experience our products firsthand.

With change comes opportunity and now we believe we're well positioned to cease such opportunities that will allow us to serve a broader and more diverse consumer base, while keeping a keen eye on our profitability and top line growth. Thus, we believe, we will capture a greater market share within the fine jewelry space.

With that, I'd like to turn it back over to the operator and open the lines for your questions..

We will now begin the question-and-answer session. [Operator Instructions] The first question is from Gustavo Gala with ROTH Capital Partners. Please, go ahead..

Hey. Good afternoon, guys. Congrats on a solid quarter. So just wanted to check in and see how are AOBs trending in this new environment.

How is she shopping differently in terms of bracketing her prices? And just overall, how are demand trends going into the quarter? I mean, we had those solid same-store sales number for Signet earlier today, just wanted to see how you guys are thinking of stuff?.

Yes. So I'll go ahead and address that. So the AOBs are holding really strong. I mean, we're keeping steady on that. And that's basically primarily the product mix too as well, so we're making conscious decisions as to what products we're bringing forward, to try to keep that where it is.

And primarily in the bridal business, it's generally a higher ticket item. So we're very pleased with the AOB where we're at currently. It's hovering between the $1,000 to $1,200 range, which has been very, very consistent for us for quite some time..

Yes. No, I mean, that sounds super healthy. And, I guess, along the same line of questioning. How is the -- so, I mean, the shift to the higher ROI, bottom of the funnel.

Imagine CACs are following, could you kind of help us -- well, like, can you help us bracket around where CACs are sitting now, because the cost to acquire customer here?.

Sure. Well, currently for the -- in Q4, we saw what we call our average ad spend per customer, which was -- as it was defined in the S-3 that we filed, previously we had reported in our Q3 earnings that we’re attracting around 400 at that point in time average ad spend per customer that now was a lot of that during the holidays.

Last quarter, we actually saw this amount decreased to approximately $135, sorry. Because of that shift in that you mentioned -- that we mentioned in our paid advertising strategy, that is away from the top of funnel campaigns..

Yeah, I'll just add to that, if I may. The top of funnel shifts was more on building awareness. Now we're mid to lower funnel, which really concentrates and focuses on that conversion model. And that is really significantly reducing that number in that delta, right? So puts us in a much, much better place..

Great. I mean, that all sounds great. And, I guess just along there.

How are the CPM strength like the competition for like more top funnel keywords and CPMs moving?.

Yeah, so it's a great question. I would say during Q2 in that holiday period we were seeing some elevated cost associated with that for those key terms. It started to trickle down after the holiday season of Q2 into Q3. We're seeing a, kind of, level off a little bit now.

Certainly there is some anticipation that we'll experience the same moving forward, but the reality is we have to do a better job of shifting and my teams right now are putting a plan together to come up with alternative terms and alternative ways to drive traffic through social media and different types of channels that we're going to push it through..

Great. And my last question would be, if I can squeeze it in. In terms of the G&A for the quarter, I think, if my math is right, it's like roughly 730,000, 740,000.

Moving forward, should we be bracketing like the 700,000 to 900,000 level? Is that we should be modeling, or how do you think about that going into 2021?.

Well, we certainly don't give guidance on those numbers, but I can tell you, we're in a comfortable spot on the margin for -- at the end of Q4, we were pleased with the margin holding it steady. We’ll also add to that, we're also pleased with the rise in the gold market and gold pricing.

So we thought we were going to experience some shift on that, but we were able to negotiate with a lot of our strategic vendors during that period of June month where we're able to reduce some costs associated with that to help mitigate some of that margin pressure, and we'll continue to look to do that forward as much as we can..

Great. Thank you. Thank you very much..

Just to confirm, when you mentioned the 700,000, I'm assuming you're identifying the cost in order to transition they’re not incurring. Just a point, a lot of that was in G&A, but there was there was some in sales and marketing as well..

Okay. Okay. Thank you. Thanks a lot..

All right..

The next question is from Berke Bakay with Bakay Capital Management. Please go ahead. .

Hello. Good afternoon. Don, congrats on the new position. .

Thanks, Berke. Appreciate it..

Yeah, just a couple of questions here. One is, as Q1 started and the world economies, especially economy here in U.S. start opening up a bit.

Just trying to get a better feel for your trends in July and August, could you shed some light on that?.

Yes. Again, I really -- I can't respond to July and August. I mean, I can tell you right now, what you're hearing in the news related to the e-commerce space. Certainly, kind of was true to our end of the quarter toward the June period, we started seeing those lifts. So it was consistent in June with that.

And really, we were able to mitigate a lot of effects of the business with that kind of lift in the market..

Okay. Then just a follow-up question on the G&A, I'm trying to get a good cash run rate absent of the stock-based comp and the severance-related expenses of the previous CEO.

Could you help me model that number on a go-forward basis or at least give me some background of what would have been absent of those in Q4, kind of a cash G&A?.

Well, we can look at it from a total OpEx standpoint and we don't officially publish EBITDA, but that's a probably a good starting point for you from the standpoint of – as everything is disclosed in the K to get to that number. But that was – and the cash impact naturally, definitely from the P&L it was recorded in Q4.

But the cash impact actually is being spread over the agreement terms that we have with the related reduction in force that we had..

Okay. Thank you for that. And I'm just -- again, trying to get a feel for – and I don't know if you give guidance on this or not, but could you be able to -- I mean, it was impressive to be able to generate free flow in a quarter, absent of PPP.

Is there any reason any onetime items that would not allow you to generate free cash flow on the -- at least in the first half of this year?.

Yes. So all I can – I mean, if you just look at the $4.4 million in revenue and basically just compare where our net losses from there, back out the kind of the severance side of the equation and kind of look at where we're at. Now, that's the new norm for the business. I mean, we right-sized the business.

So, that's basically all I can kind of kind of discuss related to that..

Okay. And just given you -- go ahead, sorry, please..

Yes. And you could pretty much produce your models from that number..

Understood. And my final question is, given your low CapEx requirements and access to line of credit and cash on hand again, I'm new to the company.

But what is the plan for cash? Is that something that you guys like to keep for kind of type of experience that we just went through, or I don't know, if you ever consider smaller acquisitions or not or any other plans? How should we look at cash?.

Yes. So we are real pleased with the cash position that we finished out the year and out the quarter. Now, there was a lot of real strategic decisions made to be able to kind of maintain that cash, and we certainly will look to deploy that cash with opportunities.

But our first priority right now is kind of to keep this business nice and stabilized, maintain it and kind of pursue some of these strategic initiatives that we have. And certainly, if you look at my pedigree from prior being with Berkshire Hathaway’s Richline Group, basically -- organic growth is wonderful.

I mean, it's great and we're going to get that. But over there, we grew through acquisition and different types of opportunities. So, I would see us potentially always looking to explore those opportunities on behalf of our shareholders. And I can't make it any clearer than that..

Okay. All right. Appreciate your time and best of luck to you. Thanks..

Sure. Thanks, Mark..

The next question is from John Davis [ph], a private investor. Please go ahead..

Hi. I've got two questions. Number one is on e-commerce.

I'm trying to understand why you all roll up other third-party e-commerce numbers into your data, because at the end of the day, unless you're getting the full margin stack on it, meaning your wholesale margin plus their retail markup, shouldn't you separate those as that has a meaningful contribution margin? So, could you all please break that out going forward or even for the last quarter, because I do think it's a little misleading, because what a third-party wholesaler sells on their site, I'm assuming they're buying at wholesale prices.

So, what does that number look like? Number two is, it's my understanding that you all turned out an offer for a 50% premium to the share price. And just understanding how you're going to get back there, especially given the comments that the CEO just made that they are going to make acquisitions or believe that's how it's been done.

So my understanding that the acquisition offer was actually for a conglomerate that's actually rolling up DTC brands and can leverage a massive shared services model and cross-marketing across their brands. Thank you very much..

Yeah. So, first of all, my first comment is we're always going to kind of reevaluate our shareholders and our investors as far as what they want to report and so forth, or want to see and better understand with the business. So, we always take those things under advisement and consideration, and we'll continue to do so.

Again, we always look at folks that are believing in Charles & Colvard, and believing what it has to offer. But the reality is, it has to be a viable consideration.

And I believe that, given the current environment of where this business is, where our cash position is, what our products are and the services that we put together, we're in a really good place moving forward. And we'll continue to kind of explore our internal opportunities.

Certainly, if there's something that's viable and make sense, we'll go ahead and look at it a little bit further. But I appreciate the call..

Do you think that you're going to get a 50% increase in the stock price in the next 12 months?.

Well, I'm not a speculator, and I don't like to speculate. I like to drive the business on the fundamentals of the business and let the fundamentals kind of speak for themselves and kind of do as they were – as they are..

[Operator Instructions] The next question is from Adam Proger with Raymond James. Please go ahead..

Hey, Don. Congratulations. I'm curious about sales in Asia. And I know that you don't generally break those out specifically, at least I don't think you have in the past. But on the pandemic first hit, I recall that, that was a big contributor to things slowing down.

Can you shed some light on how that's going?.

Yeah, great – great question. So certainly, the international side of the equation of the business has kind of suffered because of global shutdowns and so forth within the Q4. Moving forward, we're starting to see some pockets of international coming to life.

Our cross-border trade business, which is the e-commerce side, is coming to life on the e-commerce side. There still is some difficulty between kind of moving goods in and out between overseas and so forth. But certainly, that's only one side of the business or a portion of the business.

We'll look to kind of mitigate the effects of that by increasing the other side and the other channels of our business.

And I really can't comment about kind of those shifts that we've made already in taking those into consideration, but we certainly have a keen eye of the direction we want to go and pursue to kind of fill in those gaps and weaknesses that may occur..

Okay. One more quick question. With all that cash, any thoughts or conversations about some celebrity endorsement type contracts or deals..

Can you say that again? I'm sorry, could you repeat that?.

Yes, with all the cash on hand, is there any conversation or strategy about celebrity endorsement contracts or deals?.

Yes. So, that's an interesting approach. We certainly look at that. We are continuing to look at that. We have a marketing strategy that we'll kind of consider those type of things as we start to define the marketing strategy moving forward into the fiscal year.

We'll certainly look to kind of explore anything that's going to promote Charles & Colvard in both earned and shared media channels, further enhancing our social presence within the marketplace..

Okay. Thank you..

This concludes our question-and-answer session. I would like to turn the conference back over to Don O'Connell for any closing remarks. .

So, I'd like to thank everyone for joining us today. We appreciate the continued interest in Charles & Colvard and your support and thank you and good evening..

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