Charles & Colvard Ltd (CTHR) 2009 Q4 法說會逐字稿

Good morning, my name is Tina, and I will be your conference operator for today. At this time I would like to welcome everyone to the Charles & Colvard fourth quarter and year end earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question and answer period. (Operator Instructions) As a reminder ladies and gentlemen, this conference is being recorded today, Thursday February 25, 2010. Thank you. I would now like to introduce Ms. Fran Barsky with Investor Relations. Ms. Barsky, you may begin your conference.

Thank you Tina, and good morning everyone. We appreciate your interest in Charles & Colvard, and your participation in our fourth quarter and fiscal year 2009 earnings conference call. You should have a copy of the news release detailing the Company's financial results that was distributed earlier this morning. If you do not have the release, you may obtain a copy from the Company's website at www.charlesandcolvard.com. With me today are Randy McCullough, Chief Executive Officer; Tim Krist, Chief Financial Officer; and Tom [Pouts], Vice President Sales and Marketing. Randy and Tim will discuss the results for the quarter and year, the direction of the Company and its strategy to position moissanite as the most brilliant jewel in the world. Following their remarks we will open the floor for questions.

As you are aware, we may make forward-looking-statements both during the call and the following question and answer session. These forward-looking-statements are not guarantees of future performance and are subject to risks and uncertainties as well as other factors that could cause the actual results to differ materially from what we discuss here. These risks and uncertainties are available for you in the press release itself, as well as the Company's filings with the Security and Exchange Commission. You may obtain these documents from the Company's website at www.charlesandcolvard.com. They are also available on the SEC website, sec.gov. With that let me turn the call over to Randy to begin the review and discussions.

Thanks Fran. Good morning. I'm really pleased to speak to all of you this morning, and have this opportunity to share the direction we're taking our company. Our fourth quarter results include positive cash flow and a 10% increase in sales over last quarter. Before we share where we're going, lets take a minute and have Tim review the numbers.

Thank you Randy. Good morning everyone, we appreciate your time today. I will discuss the financial results for the fourth quarter and fiscal year ended December 31, 2009.

As announced in today's press release, net sales for the quarter were $2.4 million, down 33% from $3.5 million in the fourth quarter of 2008. Domestic sales for the quarter decreased 45% over the same period in 2008 to $1.5 million, and were 62% of total sales. International sales for the fourth quarter increased 7% over the same period in 2008 to $0.9 million. Net sales for fiscal year 2009 were $8.3 million, down 44% from $14.7 million in 2008. Domestic sales for the year decreased 48% from 2008 to $5.3 million and were 64% of total sales. International sales for the year decreased 33% from 2008 to $3 million.

We shipped 15,000 carats during the quarter, a decline of 19% compared to last year's fourth quarter. Domestic shipments decreased 31% while international shipments were up 10%. The average selling price per carat for our loose jewel sales decreased 7% when compared with last year's fourth quarter. For fiscal year 2009 we shipped 48,000 carats, a decline of 41% over 2008. Domestic shipments decreased 48% while international shipments decreased 25%. The average selling price per carat for our loose jewel sales decreased 7% when compared with 2008.

As you are aware, the current global economic recession continues to result in a significant slowdown in the retail environment, with the impact on the jewelry industry particularly pronounced due to its discretionary nature. In addition, we continued to experience decreased demand over 2008 from a number of our customers, due to their current levels of moissanite inventory and slow sell through to consumers. While the 2009 to 2008 quarterly and annual trends were unfavorable, we did experience a 3% increase in domestic sales and a 24% increase in international sales in the fourth quarter of 2009 as compared to the third quarter of 2009, and a 10% increase in sales overall between the two quarters. This improvement in orders placed by a number of our existing domestic and international customers occurred as we worked to regain the confidence in Charles & Colvard and to resolve legacy issues. In addition, this improvement in sales occurred with a minimal spent on advertising as we assess the effectiveness of our marketing strategy and work to redefine our messaging.

Total costs and expenses were down $56,000 or 2%, to $2.8 million for the quarter, and down $10 million or 46% to $11.7 million for the year, primarily due to lower sales and cost control measures, including a reduction in headcount and decreased expenses for sales and marketing programs. The fourth quarter included a reserve on a note receivable of $170,000 and indiscriminate loss and long lived assets of $146,000, both of which we believe to be nonrecurring. The fourth quarter of 2008 included a reversal of a $1.9 million bad debt expense related to receivables settlement with a wholesale customer that decreased our cost and expenses in that quarter.

Our income tax expense for the fourth quarter this year was $16,000 compared with income tax expense in the same period of 2008 of $1.9 million. Our income tax expense for fiscal year 2009 was $78,000 compared to an income tax benefit of $633,000 in 2008. In the fourth quarter of 2008 we recorded evaluation allowance against certain deferred tax assets, due to the loss in the year and uncertainty over sufficient future taxable income to fully utilize the deferred tax assets. Until such time that there is no longer uncertainty over whether we can generate sufficient future taxable income, to use the deferred tax assets, we will not record a tax benefit for losses incurred.

Net loss for the quarter was $440,000 or $0.02 per diluted share compared with a net loss of $1.3 million or $0.07 per diluted share in the same period of 2008, and improvement of 65% quarter-over-quarter. Net loss for the year was $3.4 million or $0.18 per diluted share compared with a net loss of $6.2 million or $0.34 per diluted share in 2008, which is an improvement of 45% year-over-year.

We ended the fourth quarter with an improved cash position from the end of last year, and from the end of the third quarter. Cash and cash equivalents were $7.4 million, up from $5.6 million at the end of 2008, and $6.8 million at the end of the third quarter of 2009. We generated $1.9 million in cash from operations during the year, $563,000 of which was generated in the fourth quarter, primarily due to a $1.5 million decrease in accounts receivable excluding the impact of the change in reserves in the non-cash purchase of inventory under our settlement with a customer. We received a $2.1 million income tax receivable from the Internal Revenue Service and a $3 million decrease in inventory, excluding the impact of the non-cash purchase of inventory under our settlement with a customer, partially offset by a $1.4 million decrease in accounts payable and our $3.4 million net loss.

Total inventory, which includes long-term and consignment inventory, was $41.4 million at the end of fiscal year 2009, down from $43 million at the end of 2008 and $42.2 million at the end of the third quarter of 2009. Shipments were offset by the $1.3 million non-cash purchase of inventory we made in connection with the settlement of a customers dissatisfaction (inaudible) receivables down.

We did not make any raw material purchases during 2009. The receivables settlement was also a factor in our decreased accounts receivable, which were $1 million at the end of fiscal year 2009, down from $3.8 million at the end of 2008.

Lastly, during the quarter we announced that our board of directors had authorized a share repurchase program until August 12, 2010, of up to an aggregate 1 million shares of the Company's stock in open market or private transactions. During the quarter we repurchased 41,670 shares on the open market at $1.21. This does not include purchases by directors and officers during the same period. With that let me turn the call over to Randy.

Thanks Tim. We continue making progress this first quarter of 2010 our management team is working well together as we begin the implementation of our strategy. While its not complete yet, we feel we have the key pieces in place that will drive the top line while managing that all important bottom line.

First we reviewed thousands of historic sales records to identify the target customer in order to focus on sell through, not just sell in to the retailer. Our review indicated that the target demographic prevalent in warranty registration records, primarily female, predominantly age 35 to 55, middle to upper middle income. Retail price points where historical sales are strongest are $99 retail to $399. Compelling also revealed in multiple prior focus groups and interviews is that moissanite was purchased as a diamond alternative. However positioned above all other alternatives in that it is a unique jewel with properties similar to or better than a diamond. The fact that moissanite was promoted as born from the stars is believable and played a significant part in their purchasing decision.

With this information we employed Teshler Creative Group to develop a new marketing message. I think I mentioned before when we spoke that I have over 12 years experience with Teshler, and they have that, if not more, experience in the jewelry industry. Today their primary account is AMD, the chip maker, and we're really excited about the product that they're bringing to line and our ability to put together a compelling offer that we can go forward with in the marketplace. Recognizing that the US is a $40 billion jewelry market currently in turmoil, we see an opportunity to position jewelry containing moissanite as a provider of incremental sales and margin for savvy retailers. We currently are focusing our efforts where we can achieve the most meaningful sales inroads, developing exclusive supply relationships with select jewelry manufacturers that provide sales and distribution rights for retailers currently in their portfolio.

With the assurance of exclusivity, key manufacturers are more willing to make the investment in gold and labor to produce moissanite jewelry. In addition, they invest in marketing and display materials, these target outlets that may include target retailers are segmented, focusing on the best of breed. The segments would be department stores, mall based jewelers, independent jewelers, mass merchandisers, mass discounters, outlet jewelers, e-commerce, TV shopping networks, and alternate channels.

Progress has been made with both old and new relationships, domestic and international. The process is slow and deliberate, usually requiring a test in place that could take several months prior to a complete rollout. We are continuing to work with them, and as soon as we have more to report, we'll make it public.

Some time in March we will be providing you with access to a completely revised friends and family website, exclusively for shareholders, employees and their family, and professional service advisors to Charles & Colvard, where you'll be able to purchase moissanite products at very special prices. In addition, we are responsibly creating portfolio collections containing designs that will establish brands under Charles & Colvard. This is best understood by looking at Proctor & Gamble, which markets many well known brands; Head & Shoulders, Old Spice, Secret, Cover Girl, Gillette, Ivory, Crest, Scope, Pepto-Bismol, Bounty, Comet, Pampers, Dawn, Bounce, Cheer, Mr. Clean, Tide, just to name a few.

Charles & Colvard exclusive brands are targeted to be marketed by select retail channels and could include Ladies Fashion brand, Fashion in the Jewelry Industry is a collection which would include earrings, pendants, bracelets, rings. An upscale brand, this would be one of a kind pieces featuring jewelry with two carat and larger centers, utilizing half carat and larger side accent stones, possibly set in platinum, with special displays and boxing.

Loose stone brand, displays utilizing metal push up holders to accommodate three to seven stones that range from one half to four carat. These will accommodate the many semi-mounts that jewelers currently carry.

Religious jewelry brand, a selection of crosses, a very hot item on the TV networks. Bridal brands, designs featuring three-quarter carat and larger centers with unique styling in 14k gold. A man's jewelry brand, rings featuring large center stones, cufflinks and other men's accessory items.

Our current cash position enables us to explore these possibilities and I look forward to updating you with our progress on our first quarter conference call in April. Most of all I look forward to actually showing you stunning product designs accompanied with exciting marketing materials when we meet here in May at Charles & Colvard's annual shareholders meeting.

Operator we're now available to take questions and answers.

Thank you. (Operator Instructions) And we'll pause for just a moment to compile the Q&A roster. (Operator Instructions)

And we are continuing to compile the Q&A roster. Please stand by, everyone.

Our first question will come from the line of Michelle [Graff] with National Jeweler.

Hello, I noticed earlier in the call when you were going over the financials that you seem to be showing a lot of strength in international markets, more so than in the US. And I wondered if you had any ideas as to why, or if you want to make any comment on that?

Yes. Hi Michelle, by the way; it's Randy.

Hi, Randy.

Tom and I first focused on the international mostly because the international shows are more prevalent in the fall. We attended the [Vicenza] show, prior to my getting here. Tim and Tom had made a trip over to Hong Kong to cover the Asian market.

We have several large distributors in those markets that we were able to shore up our relationships with. And, in turn, they have moved forward in putting product in the market place. Actually, Tom and I will be leaving next week to go back to Hong Kong and China.

So was it your attendance at these shows that helped boost international sales?

We think so. We had several very, very productive meetings.

And one more question about the different brands you were talking about launching. Is that part of what you've been working with, as a part of what Teshler has come up with for the company, having, you know, a ladies' fashion brand, the upscale band, the loose [stone] brand?

That's correct. We're working in conjunction with them.

Okay; all right. Thank you.

Okay. Just to follow up on Michelle's question, I think I told you guys last time but just in case I didn't, we did bring onboard a very experienced marketing and merchandising person to help us design and put together collections that would not conflict with what our manufacturers are doing, but position us to go to the alternative channels and provide product to really feature the larger moissanite stones.

Our next question will come from the line of David Ratliff with Doucet Asset Management.

Hey, thanks for taking my call, or my questions. We're almost two-thirds of the way through the first quarter. Are you seeing the same kind of follow through from -- you know, you had the pick up, sequentially, from Q3 to Q4 in your sales. You know, without asking for guidance, I mean, are you seeing follow through in the first quarter?

Yes, unfortunately, David, we don't give any guidance or kind of trends before we actually announce earnings.

Okay. Let's see; you dropped inventory by about $2 million, you know, Q4, 2008. I mean, I guess that's the biggest problem about, or one of the bigger problems is getting that inventory moving. I mean, the different brands, a lot of these different strategies you're talking about, I'm sure, it's going to address that. But could you give any more, you know, information to shareholders about really getting that inventory to flow through into revenue so that we can break even, post an accounting profit?

Yes, a very good question, David. This is Randy. Yes, I don't want to steer you in the wrong direction. The real volume, the real velocity in moving stones into product that will get into more retail outlets is going to come through our bigger initiative and, at this time, probably 90% of our focus. And that is developing our relationship with key manufacturers.

And I keep stressing key because the Company is focused on doing business with only those prime manufacturers, prime meaning that they have facilities that they own or they control. It's not some jobber in the middle that's jobbing it out.

And those relationships will translate into the velocity that we need to move that inventory.

Okay. Well, those were my questions. Thanks again.

Thank you.

Our next question will come from the line of Paul [Sahlit], with Potomac Capital Management.

So, the cash flow, I guess, really in the past year was relatively impressive, given the minimal amount of revenue. And obviously, that's coming from the inventory. Is it your expectation that you will continue to generate cash, you know, in 2010 and in each quarter? Or, is there some seasonality that in any given quarter you could burn some cash?

That's somewhat of a forward looking response I'd have to give. And I would tell you that there is seasonality in the business. Usually, Christmas season being the biggest with result in four to six months prior to that resulting in revenue for us, generally speaking.

But, you know, we continue to remain focused on cost containment and building revenue. So, I would expect our cash flow situation should improve.

Yes. And, could you give us any flavor as to, you know, as you talk to new and existing relationships, you know, what're you seeing, in terms of the reception and the mood?

Without getting specific, because, again, I don't want to get into a forward-looking-statement, but we have found the distributors that we have approached and again, we've been selective, to be very open and excited about where the product can go.

Some have even -- as excited as I've been about moissanite from the day that I came out and looked at this, after some of these visits, I walked away even more excited because they really come up with some clever marketing ideas and some great retail outlets to approach.

And so, we're working together diligently on that and staying focused on a manageable group that we can deliver and move forward quickly.

That's, great. Looking forward to hearing some successes; thanks.

Our next question will come from the line of Harold [Hussey], shareholder.

Good morning. I don't know a lot about the moissanite. Is it cut the same way as a regular diamond is? Like, I believe, 56 facets?

You know, it's actually 58 facets and the count that you're probably missing is the typo in the queue.

It is cut slightly different. And being an old diamond guy, when I came in, I said jeez, you guys are missing an opportunity here. But I went through it with the engineers here. They have cut moissanite over the past decade in every shape and arrangement that you can think of. And they have scientifically come up with the angles that maximize the brilliance. And I'm convinced that they're all over it. Because, I have tested with some people I know on the outside, cutting some product into different -- more at the same angle as ours.

They're very similar, not that much difference. But enough difference that it really accentuates the brilliance of the moissanite.

Have you ever tried, like, the Leo configuration? You see, my wife has a ring with a Leo diamond in it and it just seems to have more fire than a regular diamond. And I know that the Leo diamond is cut differently. Have they tried that configuration?

Yes, actually it's -- [Shaktra Namdar] has a patent on that design. And you can't use that.

I see.

That's exclusively theirs and I don't know if it would work. You know, moissanite, different from diamonds, is double refractive. And what that means, when light enters through the plane of the material, it splits into two; where, in a diamond, it stays in one beam. And so it bounces and refracts differently.

I would highly suspect that it would not work as well as the diamond material does with a cut that -- L A Tannenbaum owns Shaktra -- that he's using with the Leo diamond.

But we do have some proprietary cuts we've used with -- that the company has used in the past that are pretty exciting; similar to the Leo that we're thinking about how to reintroduce those to maximize it.

And how is the company going about to make people, you know, the general public aware of this? Do you advertise in some of the magazines that, maybe, pertain to women? Or, anything like that?

Another good question. First, you've got to stop and say, okay; how do we get the message to the millions of people out there? And the answer is, you'd better have hundreds of millions of dollars or you're not going to be successful in doing it.

So, then you've got to back up and say, okay, within my constraints, my financial constraints, how can I do it? And having been in retail for 38 years, the best way is to partner with great retailers, who are doing huge marketing campaigns and working in conjunction with them, get in their catalogs, get in their television, radio, billboards. Billboards are very effective.

And then we can accentuate some of that with a great PR campaign. We worked with CBS Early Morning the past month. And last week, they aired about a five-minute segment on alternatives and featured moissanite. And actually, the producer there, during that airing, looked at CZ Stones that were mounted in a ring; CZ, moissanite and diamond. And the host asked him to pick out the diamond and he picked out the moissanite stone. So, we got a pretty good PR off of that one.

Okay, thank you very much.

Thank you.

Our next question will come from the line of Rodney Baber with Morgan Keegan.

Good morning, Randy.

Hey good morning, Rodney.

There's a couple of things; you know, we've always talked about the size of the market. And if you go back and look at the history of the Company, we had about, I think we peaked at $43 million, which would imply that was maybe $100 million in retail sales, okay?

Last year, we did roughly $8 million and change, okay? Which would imply $16 million in sales. So, really, what I want to do is get your thoughts on what we can do with this company and what kind of revenues we could have.

On that early morning show you talked about, I heard that they put up a slide that showed that the diamond market was $30 billion and that the engagement ring market was $5.5 billion. And that alternative stones were getting $385 million of that, okay? We've always talked about getting 1% of the market, which would be $300 million.

In the alternative area of $385 million, I'm just wondering what's the breakdown of that? How much of that could be CZ, or emeralds or sapphires or what? And how much of that $385 million, just in the engagement market, do you think we should go after? What would be a good market penetration on that?

My answer would be, Rodney, I want all of it. But how much I could get would be real speculative and obviously, I can't get speculative like that. But I'm going after all of it.

I [don't] like that answer.

Well, that's where I'm headed.

Back on this awareness question, do you have any guesstimate on what they're wearing as the moissanite is? And, you know, what should it be, over time?

I mean, obviously, it maybe should be 100% at some point, but, where do you think we are?

I've read different reports from different -- whatever you call all the reporting agencies. Some, which the company employed and some that are outside agencies; but the number that seems to ring consistent with all of them is somewhere around 10%.

Interestingly, I can tell you I've talked to hundreds of people, you know, telling them where I'm at. And I'm talking about people that are non jewelry people. And I would say 10% is about right, about 10% of them knew what the product was and the rest of them didn't have a clue. And when I explained it, or showed them a piece of it, they were very receptive.

So, I do think the more we can get the message out there, the more we get the awareness up, the more we're going to have an opportunity to get 100% of that alternative market.

You, apparently, are out on Tuesday Morning, with an online offering there that's -- you know, I'd love to hear your discussion about that market channel, that distribution channel, what you think could happen with that.

Good catch; you're watching the Internet. We did launch a fulfillment with Tuesday Morning and posted a small number of pieces there. Their sell through was extremely good and I know that Tom has had a follow up meeting with them, where they're looking at rolling it out to a portion of their 800 stores.

Actually, to put it in the store?

Yes.

Wow. They just have it on their website right now, right? So, are they advertising it there? Or is it just something that they've offered up, just to kind of see what's going on with the potential there?

Yes. At the outset, they sent an E-mail message to their entire list, I don't remember how many. They sent two e-mails, I don't know how many customers they have, I know they have a lot. I know my wife is a customer, I can't keep her out of their darn stores. They're a few blocks from the house.

All right, just a couple more things. Back on the inventory thing, assuming you've got roughly $40 million in inventory and you sell with a 50% margin then that's going to produce $80 million for the company. Is that a fair statement?

I'm just following your numbers, go ahead.

All right, well at what point, what's a normalized level of inventory for the company? I know you don't know the answer, but roughly the $40 million, how far down would we probably take that before we started buying new product from Cree?

Well the driver there is going to be based on needs by millimeter size. We may be at $30 million and run out of 6.5 millimeter, which is one of your best selling sizes because it's the diamond equivalent of a one carat. I'm not saying we are, but if we did we would be forced to cut 6.5 millimeter stones. But having said that, we own a lot of material, and we could certainly accommodate that for a pretty extended period of time. I don't see us having to get back out there.

In answer to your other question Rodney, the inventory, I'd love to see us closer to a just in time, and we should be able to do that. And our source is very close and we can get in sync with one another at some point in the future. But ideally would be to be somewhere trailing what your annual wholesale sales are to achieve, if we could get it to a one time turn to begin with, but obviously at some point you want to be running, we should be able to run 380 turn.

How's the relationship with Cree right now?

We've had a meeting with Cree, we've got, I think, a good relationship. I enjoyed the conversation with Chuck Swoboda, I think he's a great guy, and we are working on, I mean our agreement is in place, we have our exclusivity and we're working on some agreements that would provide for certain needs that we have, certain needs that they have over the next four years.

Great. Just one last thing, I wanted to ask you how many employees the company has now and also to thank you for what you and the team are doing, because I know how hard you're working, and as a stockholder I really appreciate that. So with that comment, where are we on people? Where were we before and what do you think we'll have to do when this thing starts ramping, as far as hiring new people?

Currently we're at about 26 employees, the high was about 60 and we don't believe that we would have to add any people, or not more than a couple, so lets say not more than 30. We'd have to get up to a pretty significant revenue level before we feel that we'd have to add more people. The business is, at this point the business is a lot of order fulfillment, its not manufacturing, due to our inventory position. So we can really leverage that with not adding people and increasing revenues. So I think we're in good shape with our people.

Great. Well I'll jump off, thank you.

Our next question will come from the line of Tom [Zoulas] with Merrill Lynch.

Yes gentlemen a question, first I'm not with Merrill Lynch, I'm with Capitals Invest and Capital. The question is, first of all to follow up with Rodney's question, the $42 million in revenue, my understanding is that your gross profit margin is well north of 50%, is that still the case?

Gross profit margin is currently at about 58%.

Okay because if the numbers haven't changed from the recent documents, I believe our cost of inventory per carat is roughly about $40 and we're selling it north of $150 if nothing has changed in the selling price on a wholesale basis. Is that information correct?

Let me just add something there. You're really looking at half the picture.

Okay.

If the company, and I don't have the exact numbers, so I'm not speaking exact numbers, but if the company sold $40 or $50 material at $160 per carat but then turned around and gave the retailer $75 in marketing allowance, you've got to look at your net effect.

Okay. But the actual revenues would be the larger number, correct?

Actual revenues would be. But again, we're looking at the total picture from the top all the way down to the bottom.

Okay. But the inventory is more like $150 million in inventory and the retail level is what, on a revenue basis, is my understanding.

Yes, I get a little confused when you say retail, because retail to me is what the retailers sell it to the consumer for.

I'm sorry, I didn't mean retail, actual revenue that you do would be, before any discounts or credits for advertising.

Again it depends on where, if we get a large order for 8 mm stones, it's going to be much higher because it's a different price per carat, depending on what they order.

All right. Switching gears here, and I was around when Rodney was there also and a lot of us saw the company doing $42 million in revenue, and my question to you is, do you see opportunities where we can pick up $3 million or $4 million in an opportunity and are those realistic, or do we have that much base building that we've got to look at much smaller numbers? I mean if this market is so big, what can we expect down the road?

You're asking opportunities to increase sales, and I understanding that right?

Correct, like you talk about different opportunities that your pursue with key prime manufacturers. Are these orders that could have the potential of impacting us with $4 million or $5 million at one shot?

Obviously I can't give you that number, but I will say this, and you can take this to the bank, I wouldn't be here if I didn't believe we could get there.

Okay, all right. I wouldn't be here either if I didn't think that that potential is out there and that you were capable. I just wanted to clarify. All of us that have seen the stones and own the stones realize what an opportunity it is. The confusing thing is why we just can't get everybody else, and everybody that does seem to buy the product loves the product. So obviously there's a disconnect between what we see and what the actual retail people see, and we just need the right people in there to execute and we're hoping you're the right team. I just wanted to make sure you had the right vision as opposed to being happy with 20% or 25% gross per year at these low numbers.

I'm way above where you're talking. And we are definitely zeroing in on how to bridge that gap of communication. We are so focused on the consumer. We're not focused on the retailer, we will give the retailer what he needs to get sell through to the consumer. Sell in is not in our vocabulary.

Okay, great. Thanks for all your efforts guys.

Thank you.

(Operator Instructions) Our next question will come from the line of Bill Gordon with Gordon Capital.

I'm interested in the marketing aspect of the company. At one point you mentioned key manufacturers, at another point distributors, and were speaking about collections. How do we get from those two areas, be it either A or B, over to where the sell through is? Is that department stores, is that jewelry stores? How do we get from A to B? In other words, we're going in there designing a collection, having a distributor, peddle it through to the individual stores and having them represent us in some sort of joint deal, or what?

Bill that's a good question. This is Randy. What we're doing, we're identifying the customer that we want to approach, and once we identify that customer then we look at those categories that I talked about. Let's just take one category, the department store. So we look at the department stores and we say, "Who would be the number one, if we could only have one department store, who would that be? And then if not them who would be number two, number three?" Based on targeting the customer and which one of those has more of those customers, that age group, that income bracket.

With that in mind, then we say, "Okay who out there is the key or prime manufacturer that's doing the most business with that department store?" And then Tom and I contact, we usually have contacts at most of the key manufacturers. We're old enough in this industry, too many candles on the birthday cake some people say, to have made at least some relationships. And we go in and we tell them why we're there. "We think you're the guy. And we'd like to work in conjunction with you to put together product, to hit the right price points." And he makes the presentation because he has the relationship with the department store. And then once that takes place then we move to the test mode where product is built and goes into the department store. And then once the test is successful then we get a green light to roll it out. That's how that process works.

But this is, you basically said one thing and then another thing. This is really not you speaking, you speak about going to the consumer. You're really not going to do that, as you pointed out in the beginning, you don't have the dollars to do that. So you've got to actually have the representation at the counter, at the department store that has a strong presence with the consumer. They've got to show the goods and marketing literature and the sales lady has to sell to her customer there.

So the whole key, it seems to me, is the end point, is the exit strategy of that department store or retail store, etc. It is not peddling to the consumer. It's got to be where the consumer wants to buy something at the jewelry store or at the department store. It would seem to me, in terms of being cost conscious.

Absolutely. No, you're absolutely right. And with that, in conjunction with everything we're talking about, we are in the process of developing a web based solution for training of employees, because at retail, I can tell you at Samuel's I had about a 50% turnover, and that's pretty consistent for the industry. So that employee behind the counter, whether its at the department store, the jewelry store, any of those channels we've talked about, and that case is where the sales are going to be made. That sales person behind the counter is turning over about every six months. So it's an ongoing effort to be able to train that sales person to properly represent moissanite, which will enhance sales. And we're working on that, we will have something that we will be able to offer the retailer in conjunction with the product and the distributor. This is a partnership, this is not where we just hand them a bag of stones and say, "Good luck", we're working all the way through.

And we're also working the marketing message and materials that would be provided to, in that scenario, the department store. Now the department store is going to take our message and they're going to customize it to fit their message. Because they have a look and feel that they want to have, but it will still be a message that is in line with where moissanite should be placed going forward, based on consumer needs. Everybody's focused on getting sell through to the consumer.

Blue Nile is able to sell through diamonds. Can we use a website to sell moissanite? And number two, can we sell through to Home Shopping, QVC, those type of people?

We're on over 100 websites from what I understand. I don't know the exact count, that's what I was told by Stuller, who's one of our major distributors. And they distribute to most of the independent websites. The home shopping networks, you can go and see, HSN still features moissanite, and I'm sure others will have an interest in it.

Thank you.

Our next question is a follow up from Michelle Graff with National Jewelers.

I just wondered if you could give me the numbers again on the international sales for the quarter and the fiscal year versus domestic sales. I just want to make sure I have those right. Thanks.

Sure.

Domestic sales for the quarter was $1.5 million. And international sales for the fourth quarter was $0.9 million. Net domestic sales for fiscal year 2009 was $5.3 million and international sales was $3 million.

And international sales, in both cases, that was an increase from the previous, from last year's quarter?

No, they were down. Down 33% for the year and up 7% for the quarter.

Not with international sales?

With international, yes.

Up 7% per quarter and you said down 33% for the year. And what was the international number? As far as being up or down, for the quarter and then for the year?

That's what I just gave you. Sorry.

So that was domestic?

No, that was international I just gave you. Domestic sales for the quarter, decreased 45%.

Okay.

And for the year, decreased 48%.

Okay, all right. Thank you.

You're welcome.

Our final question will come from the line of Rodney Baber with Morgan Keegan.

Randy, do you have any sense, now that you've been in the Company for three months, about how much of the market we actually have penetrated? In other words, of all the potential sales areas that you see, what percentage of that did we get to with this Company at this point in time? What percentage? Do you have any kind of read on that?

I really don't, Rodney. I really don't. Obviously, it wasn't enough or we wouldn't be where we are.

Okay. Well listen, on this international/domestic thing, give us just a little more feedback on how you see that playing out over the next, let's say, five years, as you develop the Company domestically.

And internationally, how you'll go about that over what timeframe in which you want to bring international back in? Where's your focus going to be?

Well currently, we're dual tracking. As I mentioned, Tom and I are headed to Hong Kong next week. In many countries, we have distributors. We have had extensive conversation with most of those, over the past eight to 10 weeks, some face to face, when we were in Italy. And we're pretty bullish on the domestic -- I mean on the international.

Now having said that, the domestic is, in my opinion, the low hanging fruit. So, we can't take our eye off of that.

Well, I seem to remember that the US market was half the worldwide market. So, international is the other half. Is that roughly what it is?

I don't know that number; I'll be honest with you.

Okay.

I mean, I could go get it. I'd have to go out and look at it. I don't remember the US being half anymore; they used to be.

Okay; great. Well, thanks again.

And we now have a question from the line Dennis [Dove], private investor.

Good morning. I have to say I'm very encouraged about what I'm hearing today and I'm looking forward to seeing how this plays out.

A few quick questions; first, you mentioned the CBS thing. Is it possible that what's new on the websites are something that you can give a heads up ahead of some of these events so that we might be able to catch them? If that's possible that'd be great.

Got a question; you mentioned that a lot of moissanite sales are just self-purchasing women and that was kind of the target in the past, of the Company. Past management targeted those folks.

There's a concept of self fulfilling prophecy and I've worried that that shows up somewhat in the results. So you target a certain group and you see that that's the group that you're getting; and then use that to go forward. Do you have any comments on that? Are you considering that and -- it does sound like you're expanding the target a bit. You're talking about bridal markets and such.

Okay, good question. First, I'm going to go back to the CBS. To the extent that we know it, we should post it. So, you know, people following Charles and Colvard could watch it.

However, having said that, it originally was scheduled to air the Friday before Valentine's. And we got bumped because of former President Clinton having his heart scare. And so they had to revise it. And then, when they actually showed it, I'll be honest with you, I missed it too because they didn't tell us the date it was airing. I had to watch it on a replay with a piece that they'd sent us. But in the past, I think we posted those on our website. So we should, in the near future, be able to post that on the website, that segment.

Then, going to your second question, you know, as you were saying that, I was sitting here thinking, now my wife has over 30 something or 40 something pieces of jewelry. I don't think she ever bought one. I think I bought every piece she has. And I know my next door neighbor bought every piece of jewelry his wife's wearing, other than some costume jewelry that she bought at the department stores, you know, the rock kind of jewelry.

So, I can tell you, I'm going after those guys also. Because those guys buy a lot of jewelry, for their wives. I've got to convince the wife that it's a great product to wear and she's going to enjoy it. But I'm definitely going to be in the ear of those guys that are buying that stuff.

I'm very encouraged to hear that. That's great to hear.

Now, in terms of the brands you talk about, you're talking about actual jewelry line brands, not branding jewels in different ways, I believe. And, are you talking about Charles & Colvard owning those brands of jewelry lines? Or, the manufacturers own or some joint project?

You know, that's a good question. We're working in conjunction with Teshler. Let me tell you, historically, in my 38 years in the business kind of how these things unfold.

We come up with a concept for a jewelry design and a brand to go with that design, which obviously, is going to feature moissanite as an ingredient in the piece. Our intention would be to own that brand.

But then you show it to a large retailer and he says that's great but if you want to do multi-million dollars worth of business with me, I'm going to own that brand. And I've done that many times when I had Samuels.

I had several manufacturers come to me with a brand. I said that's great but you're going to give me the brand if you want me to do it. We'll do a deal; we'll do like a five-year deal but I'm going to own that brand.

So, you can't say that you're always going to own the brand. But what we're going to do is continue to develop things that would be exciting to all those various retail channels. And then, we may take it and do it in conjunction with a current jewelry manufacturer because it may be a potetntial multi-million dollar project that we need him to help finance. Or, it may be something that we feel we can handle and we'd take it on our own.

I mean, there's all kinds of opportunities that we would look at and we would take the one that would be the most successful for the Company.

That sounds great. I've seen good to develop a brand and, if you can exchange that for some guaranteed sales, that would be a good deal.

In terms of -- I've got to say, I'm a person that doesn't mind getting dragged into Tuesday Morning. So, it was interesting to see that there. It sounds like you're talking about that as an ongoing business. I mean, they have kind of a reputation as a clearance place. So, that was not a project to clear out some of the jewelry inventory we picked up from manufacturers? But that is an ongoing, or at least potentially, a sales channel?

That's a fair question and it did start as an outlet to move some of the product that we had. But it's developing.

Okay. That sounds, I mean, everything's good. You also mentioned the from the stars campaign, which was the original campaign back when. And, are you actually talking about revising something along that line for marketing? Or is Teshler, whatever, looking at multiple ideas to develop a new marketing?

Yes, they have fresh ideas. We're actually in Austin next week with a video photo putting together a campaign. The reason I bring that up is because that was (inaudible) in the focus group and a lot of the other questionnaires that women filled out. So, we do see it as a viable piece that should be included in an ongoing marketing campaign.

It may end up being a different slogan. It may be in a different interpretation. I don't know the answer to that yet. But we do need to keep that as an ingredient in the marketing campaign. We're convinced of that.

It gives a purpose for -- I mean, you know, the formula was derived scientifically and then went in and the material is created or made. But having an origin really rings well with the consumer. That origin being from, you know, the stars. And the stars seems to ring a little better with them than meteorite.

Okay, I understand that. I guess what I worry about is overemphasizing the created aspect of the jewel when, you know, it's really the jewel, what it is that matters, not whether it's mined or created, at least to my mind. Others might disagree. There's a whole industry that pushes that mined is superior. But we don't have a mined jewel; we have a created jewel.

And, but emphasizing that too much is kind of a turnoff instead of a positive. And the stars thing could go either way. It could end up highlighting that it's from the stars. But there isn't any from the stars, so we had to create it.

Right.

I mean, do you worry about that aspect? How does it being created play in your mind?

I can give you a real simple answer to that. I'm in absolute agreement with you but unfortunately the FTC is not in agreement with you or I. So, they impose their restrictions and we have to say it. It's not a choice.

If we talk about moissanite, we have to say the word created.

Is that something we can fight? I don't know we want that fight, with the FTC?

No, you're not going to fight that one. You're going to lose that battle. And that's not just us; that's with created emeralds, created sapphires; all of that. You can say laboratory grown, created, that's the two primaries. And they just had a world council meeting in Antwerp, Belgium. And the world council just sanctioned it also, that it has to be created or lab grown.

The good news is, at least they're recognizing us and allowing us to be included in all the materials that gemological institutes, AGS, American Gemologically, the Diamond Council of America, all these people now will be including moissanite in all their educational materials.

Remember five years ago, you couldn't find moissanite in anything that was educating gemologists. They were out there selling behind the counters. So, there is good news mixed with it. And, we'll find the right way to market it. I'm convinced of that.

Fran has just told me that we are running out of time. And, actually, we're out of time.

Hey guys, I look forward to our next quarterly earnings call in April. And I'm very hopeful that we'll have some exciting things to share with you then. Thank you for being on the call; especially, thank you for your support. And, we'll talk to you guys in April.

And ladies and gentlemen, that does conclude today's teleconference. You may all disconnect.