Good afternoon and welcome to the Charles & Colvard, Ltd. Second Quarter Fiscal Year 2023 Earnings Conference 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.

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 questions you'd like to submit, please e-mail cthr@lythampartners.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. Over the past few years, our focus has been to build a company that can take advantage of the longer term movement in the marketplace towards responsibly sourced gems and jewelry to capture greater market share.

A recent Mackenzie report noted that consumer shopping for fine jewelry are increasingly favoring brands that act responsibly value diversity and have a compelling brand presence both online and offline. In years past, when people shot for high-end jewelry, design would be at the forefront of their mind.

However, in recent years, research shows that consumers now also search for a brand that resonates with them and is socially and ethically responsible, which we believe is one of our key differentiators. Millennial customers in particular won't even consider a brand that doesn't prioritize sustainability according to Mackenzie.

Since the pandemic began, the consumer buying journey has fundamentally changed, while previously customers would visit a brick and mortar store in order to try on fine jewelry items in person, the pandemic moved consumers online. Research has also shown that sustainability considerations across product categories are growing.

Within high-end jewelry, the consumer cares much more about ethics than they did before the pandemic. McKenzie projects that sustainability influence purchases while account for 20% to 30% of all fine jewelry sales by 2025. Perhaps as much as $110 billion, which is more than triple the number of sustainability influence purchases in 2019.

The lab grown jewelry market, which represents one of the hottest growing categories in the jewelry space and as a subset of sustainability influence purchases, is forecasted to exceed $9 billion this year.

We believe that Charles & Colvard is ideally positioned with our Manotmine strategy and campaign to benefit from what McKinsey has dubbed the sustainability search, as well as our broader direct-to-consumer initiatives providing us optimism for growth opportunities for the future of the company.

In order to take advantage of the movement in the market, we have undertaking key initiatives to drive long-term value in the company. This includes focusing on finished jewelry products, the utilization of one of our long-standing core strengths in the production and faceting of loose gemstones to now include lab grown diamonds.

Diversifying our product offering beyond created moissanite to include lab grown diamonds and colored gemstones.

Expanding our direct-to-consumer footprint, which includes our online focus, our signature showroom initiative, and some exciting opportunities we will be exploring in the coming quarters and building up branded distribution assets of our owned properties to become more self-sustaining while allowing us to leverage our infrastructure in the future.

While the macroeconomic environment is certainly providing some near-term pressure to the industry right now, we have begun to take steps to diligently manage our expenses when possible, and overall inventory position.

We believe the underlying results of the quarter are an indication that we are executing against our long-term initiatives while maintaining the strength of our balance sheet, positioning us well within the growing transformation that is taking place within the jewelry industry.

So when I talk about execution against our key initiatives, what does that mean? First, as I mentioned, we are expanding our focus on enhancing our finished jewelry assortment and showcasing our value proposition with its core and original designs. Featuring moissanite gemstones in premium quality.

In fiscal year 2021, approximately 62% of our total revenue was attributed to finished jewelry. That number was 68% in fiscal 2022, and during the most recent quarter end of December 31, 2022, it comprised 81%. Why the added focused on finished jewelry versus loose gemstones.

For several years, we've worked diligently to become a globally recognized fine jewelry destination, rather than simply a single gemstone supplier in the wholesale capacity, which we believe limited our future growth opportunities and overall total achievable market or tam.

Our second key focus area is broadening our footprint to capture a greater share of the lab grown diamond market. Data shows the number of engagement rings sold that featured a lab grown diamond jumped 63% from March 2021, to March of last year. While the number of engager rings sold with a mine diamond declined 25% in the same period.

Lab grown diamonds comprised about 3% of the specialty diamond jewelry market in 2020, and that figure grew 7% in 2021. This is a growing market and we intend to be a major voice within the industry. In September of 2020, we launched Arcadia Lab Grown diamonds.

While still a fraction of overall sales, it is clearly the fastest growing product category for us, with sales of 19% compared to last year's second quarter and year to date, we are up over 600% compared to the same period in fiscal 2021.

Moissanite will continue to be a huge focus and key differentiator for us, but we intend decimally compete in the diamond space, adding to our incredible line-up of Manotmine gems and jewelry.

As mentioned, another key focus for us is on expanding our direct-to-consumer focus, thereby broadening our footprint and providing the ability for our consumers to experience our product firsthand. As a report I mentioned at the beginning discussed there is increasing movement towards online and non-brick and mortar purchases.

Clearly brick and mortar is not going away. In fact, we recently opened a flagship store in Research Triangle Park, North Carolina to expand our reach, but the growth especially amongst younger individuals is moving towards online.

We have expanded our capabilities online over the last number of years to enhance the customer experience, while also looking to improve our advertising and marketing focus to build greater brand awareness. That said, the investment to capture the direct-to-consumer and online sales do come to cost.

Digital advertising costs have increased substantially in the ROI fluctuates. Like many in the industry, we have refocused efforts to find ways to reach the consumer more effectively, strategically focusing our marketing efforts to find customers predisposed to our Manotmine product assortment.

At a high level, online channels comprised 76% of our second quarter sales in fiscal 2023 compared to 66% during Q1 of fiscal 2023 and just 62% for full fiscal year 2022.

Our strategic focus remains continuing to drive and elevate our direct-to-consumer presence and brand strategy, which we believe will better position us from long-term growth and help bolster against the current macroeconomic uncertainty and geopolitical unrest.

We continue to make strategic investments in our direct-to-consumer initiatives, which we believe will further strengthen our moat and overall position in the market.

Our goal is to leverage our assets in order to make Charles & Colvard synonymous with responsible moissanite fine jewelry and gemstones for the conscious consumer, which we believe is the largest growing category and opportunity in the jewelry space.

We want to own more of our destiny and become a top destination of choice where our customers can satisfy all of their jewelry needs. Our web properties and flagship stores are examples of this.

With a large portion of our capital investments funded and key personnel added in support of these strategies, we can now focus on ways to monetize these initiatives in a meaningful way.

This will take some time to bear fruit, but we believe we have strengthen our resources and capabilities building upon our past successes infrastructure and brand equity to take the company to the next level. Clearly, the challenges in the economy are playing a part in our results.

Domestic and global inflation and rising interest rates, coupled with ongoing fears of recession continue to erode consumer confidence and present major challenges for the global retail and jewelry industry.

While American consumers spent more this holiday season to keep up with higher prices, we experience lulls during the calendar year end holiday season, and we expect that consumers will continue to feel pressured financially, particularly during the second half of fiscal 2023.

This is not unique to Charles & Colvard and we are facing similar challenges of retailers in the fine jewelry space. At the same time however, these same challenges are providing us the opportunity to continue reevaluating technologies and strategies to better position us in the future.

Some of these I've discussed already on this call, but another important aspect has been our ability to manage our inventory and cash flow. As you will see in the results, our cash position increased during the quarter, despite the net loss. Cash increased from $16.6 million last quarter to $17 million this quarter.

Further, our cash flows from operations were also positive this quarter. We expect that our inventory levels, which were down $1.6 million from the most recent quarter, should continue to decrease in the quarters to come.

We feel confident that we have taken decisive actions to align our go-forward growth and profitability strategies with the near term economic backdrop, to help maintain a strong balance sheet going forward.

I would like to highlight again to everyone that we currently have $17 million cash and cash equivalents and inventory valued at $35 million, for a combined total of $52 million with only $10 million in total liabilities, including zero debt.

So even if you ignore all the other assets we have, including net fixed assets and equipment, intangible assets such as our intellectual property, receivables and excluding any value for our brand equity, etcetera, and only account for cash, cash equivalents and inventory, less all liabilities.

it comes to approximately $42 million compared to a current market cap of approximately $29 million. We believe this showcases our demonstrated value. As I turn it over to Clint to review our financial statement in more detail, let me just quickly summarize.

Despite the challenges in the industry, we still deliver $10.4 million in revenue, a level that's only been achieved a handful of times in the company's history. We generated positive cash flow from operations this quarter.

We are transitioning the business to focus on areas that create long-term value, such as focusing on finished jewelry products and allow us to capitalize on key consumer opportunities such as diversifying our offering to include lab grown diamonds and colored gemstones, while expanding our direct-to-consumer footprint.

These key areas of focus outperformed the larger top line number during the quarter, which was largely impacted by non-direct consumer sales and our wholesale loose gemstone business. Clint will expand more on this shortly.

We are building value in our distribution capabilities and brand equity to better control our own destiny, meeting the consumer directly where they're shopping. And finally, our balance sheet remains strong, affording us the ability to invest in areas to enact these strategic initiatives and take advantage of key opportunities in the marketplace.

At this time, I'd like to turn the call over to Clint Pete, our CFO for an overview of our Q2 financials. I'll return to wrap things up after.

Clint?.

Thanks Don. Today I'll provide a summary of key financials for the second quarter ended December 31, 2022. Additional detail can be found in our earnings press release that we issued this afternoon and our form 10-Q, which we expect to file tomorrow.

Please note that all percentage comparisons are to the second quarter end December 31, 2021 unless specified otherwise. First, we'll start on Slide 11 with comparative analysis of the second quarter of fiscal 2023 compared to the same period one year ago.

In total net sell for Q2 2023, total $10.4 million versus $13.8 million, a decrease of 25%, due primarily to the economic factors Don alluded to. While revenues were lowered in a quarter, the decline was slightly less than what we experienced in the first quarter when compared to the comparable prior year period.

Net sales for online channel segment, which is primarily direct-to-consumer and includes charlesandcolvard.com, moissaniteoutlet.com, marketplaces, drop ship retail, another pure play outlet totaled $7.8 million for the quarter or a decrease of 16%, but now representing 76% of total net sales up from 68% one year ago.

Net sales for our traditional segment, which consist of wholesale and brick and mortar customers, totaled $2.5 million for the quarter or a decrease of 43%, representing now approximately 24% of total net sales.

Finished jewelry net sales decreased 20% for the quarter, but represented 81% of total sales in the quarter up from 77% of sales in the second quarter one year ago. Loose jewel net sales decreased 40% for the quarter.

As we mentioned above, due impart to our shift towards finished jury and directing consumer strategies while many domestic and international distributors reduced third calendar year forecast in overall inventory due the softer economic environment.

International net sales decreased 49% as certain of our distribution partners continue to face ongoing COVID-19 restrictions and closures as well as lower calendar year end holiday demand due to consumer inflation and recessionary concerns and the global geopolitical unrest.

As you can see at the high levels, our areas of strategic focus including direct-to-consumer and finished jewelry, were somewhat less impacted. We want to point out changes in our online channel segment as well as in the finished jewelry as they relate to the percentage increases of these two total revenue.

We have seen increases not only in the current quarters as discussed above compared to year ago quarter, but also comparable to the trends we saw in Q1 of fiscal 2023 that had similar increases when compared to the prior year period. We are also seeing these same increases when comparing Q2 2023 to Q1 2023.

Accordingly, we are becoming less dependent on the distribution network in our traditional segment as we continue to shift to a more of a direct and consumer focus in which Don alluded to earlier and is by design.

Moving to Slide 12 to discuss gross margin and profit, we delivered a gross margin of 41% versus 49% in the year ago quarter, delivering 4.3 million in gross profit versus $6.7 million in a year ago quarter.

Most notably, the decrease in the gross margin during the quarter was related to an approximately seven percentage point impact due to our applied labor cost that are capitalized to inventory with an additional approximately three percentage point impact due to the shift and our product makes towards Lab Grove Diamond accordingly, most of the decrease in our gross margin was due to the adverse change in applied labor cost and not the result of any large scale discounting.

During the period for Q2 2023, total operating expenses increased 5%, representing 53% of total net sales compared to 38% in a year ago quarter. Sales and marketing expenses increased 6% to $4.3 million in support of our growth and brand awareness initiatives and G&A expenses remained flat at $1.2 million for the quarter.

We explored alternative marketing efforts to reach a broader audio with some initiatives admitted Italy falling flat of expectations. We reported in net loss for Q2 2023 of $1 million or 3 cents loss per diluted share compared with a net income of 1.2 million or 4 cents earnings per diluted share in a year ago period.

Included in our net loss per Q2, 2023 is an income tax benefit of $132,000 compared to an income tax expense to $283,000 in a year ago period.

Our weighted average diluted shares outstanding used in the calculation of diluted loss per share for the quarter were approximately 30.3 million shares for the period ended December 31st, 2022 compared to 31.3 million shares for the period ended December 31st, 2021.

The decrease in shares outstanding is partially driven by the impact of the company's share repurchase program. Now let's move on to a snapshot of our balance sheet.

As Don alluded to the liquidity and capital position remained strong as we ended the quarter with 17 million of total cash compared to 16.6 million at the end of the first quarter that ended September 30th, 2022 or can capos also strong ending at 26.3 million up from approximately $25 million at the end of the first quarter of fiscal 2023.

In addition, the company continues to be debt free. We believe our capo structure remains strong and able to weather inflationary and geopolitical factors in the near term.

Our cash flow provided by operations was $617,000 during the quarter compared to $3.1 million used in operating activities during the first six months of fiscal 2023 and $121,000 provided by operations in the year ago period. The improvement and the current quarter primary reflex are continued inventory management efforts.

In terms of other sources of liquidity, we have access to our $5 million cash secured credit facility with JPMorgan Chase Bank, which we renewed on July 29, 2022 for one year as of December 31, 2022 and through today, we have not access funds to our credit facility agreement as Don discussed inventory as December 31, 2022, total $35 million compared to $36.6 million as of September 30, 2022, a reduction of $1.6 million whose jewels inventory was $15.9 million as of December 31, 2022 and compares to $16.6 million as of September 30, 2022, a reduction of approximately $700,000 finished jury inventory was $18.8 million compared to $19.9 million as of September 30, 2022, a reduction of $1.1 million demonstrating a solid sell through of our finished jury in the direct-to-consumer online channels, while still maintaining a high percentage of in-stock rates to meet our SLAs.

As Don discussed, we plan to remain focused on prudent inventory management strategies going forward. In summary, we remain confident in our financial strength and our continued efforts to increase shareholder of value. With that, I'll turn the call back over to Don..

Thanks, Clint. To wrap things up, the jewelry industry is undergoing an incredible transformation, one that I believe we are in the strong position to capitalize on in the years to come.

The results of the quarter, despite the macroeconomic backdrop show that we are executing on our key initiatives that we believe are driving long-term value in the company initiatives that we believe allow us to take advantage of our branding and distribution capabilities to enable customers to find, engage and transact with us on a greater scale.

And finally, I'm appreciative of the hard work and dedication of our employees and the continued support from our shareholders. With that, I would be happy to now take any questions you might have..

[Operator instructions] Our first question is from Matt Koranda with Roth Capital. Please go ahead..

Hey guys, good afternoon. Just starting out with the online channel, I guess I was just a little bit surprised with a bit of the deceleration there.

If I look at it sequentially on a year-over-year basis, and just wondering if you could break out the puts and takes of the different underlying channels in online maybe at the very least, if you could just kind of call out sort of how your own site performed during the quarter relative to some of the other items like marketplace and whatnot..

Yeah, hey, Matt. Appreciate the question as usual. Certainly we had some headwinds within our online segment too as well. We attributed those to a lot of various reasons. Certainly the macro, as we stated multiple times within kind of our script the advertising spend and campaigns that we ran did not generate the ROAS that it traditionally did.

So if you're basing the historical ROAS that we had, cost per clicks plus the competitive landscape, plus the economy, plus the higher interest rates to purchase or finance jewelry and gemstones, we believe it just contributed to a softer holiday, much softer.

Certainly it began in October for us, and then we started to increase velocity towards November and December. But to answer your question, our direct-to-consumer presence, CDC and Charles & Colvard and owned properties performed well.

We had in the marketplaces, as we had a couple individual direct distributors that were very weak and really participated in a heavy sales cadence or on sale cadence, but then kind of shifted and where they had a nice steady cadence of product and sales over last year they ran toward the end of the season in a very, very heavy, strong sale cadence.

So it reduced the overall revenue in those categories too as well. So it's a combination of a multiple things within that sector, but really the wholesale piece of the business is what really know of shifted for us most but I do get your question though..

Yeah. Okay.

Yeah, I want to address wholesale in just a moment, but just spinning back to your ROAS comment there, Don, just curious how you think about sort of, I guess, if you're not seeing the efficacy from that ad spend that and it's understandable, I guess just given where the economy sits and to your point, cost of financing and higher ticket items and stuff like that might be seeing some more pressure on the consumer discretionary front.

But how do you think about the ad spend on a go-forward basis, and do you lean out of that a little bit while we go through a softer patch, or do you just redeploy the marketing dollars in a different way to try to boost that rowhouse again?.

Well, we started to see the softness and the conversion rates decline in the October timeframe, right when the interest rates started climbing up, right when really the tail end of discretionary started to go away.

And then we said, okay, what do we need to do? What do we need to kind of refocus our ad dollars on and we tried some alternative types of marketing campaigns more top of funnel, which did not bear fruit. The results weren't as satisfactory as we were. So that's why we've got such an increased spend with less revenue there.

So we did try to branch out just because basically the average cost per click was rising between even our own search terms and keywords and phrases. We were definitely digging into the analytics and into the analysis and trying to pivot the company to find other alternative ways to drive traffic. Certainly organic is really important to us.

Certainly we need to do a better job on the marketing side, but the competitive landscape for our own keywords, phrases, we've even had certain top leading customers that would really go heavy handed on our own namesake and so forth.

So it's always a challenge in that category, but seen the pricing go up six-fold and specifically to some of our key search words. So we have to pivot. We have to do better, and we just need to figure it out..

Okay. All right. That's helpful color. And then just on the traditional channel, you mentioned sort of the distribution side of things being the real culprit here. It has been, I guess, for the better part of the last year plus maybe, maybe even longer at this point.

How small a piece of the traditional channel is that distro and international piece at this point? It seems like it just should be a lot less meaningful on a go forward basis, but if you can just help us understand how to quantify that and how it, how it moves on a go forward basis to be helpful..

Yeah, sure. So right now we're looking at almost three quarters of our business is online. So that's really important, and that's by design. That's literally at the base of all our initiatives moving forward. That's where our spend is going.

That's where our investments are going because we believe that generates the long dollar and the highest value proposition for us as a company and a brand. So that's most critical. Going back to your question, which specific to traditional, which is now a quarter of the business, and then you would break out the brick and mortar part of that.

So the wholesale business is a much smaller representation of our overall revenue.

And then, going forward, we speak about other initiatives that we have in place in other areas like our signature showroom, which if I could report on the signature showroom was incredibly exciting category and a channel for us this holiday season, and it's taking shape just right now and, and really performing better than expectations.

So we're pretty excited about that. So anywhere we can control our own destiny is really important to us. So we all know that the wholesale business, has different challenges, right? So our dis our distribution partners are managing their inventories differently.

They're trying to practice just in time, they don't have the capital or they don't want to make the capital investments to hold inventory, especially given the economy and what's happening in the environment. So in doing so they're reducing their overall positions and exposure. So we understand that.

So that's why early on we started this shift, as we stated over, the last couple years to be able to go more direct to consumer, to look for more channels to create our own owned properties multiple owned properties, and then really reach that consumer digitally and virtual whenever we can. We talked about live streaming.

We talked about shopping direct response, more of a linear comment that's going to actually be monetized in the future as we become less dependent on the wholesale arm. The pricing pressure right now between the race to the bottom and lab grown diamonds is putting downward pressure to the wholesaler on our moissanite business too as well.

So that's why the more we can do direct-to-consumer, we can still realize and capitalize on the higher margins and continue to do so moving forward.

So we've been making it very clear, I understand that when we say this particular section or segment is down by 49% I don't want everyone to get hung up on that because ultimately, as that becomes a smaller and smaller piece of the business, certainly that percentage is going to climb and rise.

But the thought is that the online business and our direct to consumer business will grow exponentially higher as these investments start to come in and take shape..

Great. If I could sneak in two more just one, since you mentioned the signature showroom, just any, any metrics for success you can share on that front.

I'm just really curious how that's going, and then what would be the sort of I guess the gating items for looking to open additional showrooms?.

Yeah, so right now we're still in for all I intents and purposes, the beta scenario related to the signature showroom, we're testing out a lot of different things specific to the store, to the consumer that's coming to the store.

We're doing things that are non-traditional, like we're doing special events, we're doing corporate alliance programs, we're doing collaborative type engagements with local community. So it's -- there's just a lot of moving parts there and we can't -- we're not giving any, guidance or forward, numbers specific to that.

But we can just tell you that it is performing better than anticipated and we believe that there's definitely a future there. We believe that in some shape or form we can take this model and we can position this model in key strategic areas and demographics that are performing quite well for us within different regions domestically at this point.

So the timing for that still remains open for discussion. And we're still, basically we just launched in October on the signature showroom. So we've got a few months under our belt right now. We do have some holiday traffic. Valentine's Day has been pretty exciting. Matter of fact we have a, a big event scheduled for Saturday here too as well.

And these events come between, 50 guests to 100 different guests come at a given moment. So, it's been pretty exciting and we're pretty pleased with, with kind of the performance there. So I believe, in the coming quarters, we'll be able to make a, a more concrete statement as to what that looks like in the future..

Okay, fair enough. And just one last one on the margin the gross margins, if, if I could Clint, you referenced that a big portion of the year over year headwind, I think it sounded like 700 basis points of it was a difference in how you're applying labor costs to capitalize inventory.

Can you just explain that in a little bit more detail for us so we understand it and on a go forward basis is this, this, are you going to be applying the same methodology so that we should assume all things being equal? We should be assuming somewhere in that kind of by single digit a hundred basis point headwind on a year, year basis..

Yeah, so Matt, sorry about that. Let me just address that and try to simplify that just a little bit.

I don't mean to, take that from Clint, but as we start to transition our business into more of a direct to consumer as opposed to the wholesale distribution company that we were in the past or a loose gemstone, we're reducing the amount of what we call whip or work in progress related to the cutting and fasting of our gemstones.

So in the past, we literally had, x number of gemstones that were cutting on a quarterly basis, on a monthly basis, and therefore that was spread out over the course of, month over month within the quarter. And it would be spread out across the board over the inventory.

Now that we're being mindful of that inventory and we're not actually producing as much raw material and we have finished goods and we have inventory in stock, we don't have the advantage of that applied labor as much. And Clint, you can elaborate a little more if you want to on that, but that, that's pretty much, where we're at. And.

I just wanted to clarify, Matt, it wasn't a change, I think it, it was just the, the, the amount of the jobs that the process as Don mentioned, related to the fabrication of the moissanite and the raw material..

Okay, got it. So we should just assume that on a go for basis inventory may, you may be able to flush more inventory, just because you're not producing to demand not just to a certain set level every quarter..

You're absolutely correct. One other factor that Matt, we should consider is that as lab grown diamond pricing, becomes, it's trying to find a bottom, it's trying to stabilize. So, because there's a race to the bottom. When we first got in and we first introduced lab grown diamonds, inventory was at X price.

So, and basically there was a cost associated with those particular goods that we had in stock at the time. Now the pricing is literally dropped and come down, but we still had the cost associated with those original goods, that original inventory. So we had some margin pressure specific to that.

We believe we've rectified that and we remedied that and we're in a good place now as we continue to go more vertical. We basically are becoming more and more competitive and we're pricing our goods in line with the market. If not, we're actually below most of the retailers and we're more competitive.

But initially to get into the space, we made a capital investment and that inventory was valued at X. So we did feel some margin pressure there. We believe that we sold through almost all of those goods and now we're pretty much stabilized. So, we will be in a much better place moving forward..

Okay, that makes a lot of sense. I'll leave the rest of others. Appreciate the time..

The next question is from Peter Jackson, a private investor. Please go ahead..

Yeah, so in the prepared comments, I think it might have been something that Clint said you said you guys were expecting sort of continued softness, especially in the second half.

Can you elaborate on that? Are you making sort of a larger macro call here about the economy and interest rates, or are you saying specifically that you're seeing continued softness or as doesn't make sense to spend a lot of money on marketing, therefore the sales will be soft because it doesn't make sense to, to spend the dollars?.

I believe there's a lot of truth in what you said and how you framed it across the board. I think it's a little bit of everything. I personally feel that the global economy, although I'm not an economist and I can't, predict what's happening, kind of, and we don't give, forward looking statements specific to that.

But, certainly we believe that, I mean, I guess, in today's indication, it's up today and things are up today and optimism is up and things are moving in a positive direction.

But I still believe that the consumer has, an issue specific to higher interest rates, specific to financing terms related to jewelry whether they're going to purchase that particular item or they're going to pay their rent or mortgage or they're increased mortgage, whether they're on fluctuating rates. We just don't know.

So, I guess it's more of a macro scenario, but certainly I will tell you specifically, you're a hundred percent correct as it relates to, marketing dollars. If you look across the board, look at some of the other, technology companies. Look at the marketing spend and the dollars and the revenue associated with the spend, we're no different.

we're looking at that. If we're not getting the ROAS or the return, we're basically going to dial back in those particular areas. So, we want to strive to be profitable and we want to do things right. We're just not out for, purely top line growth and numbers.

We're trying to build a real solid company and we believe we've got some really great initiatives that we can deploy capital that'll bring value to the company. And also later on, we'll be able to monetize those channels in a much greater way than perhaps burning through cash in some of these paid in social campaigns that were run previously..

Right.

Well, that also connects to, what you do with that cash and if investing that cash isn't attractive on advertising because of the poor ROAS, are you better off buying shares? I think I saw on the release that you bought about 450,000 shares back, which seems like a lot, but at the dollar level that it's not a lot of money relative to the $17 million.

At some point, and by the way, I know in the past, people like Alan Sykes and other, and others were really buying in a big way. It's a little discouraging just not to see really any meaningful buying lately.

Is that between that and perhaps not buying the shares back at a higher level? Or can we infer that you guys think this is going to be softer for a longer period?.

So let me answer the first part of your question. Certainly, we made the case for why we believe that we're an incredible value and we believe that we're trading way below book. And the opportunity is there. We certainly believe in the long term outlook for Charles & Colvard and what we've kind of built in the initiatives we have in place.

Some, we've discussed, some we, are still to come to fruition in the coming quarters. So, there is this thing called quiet period. So, certainly insiders, myself or whatever can't purchase within these timeframes where we have material non-public information.

Certainly we did lean in and buy, a half a million dollars’ worth of stock because we believe that that was really important and we believe that the value was there.

We absolutely will consider, given, the situation and downward pressure on the stock should it be something that, is meaningful to us, given what we know to come in the future and where our investments need to go and where we believe that we're going to monetize, exponentially is not at risk. We will certainly consider more buybacks.

Just in December, Clint right here, he did, purchased some shares. So, we're constantly looking to see open windows when we can actually invest in ourselves and our people. So right now we're, we did come off two years’ worth incredible growth and upward trajectory and profitability.

We said that now we've built up a lot of cash, upwards of $20 million then. And then we were going to deploy that cash, make investments in infrastructure, make investments in our distribution capabilities, make investments in our, our enterprise resource management system, make investments in our web properties. We did that moving forward.

We want to continue to be the best of breed in the e-commerce space for all things made, not mined. So we'll want to have the best in place as far as our web properties and that cost money. So we'll continue to make those investments.

We have some incredible things coming up that we believe that are really critical to this direct to consumer business model that we're creating rather than, as I said in my, opening comments, a single threaded moissanite and I distribution company. So, we like to believe that, we made those announcements.

We know the triggers that we need to, kind of press that are going to kind of exponentially move us to another level, but we did level set that we're going to make those investments.

So again, times are changing, it's a different environment what I'm saying? So, we'll certainly look at every opportunity that comes to, increase the value of our shareholders' positions certainly I'm a stakeholder in this company too as well, and I have a significant portion of shares and investment in this company myself.

So, it's within my best interest to be able to drive growth and drive value within the stock, and that's what I do every day, and that's what we all do here. So, we'll, we'll do the, we'll do what we believe is the right thing for the company..

Okay, fair enough.

And on the direct to consumer business what do you think that we can model in, in terms of gross margins going forward?.

Again we've had some margin pressure given two things. So number one, pricing related specifically as I spoke before about the initial investment in the diamond goods or lab grown diamond goods, the original cost for those goods. And then now the, kind of the reduced cost and the pressure there to be competitive and sell off those goods.

The other thing that will happen is as the race to the bottom goes on lab grown diamonds, we basically have to kind of see where that goes, and we want to still make sure that we're competitive. We still want to make sure that we're in the conversation and our goal is to be one of the top destinations. In order to do that, we need to be competitive.

We need to build a story of why that consumer should buy from us a compelling story with the design and the aesthetic of what we're bringing to market. But certainly there may be some pressure there. So the answer specifically, I've said this a million times, that 40% margins a very, very strong business in the jewelry space.

That's just my personal opinion, and I believe that's strong. We always strive to be north of 50%. So I would say somewhere between the 40 to 50% would be a model that I could absolutely, get behind. So, again, it really depends on some key factors that may come.

And those key factors are, do we want to spend money and deploy capital in additional marketing areas that we haven't done in the past? Whereas if the paid and social spend is not bearing the results that we want, then maybe we try some other type of avenues that may definitely increase the expense, but not get the return.

So, we're in a complex scenario that if we lean in too much, it basically affects the bottom line and it affects the margin almost immediately. So we're trying to build a company and we're trying to grow at the same time, but it's kind of a catch '22.

So, to answer your question, I believe somewhere around a 45% to 47% would be the ultimate area, but there is the possibility of some pricing pressure between the lab grown diamond, which is representing a larger portion of our online direct-to-consumer business in Charles & Colvard right now..

Okay. And last question, just saying on the DTC, so if it doesn't make sense to spend money on the -- on advertising right now because of the incredibly tough ROAS.

How are we going to keep the DTC from falling with all the investments and actually increased investments, it's hard to see it drop by 16% in the quarter and again, totally understand the macro issues.

But I just looked at Cygnet, which I know is not a great comparable, but it's the only one of the few that's public and their sales for the quarter and in December are based on their guidance, which you updated and increased is going to be down like 5%, and we dropped 25%.

So obviously, again, not a perfect, comparable and much smaller company, but the bigger question is how do you -- how do you get those DTC sales back up, especially given the tough environment, especially given that it doesn't make sense to spend a lot of money on advertising right now..

Yeah. So all pointed great questions, right? So let's talk about the commentary on Cygnet, right? They're a conglomerate, they're a monopoly. They pretty much own all four corners of the earth as it relates to jewelry. So a lot of their growth has come through acquisition.

So certainly, their latest acquisition of Blue Niles, that revenue is starting to trigger diamonds Direct they bought. So all of that's coming into play. Also over the years prior, they were literally just beaten down. So their growth trajectory and their success, in my view, has been a little bit skewed by that and skewed by kind of the acquisitions.

They pretty much own the marketing universe as it relates to Google and Facebook and everything, because they can deploy pretty much unlimited capital to be in the top rankings and to be top of mind to most consumers.

So the comparison, and I appreciate you saying that may not be a direct comparison, but what we need to do is we need to figure out where is that point of diminishing re returns.

We're certainly going to continue to spend in paid advertising and, and still go there, but we need to find the really that threshold where we have to stop the spend, redeploy those dollars in other areas. We also spend money with our co-op partners in brick and mortar, and they're requesting more, brand assets and collateral and co-ops.

So we need to support them because brick and mortar is still a strong piece of our business. So we're doing that. And then I guess to answer your question, we need more channels to be able to distribute our product.

We need more drop ship partners that we believe can just broaden our footprint, we said footprint, maybe five times within the, the prepared remarks.

And, we certainly believe that that's how we're going to do it, and that's a, a much more affordable way to kind of drive revenue into the online segment because basically it's a, a percentage of play and it's not a direct spend, if that makes sense.

So we as a company are looking for more strategic partners that we have in the online business where we can represent a direct to consumer presence, control the message, control our designs in that category.

Then lastly there are other channels out there besides online digitally that we can utilize a lot of these assets that we built up, a lot of the infrastructure that we put in place where we can reach that consumer streaming in more of a direct response or a linear approach where we control the, the medium, we control the messaging and we control for all I intents and purposes the airtime.

So the goal would be there is to build that out stronger where we can control our destiny. There is a cost associated with that. We just need to manage through that and see where the returns are greater. So we believe we've got a plan moving forward.

Certainly the complexity of the environment in the universe is there, so, we'll see what we can do in the next couple quarters. Do, do you work with influencers? Much so we do, right? So I mean, recently it was with JLO and not JLO, but one of the Jersey Shore folks JW, sorry about that.

we work with a couple other influencers too as well, but the goal is to be able to really understand what the value is of those influencers. We believe right now the influencers that we've approached in kind of that direction is pretty much one and done. We did the Bachelorette, we've done a lot of campaigns there, so that was successful for us.

We'll continue to do that. We're better off with those type of influencer paths, right? Certainly we have affiliate programs that have an influencer base too as well, those affiliates and we're actually growing the affiliate universe right now.

But we believe that kind of coordinating with designers and other types of in influential, type folks within our industry is, is more meaningful for the future.

So we'll do a little bit of, a little bit of both, but if we lean in on one big influencer and that cost associated with engagement is, X number of dollars like a Super Bowl commercial, then where are we going to be with that? So we, that's the unknown, right? We don't know if a single ad or a single influencer is going to give us, that catalyst to moves us to another level, or is it going to fizzle out? It's just going to be a one-time spend and therefore just destroy us financially.

So we're trying to be prudent and responsible and fiscally responsible with our shareholder's money and with our initiatives moving forward..

[Operator instructions].

Hi, Don and Clint. It's Adam Lowensteiner, Lithium Partners. I've got a couple questions here from investor to emailed us.

As moissanite becomes a smaller portion of overall sales and perhaps declines in sales, is there a risk to the agreement with the supplier Cree regarding minimum orders over time? I mean, along those lines, what is being done to secure better pricing on supplies of lab-grown diamonds?.

Okay, great, thanks Adam for that. So also a great question. certainly, if you, if you kind of look at our filings, which will come out tomorrow you might take note of kind of the consumption of raw material, which is definitely present there. We're definitely being responsible and prudent with our inventory.

Certainly you see the decline in the inventory quarter over quarter and sequential quarters. We anticipate that one would assume that we're going to make responsible decisions related to wilt, which is wolf speed. Now certainly they're an incredible partner and a strategic partner, and they've been with us for over 27 years, or around 27 years.

So we're all aware of the business climate, we're aware of, kind of the overall requirements and the demand. So, as we progress forward, we'll, we'll make executive decisions to manage through that. We believe that we have the type of relationship certainly we did that at the onset of COVID when it first started.

Certainly, that'll be a continued conversation with our partners and we'll continue to be mindful and respectful, of that relationship. But certainly take a look at the consumption and kind of, navigate through that. As it relates to, how do we secure better pricing and lab grown diamonds? I alluded to it a little bit within this conversation.

Our goal is to become more vertical in this space and become an active player, whether we become the grower and then go from grown to market, that's a, a much bigger conversation. That may come in time, whether there's a partnership like a wolf speed scenario that could come to fruition where we could literally procure the rough.

I can tell you that right now we're ongoing R&D and test, and we're cutting and fastening our own rough. So that is provided by a strategic growing partnership that we have. So that's going to get us more vertical. We believe that that's going to hedge against any pricing pressure.

We believe that that's going to get us more competitive and we believe we'll become a bigger player, much like we are in the moissanite world, where we basically facet and cut more moissanite gemstones than anywhere in the world. So, we anticipate one day that will be a factor in that space. So I hope that answers this. Questions on that..

Next question is on inventory.

Is the percentage of inventory mix changing and he's talking about the increase in finished jewelry and the decrease in loose jewels?.

Yeah, so certainly the goal is to provide more value to our shareholders, right? So, in the past, what I've learned is, it's a very simple exercise, right? You want to be able to maximize the value of your inventory.

We're fortunate that we're dealing in commodities and that commodities, albeit somebody say the fiat money system, people say different things, but gold is gold. Platinum is platinum. So the market dictates the value of that.

So when you see our inventory and you look at finished jewelry and finished goods, the valuation of that inventory is exponentially higher because it has that high gold concentration or intrinsic value that's very easily calculated on a balance sheet.

So look to us to continuously build out, finished, jewelry because that's where we're going more direct to consumer, and that's where we believe is the best path forward for us as a company.

Also, keep in mind as we, build out our drop ship programs and our partnerships, there's certain SLAs that are in place, which are service level, agreements that are in place that we need to maintain inventory stock and everything. So we need to maintain those inventory thresholds to be able to support them.

And also as we start to see the shrinking pie of wholesale distributors or the distribution of loose gemstones, because basically they're experiencing other pressures, we actually did a consolidation between our partners and our distribution partners. So there's less of them.

We're actually pushing our goods into more individual pieces than selling 500, a 1,000 of a number. So look to us to decrease our loose jewels inventory too as well, and we believe that that's a good thing. Gary, I think we have one more caller..

And the next question is from Jack Straub, a private investor? Please go ahead..

Hi, Don, just a quick question on potential acquisitions. Have you guys been approached by any larger company to be acquired just based on you guys trading about half book value? I didn't know if there was any conversations from many other company towards you guys. Thank you..

Hey, Jack, great question. I mean, it's a loaded question and obviously I can't answer that question specifically. we don't discuss any matters specific to that, but I can tell you that we've got a tremendous opportunity ahead of us.

We believe there's a roadmap ahead of us, whether we become the acquirer of others to be able to grow our footprint or to grow our brand, or to grow our strategy, that remains to be seen.

We're looking at every, so, certainly, I have an obligation, in the chair that I sit in to be able to review and discuss and, and take into consideration any opportunity that would present itself. So we think we're a great company, we think we're, a great value. We have a good position in the market.

So, we believe there's plenty of growth for us to grow our business standalone. So, I don't know if that, kind of answers your question..

Well, so you completely ruling that out. Then.

If a company did approach you and you thought it, it brought superior value, then the current share price, you would consider that you're not completely shooting down that just based on where you think you can grow the company three years?.

Absolutely not. So, we would take any consideration, anyone that comes forward with a, a legitimate bonafide offer, we take that to the board of directors. We talk about it all the time, should an opportunity present itself and it makes sense for the shareholders and myself included across the board. Absolutely.

I mean, why wouldn't we? So, given, an opportunity that could or will present itself we'll, we'll kind of visit that at the time..

Great. 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 first of all, I want to thank everybody for today and on behalf everybody at Charles & Colvard, we appreciate your time and I want to thank you all for your continued support, and we look forward to things that come in the future for Charles & Colvard..

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