Charles & Colvard Ltd (CTHR) 2010 Q3 法說會逐字稿

Greetings, and welcome to the Charles & Colvard Third Quarter 2010 Earnings Conference Call. At this time, all participants are in all listen-only mode. (Operator Instructions.) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Fran Barsky, Investor Relations with Charles & Colvard. Thank you. You may begin.

Thank you, [Bob], and good afternoon, everyone. We appreciate your interest in Charles & Colvard and your participation in our Third Quarter 2010 Earnings Conference Call. You should have a copy of the news release detailing the Company's financial results that was distributed after market close today. If you do not have the release, you may obtain a copy from the Company's Web site at www.charlesandcolvard.com.

With me today are Randy McCullough, Chief Executive Officer, Tim Krist, Chief Financial Officer, and Tom Pautz, Vice President Sales and Marketing. Randy and Tim will discuss the results for the quarter, 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 in 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 to you in the press release itself as well as with the Company's filings with the Securities and Exchange Commission. You may obtain these documents from the Company's Web site at www.charlesandcolvard.com. They are also available on the SEC Web site, SEC.gov. With that, let me turn the call over to Randy to begin a review and discussion. Randy?

Thanks, Fran. Good afternoon. I'd like to thank each of you for taking your time today to participate in our Third Quarter Earnings Conference Call. In a few weeks, I will have completed my first year as Chief Executive Officer here at Charles & Colvard, and I am pleased to say that in my 39 years in the jewelry industry, I have never been as excited as I am today regarding our progress and the opportunities we have identified within the past 12 months.

Since I joined the Company, our management team, which has over 100 years of combined jewelry industry experience, has addressed and resolved the legacy issues of the past, put in place a strong foundation for future expansion of moissanite distribution, made the necessary changes to position the Company for continued profitability, put up jewelry manufacturing capabilities, began development of multiple brands to position moissanite jewelry in various retail channels in the marketplace, establish training and support to enhance sales momentum and implemented customer-driven pricing that has resulted in increased sell-through at the retail level.

One of our primary goals is to increase positive cash flow each quarter as we build and reinvest in the business. During the first half of 2010, we began to implement our new strategy and messaging initiatives. Key elements of our strategy include better support of our existing channel partners in order to improve sell-through the retailers and consumers and to increase consumer awareness of moissanite and the identification of additional channel partners that can open new domestic and international markets for Charles & Colvard.

By right-sizing in the business, keeping control of our expenses and pursuing new sales and marketing initiatives, we have returned to profitability, achieved an impressive sales turnaround, restored positive cash flow from operations and greatly strengthened our channel partners' relationships.

In addition, our Company, now, as all new enterprise-level financial and operating systems that can support efficient and profitable jewelry manufacturing activities, thus providing opportunities to future expand our channel for distribution.

With past issues resolved, our management team is now able to focus fully on expanding the business by providing our retail partners with the tools necessary to enhance sales. New training programs have been developed to assist in facilitating sales behind the counters. An arsenal of marketing material is now available or is currently under development to provide necessarily retail supporting including displays, catalogs, postcards, brochures, certification cards, warranties, backlit signage, banners and TV commercial spots.

In addition, a team has been tasked with improving our Internet presence and social network marketing capabilities, pursuant to which a series of projects are well in development and should be completed and deployed in early 2011. We believe these initiatives will increase sales and market awareness of moissanite.

We have been diligently identifying opportunities with new and existing partners to build a solid foundation of revenue and profitability in the fourth quarter and beyond. Last week, Tom Pautz, our VP of Sales and Marketing and I attended a series of meetings that hosted over 180 managers for Ultra Diamonds, which is adding an assortment of moissanite jewelry to its stores for the 2010 Christmas season.

Ultra operates stores in the US and major centers as well as Filene's Basement and the Burlington Coat Factory. The enthusiasm of the store managers was very high over the moissanite product.

This week, we are shipping moissanite jewelry to stores operated by the Army and Air Force Exchange Service in the US, Europe and Asia. The Army and Air Force Exchange Service has provides goods and services at competitive prices with superior service to the American armed forces personnel for over 115 years. We are proud to offer moissanite jewelry at a great value to the men and women who serve our country.

Estrella, a higher-fashion brand of moissanite jewelry exclusively from Charles & Colvard, is now available on ShopNBC, which is known for excellence in fine jewelry and outstanding values on top brands and other unique items. Last week, ShopNBC aired its first moissanite show in five years. The show, scheduled for one hour, starting at 6 pm and ended three minutes early due to a near-sellout of merchandise. Sales exceeded all expectations.

ShopNBC is a multi-channel electronic media retailer that broadcasts to millions of homes, selling product live 24 hours a day, seven days a week. In addition to its strong presence in the television home shopping, ShopNBC is on the Internet, where it is positioned as a premium lifestyle brand.

Moissanite jewelry will also soon be available on Jewelry Television, know as JTV. Similar to the Home Shopping Network but exclusively jewelry product, they provide a wide array of jewelry, loose gemstones, castings and jewelry-making tools, offering products at reasonable and affordable prices.

Founded in 1993, JTV has evolved from a small enterprise into one of the leading retailers of fine jewelry in the United States with over 2,000 employees and an estimated coverage area of over 65 million viewers in the US. Our first show will air November, and moissanite jewelry is on their Web site today.

I am pleased to report that moissanite jewelry is back in the Landau chain of stores. Landau has more than 60 boutique stores located in some of the most exclusive retail shopping venues throughout the United States. Whether Trump Tower, the Waldorf Astoria, Copley Place in Boston or the Forum Shops in Las Vegas, its boutiques are set amidst the world's most exclusive retailers. In addition, Landau has prominent locations in hotels throughout the country and in many of America's busiest airports.

Charles & Colvard has become an approved supplier for the Continental Buying Group, known as CBG, the most prestigious and largest independent jewelry chain organization in the US. Presently, they have approximately 98 members with 300 retail jewelry outlets and an annual sales volume of over $400 million wholesale and $1 billion retail.

All of the CBG members are highly respected and well established and have impeccable credit ratings with many fruitful years in the jewelry industry. Their buying power and ability to negotiate for the very best terms, prices, services with all types of vendors enables a member to give his customer the best product, service and guarantee no other jeweler can match.

On the international front, Mumbai-based Sanguie Industries, one of Charles & Colvard's Indian distributors, announced that it's planning to add 28 more stores under its moissanite jewelry brand, Fiona, by the end of the next fiscal year.

Each of the proposed retail stores will entail an investment by Sanguie of approximately $115,000, including moissanite inventory, and will be located in highly-visible areas targeting the upper middle class. Sanguie has appointed mass franchises in all of the major states to fuel its expansion plans. The current -- the Company currently operates 22 moissanite-branded Fiona stores across India.

Kim Tai Jewelry, with offices California and Vietnam, has become a successful distributor for Charles & Colvard, hosting increases month-over-month since coming on board in April 2010. They have partnered with a Vietnamese jewelry manufacturer in order to expand their market reach throughout the country.

Moi Moi fine jewelry, Australia's only moissanite and created jewel specialist, has opened the doors of their second store, located in Perth's Carillon City, promoting a shop experience that offers outstanding value, fine craftsmanship and impeccable service. They opened their flagship store in Queen Victoria Building, Sydney in December of 2004.

Moi Moi fine jewelry was established with the aim of creating a new category of fine jewelry, which features Charles & Colvard created jewels of the highest qualities. Moi Moi currently plans to further expand their retail store presence in various cities in Australia.

Moissanite created great success on a -- recent two-hour segment by increasing sales multiple times over projections during a show hosted by Ideal Shopping Direct, Ideal World. It is a leading digital retailer selling products to consumers via its television shopping channels and the Internet in the UK. Ideal World is the flagship of the four shopping channels that Ideal Shopping Direct owns, thereby providing a digital department store filled with fantastic brands to millions of consumers.

We continue our growth in China with a new store opened by one of our jewelry manufacturing distributors this month in Sinyang [sp] and two more opening by early December in [Hairpin] City in Northern China. Additionally, we have scheduled meetings with a number of potential channel partners in the coming month, and I hope to report upon further new relationships in our next conference call.

At this time, I'd like to turn the call over to our CFO, Tim Krist, who will review our financial results for the third quarter and the first nine months of 2010. Tim --?

Thank you, Randy. Good afternoon, everyone. Thank you for joining us today. I will discuss the financial results for the three and nine months that ended September 30th, 2010.

As announced in today's press release, net sales for the third quarter of 2010 increased 40% to approximately $3 million, compared with approximately $2.1 million in sales during the same period of 2009. This improvement reflects increased reorders from our existing customer base, which resulted from our collaborative efforts with our channel partners to increase retail sell-through of moissanite jewelry to consumers.

Domestic sales for the quarter increased 33% from the same period in 2009 to approximately $1.9 million and represented 63% of total net sales. International sales for the quarter increased 53% from the same period in 2009 to approximately $1.1 million and represented 37% of total net sales.

Net sales for the nine months ended September 30th, 2010, increased 54% to approximately $9.2 million, compared with approximately $6 million in sales during the same period of 2009. This improvement was primarily due to management's execution of its strategy to revitalize existing customer relationships along with the addition of several new domestic and international customers during the period.

Domestic sales for the nine months ended September 30th, 2010, increased 40% from the same period in 2009 to approximately $5.4 million, and represented 59% of total net sales. International sales increased 81% from the same period in 2009 to approximately $3.8 million and represented 41% of total net sales.

We achieved our third consecutive quarter of profitability with net income of $512,000 or $0.03 per diluted share, representing an approximate $1.1 million improvement over a net loss, as adjusted, of $596,000, or $0.03 per diluted share, in the third quarter of 2009.

Included in net income for the quarter was an income tax benefit of $218,000, composed primarily of federal tax refunds and the elimination of an associated uncertain tax position resulting from the carryback of operating losses to the 2004 and 2005 tax years.

Net income for the nine months ended September 30th, 2010, totaled approximately $1.1 million, or $0.06 per diluted share, representing an approximate $4.2 million improvement over a net loss, as adjusted, of approximately $3.1 million or $0.17 per diluted share in the same period of 2009.

Cost of goods sold was approximately $1.1 million in the third quarter of 2010, compared with $917,000 for the same period in 2009, an increase of $173,000 or 19%. Cost of goods sold was approximately $3.5 million for the nine months ended September 30th, 2010, compared to approximately $2.7 million for the same period in 2009, an increase of $833,000 or 31%. These increases are primarily due to higher sales during the periods.

Operating expenses were approximately $1.6 million in the third quarter of 2010, compared to approximately $1.8 million of the same period of 2009, a decrease of $140,000 or 8%. Included in operating expenses for the quarter was a non-cash bad debt expense of $390,000 related to our allowance for doubtful trade accounts receivable.

Operating expenses were approximately $4.9 million for the nine months ended September 30th, 2010, compared to approximately $6.3 million for the same period in 2009, representing a decrease of approximately $1.4 million or 22%. These decreases are primarily due to ongoing cost control initiatives that commenced in the latter part of 2009.

The end of the third quarter was an improved cash and liquid long-term investment position relative to the end of the previous quarter. Cash and liquid long-term investments totaled $8.3 million, up from $8.1 million at the end of the second quarter. During the quarter, $750,000 in bonds were called by the issuers, and we increased our cash position with the proceeds rather than reinvest in bonds or other long-term investments in order to prepare for future investment in the business.

We generated approximately $221,00 and $851,000 in cash from operations during the three and nine months ended September 30th, 2010, respectively. During the third quarter of 2010, net income of $512,000 and a net decrease in inventory of $472,000 were the primary drivers of positive cash flow and more than offset an increase in trade -- net trade accounts receivable of $635,000 and a decrease in trade accounts payable of $158,000.

During the nine months ended September 30th, net income of approximately $1.1 million, a net decrease in inventory of approximately $1.5 million and an increase in the crude cooperative advertising of $373,000 were the primary drivers of positive cash flow, more than offsetting a net increase in trade accounts receivable of approximately $2.2 million.

Total inventory, which includes long-term and consignment inventory, approximated $37.7 million at the end of the quarter, down from $39.1 million at the end of 2009. This decrease is primarily the result of improving sales offset, in part, by purchases of silicon carbide and jewelry castings, findings and other jewelry components.

As previously reported, we changed our method of accounting for inventories from the first-in-first-out, or FIFO, method to the average cost method as of January 1st, 2010. The effect of this adoption was that prior year results are shown as adjusted, with third quarter 2009's cost of good sold increasing by $68,000 and net income for that quarter decreasing by the same amount. In addition, inventory decreased approximately $2.2 million as of September 30th, 2009, due to the cumulative change in the accounting principle.

Lastly, in June 2010, we received a letter from our secondary silicon carbine supplier, Norstel AB, stated that, as a result of our agreement with Cree to purchase silicon carbine crystals in 2010, to satisfy the existing 2007 purchase commitment with Cree, we are obliged to purchase approximately $800,000 of material from Norstel over the same period.

Furthermore, the letter stated that failure to do so would constitute a material breach of the exclusive supply agreement with Norstel and us. Over the following months, we worked with Norstel to amicably resolve the dispute, the outcome of which was a proposal to terminate the supply agreement without any payments to either party.

We agreed to this proposal in October because, first, we have a positive forward-looking relationship with Cree and our exclusive supply agreement with Cree is in place through July 2015. Second, we have worldwide patents, most of which are in place through mid-2016, that claim silicon carbide for use suitable as a gemstone material and protect the manufacturing method toward making silicon carbide-based gemstones.

Third, we have purchased only $550,000 in raw material silicon carbide from Norstel since the exclusive supply agreement's commencement in February 2005, which represents approximately 1.4% of raw material silicon carbide purchases the Company has made between February 2005 and September 30th, 2010.

Fourth, Norstel had not demonstrated, to date, the ability to consistently grow high-quality silicon carbine crystals that meet our requirements. And fifth, we have sufficient on-hand quantities of raw silicon carbide crystals that would extend beyond the exclusive supply agreement's natural termination date of September 2011.

The parties entered into a compromise agreement in order to terminate the agreement that included release of all claims and rights of action that the parties may have against each other arising from or connected with the exclusive supply agreement end of termination.

I'd now like to turn the call back to Randy.

Thanks, Tim. Before we open up the call for questions and answers, I would like to announce that we have recently retained RJ Falkner and Company as the Company's new investor relation firm, which will help us develop and implement a proactive program to improve Charles & Colvard's exposure and the level of interest among investors in the coming months.

RJ Faulker and Company has been working with small cap companies to expand investor interest for over 20 years, and its President, Jerry Falkner, is a chartered financial analyst with more than 40 years of research experience on Wall Street.

He will be authorizing a research report on Charles & Colvard over the next few weeks, which will be distributed to over 10,000 investment professionals, and we would encourage our existing and potential shareholders to contact Mr. Falkner to get on the list to receive the report as soon as it is published. RJ Falkner and Company's phone number is 800-377-9893, and their e-mail address is info@rjfalkner.com.

We would now like to move on to the question-and-answer portion of today's conference call. I would like to remind everyone that the Company does not provide financial and operating guidance on a quarterly or annual basis and, accordingly, we will not address questions pertaining to such guidance.

Operator, would you open the call to questions, please?

Thank you. (Operator instructions.) Our first question comes from the line of [Bozard Holland] with UBS. Please proceed with your question.

Thank you for giving such a nice talk or update. I do particularly appreciate your explaining the Norstel arrangement, because I thought the -- when it was put out on the news, where -- I -- it was terribly misleading. Can you tell me what happened to the JCPenney relationship? And are we still dealing with Kohl's and the Dallas distributor we used to have?

Sure. The Dallas distributor? I'm not sure --.

Okay.

AAFES is in Dallas, and also --.

Right.

JCPenney. AAFES we're back on board with. We've taken that account over. It was tied up with a company that was purchased by the Richland Group, and we were able to work in -- work out of the distribution agreement that we had with them so we could take over AAFES direct. So, we're actually manufacturing the product of the merchandise that we're sending to AAFES.

JCPenney was headed up by Beryl Raff. Beryl Raff moved to Helsberg as President of Helsberg. Pam Mortensen took over the jewelry division of JCPenney. She came out of Wal-Mart. I've known Pam for years. We have a very good relationship. I had -- I spoke with Pam at the jewelry show in June in Vegas, and we've had contact with various people inside their organization.

JCPenney has an inventory stocking problem that they're working through. I'm not sure I should really be discussing their issues, because they kind of told me all of this in confidence, but when it's appropriate, we will be having a discussion with the appropriate people there.

Okay. And how about Kohl's?

Kohl's -- Tom has -- is putting together a presentation, and we'll be contacting them in the very near future.

Thank you for the great job you've done.

Thank you.

Thank you.

Thank you. Our next question comes from the line of [Mark Wright], who is a private investor. Please proceed with your question.

Congratulations on the positive quarter, guys. At the shareholders meeting, I made a few notes. I wanted to follow up on those. The notes I made were we were going to focus on traditional, bridal, anniversary and fashion luxury categories. Is that still the plan?

That's the plan. We are -- and I'm thinking that through, how you interpret those categories. We are putting together brands in order to expand our reach, because we've been introduced to some other categories by a designer that's been out in the marketplace for over two decades.

We're not quite ready to make that announcement yet, but what you will see -- and again, it's not a total focus. It's just one of many what we call "tentacles on the octopus," and an opportunity go into retail -- selling arenas that we probably would not normally be looking at.

He typically likes to combine jewels, and it -- this would be the first time he's worked with moissanite --jewels with color. And it could be created color, and it could be natural color, meaning sapphires, rubies, emeralds, tanzanite, whatever. But, he had a good rapport out there, and what I've seen so far is pretty exciting. And I look forward to being able to share that with you in the very near future. Hopefully, on this call next quarter. And again, that will just be one more in a long list of areas that we're pursuing.

Obviously, the bridal is a -- in the jewelry industry, the bridal is the most significant category, but when we say "bridal," a ring that is just red hot right now for all the major designers out there, whether you're talking about Tacori or Ritani or whoever, is a ring they call the halo ring.

This Company's had versions of the halo ring in the past. What they -- what's hot today is a much more tailored version, and the surrounding stones that surround a larger center stone are put more at an angle instead of a -- instead of straight. We're developing a line very similar to that, and we'll be branding it and hope to roll that out in this very near future.

Okay. I thought it was good that you focus on a limited number of areas. You might remember I sent you an e-mail shortly after the shareholders meeting mentioning that. So, I was going to ask you about what brands you were using for these different categories. Have you established those brands? I know about Estrella.

Yes, we're close. We do have names, and we've actually filed the trademark --Trademark (inaudible) -- And got the green light back. It takes about six months to get that turnaround. So, we will be launching one, but I'm just not ready to go public with it yet.

But, to your point about having a focus and being able to keep the projects in controllable amount, we've also reached out to a very seasoned -- in addition to our merchant, who's focused on brand products that we will be using exclusively for Charles & Colvard, we've reached out to a lady -- Sandy McMillan [sp]. I had to verify that with Tom.

Sandy McMillan has -- and I don't know exactly how many years, but I know I've known Sandy for over 20 years. She was very involved with Reeves Park. Reeves Park was one of the largest distributors of moissanite in the past, and she has since retired from Reeves Park, and we've brought her on as a consultant to help us revive some of the old accounts and also work on some of the new projects and design such things as we're talking about that would be a little out of the box for us to work on those designs so that we don't lose the focus on our internal team.

Okay. That gives me another thought. This is really a request for you -- for us individual investors. It would just be so good to see you guys update your investor relations section of your Web site when you have the new brands and they're ready or when you come upon a new retailer that you're working with.

If you could put an update out there so we would know it rather than having to wait every quarter for this call, that would be great. That's just a request for you. You don't need to comment on that. But, that would be great --.

Well, that's one that I want, too, so -- and we do have guys in-house working on that, and we should've already had it up. We will have it resolved shortly.

Yes, that would be great. At the shareholders meeting, I saw the unbelievably brilliant -- I'll call it a slogan. Are we still using that? or have we gone to something else?

There's a -- we have about four slogans, two which have been used in the past. I mean, obviously, we could never move away from "Born from the Stars" or even -- actually, in some recent research, we found women lean more towards, "A Gift from the Stars."

But -- and depending on what the application is, we will be using one of several, but that particular one, if I remember, was unbelievably brilliant, surprisingly.

"Unexpectedly Within" --.

"Unexpectedly Within Reach." That one we're working on, but in a play on the "Born from the Stars."

I like "Gift from the Stars" also you just mentioned. That sounds good.

Yes, that's been -- of all the ones that's out there, that one kind of gets the biggest checkmark when we reach out to our consumers.

That sounds good to me. Also, in the shareholders meeting, there was a comment about Ken's [sp] project about increasing yield from raw material. Wanted to ask how that's going.

That's going to be an ongoing project, and it's not just Ken working that. We have one of the -- one of our scientists who's on our -- a consultant with the Company also working with him on that. That's an ongoing project. And we've also had a meeting with Cree to discuss the same. And we may be able to -- I mean, in -- I'm not trying to get forward statement. I know Tim's going nuts here.

We're hopeful that we might -- could even improve the way the product comes out of Cree that would allow us to improve our yield.

Yes, that would be great. I'm glad to hear it's still ongoing. And if you remember my e-mail, I recommend you get a patent before you go forward on that so no one else can take it from you.

Okay. Good advice --.

I wanted to also ask, can you tell me the channel partners that your working with? In the announcement that I read, I saw new channel partners. You mentioned some new retailers, here, during this call. Can you tell me --?

Right.

Who the channel partners are?

Well, they would be our partners because most of the ones that we're talking about, we are the manufacturer. We've taken that in-between step out. We're taking that profit ourself.

Okay. All right. Also, during the shareholders meeting, there -- I really pushed consumer market. I'm looking for YouTube, for Web sites. You mentioned that you guys are still working on that: "Expect something first quarter 2011." Is there any place I could be looking today so consumers would be reading and learning about moissanite online?

Well, we have, still, the site up, "What is moissanite," and then moissanite.com and then Charles & Colvard. There's information on all of those from the past, and some's been updated. But, we have -- Kate Peterson, who's -- in the jewelry industry, is one of the best known for training and that type of material. She is very close to wrapping up. Has been working on it for about 120 days, and we're going to organize that on our websites also. It's more of an update.

Thank you. (Operator instructions.) Our next question comes from the line of George Whiteside with SWS Financial Services. Please proceed with your question.

I was thoroughly impressed with your array of sales channels and organizations that you're linked with. And I was thinking that you're running so hard that you must be breathless trying to keep up with it, but that's a good problem to have.

I think the enthusiasm and the excitement is -- we're driving and just always looking for more. But, if you were sitting here look at Tom, my VP of Sales, it's good to see that he might be shedding a pound or two.

Oh. Well, that's a wonderful way to get slim and (inaudible). I got a couple of questions. One is relating to your inventory, and I suspect that it may be related to your raw material supplier. And that may not be the proper term, but you've got an inventory of roughly $38 million, most of which I presume is from Cree and others.

Is there any kind of possibility of a obsolescence of those inventories or is this something that, over time, you'll probably reduce through increased sales.

This is Tim. Every quarter, we review our inventory for obsolescence and, to date, we have never taken an obsolescence reserve because the vast majority of our inventory are finished gem stones, which we don't feel are subject to any kind of a fashion trend or a loss in optical appearance or other value that would require us to take an obsolescence reserve.

To date, all of our costs are well below the market price of the product, so we don't have a lower cost-to-market issue either on those.

Well, that answers the -- anybody's question about why you shifted to LIFO.

Well, we shift average cost for a number of reasons, but one of the major reasons was to be more comparable to a number of jewelry manufacturers publicly traded out there, which would represent a better comparison against our peers.

And we also wanted to, I guess, average our cost of -- on a part number basis, average our costs on those individual part numbers as well, for better, I guess, reporting with our peers.

Makes perfect sense. Now, my next question has to do with your profit margins. And certainly, you've seem to be doing rather well. It looks as though you're slightly above 60%. And going forward, do you think that you'll be able to maintain those margins?

Why don't you take that one?

It -- well, it depends on what time period you're talking about. As long as we're working with existing inventory, then we've -- we're pretty -- with average costs, we're pretty much in control of our cost. The cost of material -- if we had to go out and buy material today, the cost of the material today is higher than what it was five years ago, three years ago. And -- but, some of that's volume related also.

And so, obviously, that's -- the answer to that is really almost unknown because we don't know where we're going to be at when we need new material. We don't know where we're going to be at on the yield, which will improve the margin if we improve the yield, as well as the volume of the material that we'll be able to consume, which obviously is driven by revenue. If we can get sales in some higher range, then we'll be able to drive the cost of the material down substantially.

We may also see a slight decrease in our margin percentages as our product mix changes. As our sales of jewelry -- finished jewelry increases, it may have some impact on our margins. However, we think that the increase in sales volume will more than make up for any percentage declines in gross margin due to our relatively small fixed cost component of our Company.

Yes, let me state that just -- having been in the jewelry business and also ran a factory for seven years, currently the Company -- or historically, the Company has sold a jewel -- and let's just take a round number, $150, and they sell that jewel for $150 making 60-plus margin. Then, the manufacturer takes that $150, along with the cost of the metal, which traditionally is 14 karat gold, and then there's a labor component. It's a small component, but it's -- there's labor involved for the jeweler to set the stones in the jewelry and finish off the jewelry.

And for gold and labor, typically the industry takes about a 30% markup. So, the blended margin on a piece that, instead of $150 retail, now the retail -- or I'm sorry, the wholesale price for Charles & Colvard, the revenues from the selling price, instead of $150 it could be $300 in revenue, but the margin -- blended margin may end up -- and let's arbitrarily use 50%, but the margin dollars will increase substantially.

Well, that certainly make sense because, out of that process of doing finished jewelry, you'll end up with significantly higher sales, I would think.

Correct. And increased margin dollars is -- again, the increase, I point out, on the gold and labor will not be at the same rate as the jewels in order to be competitive with the marketplace.

My last question has to do with your exclusive agreement with Cree. Now, that is for a specific time period, from what I understand.

Correct.

That it -- that's right. It's through mid-2015 -- current -- is the current exclusive supply agreement that's in place.

And so, when that particular contract ends, will that lead to competition elsewhere in the industry? Because then, at that point, presumably Cree would be able to supply others.

It could. Everything will be negotiable, but currently, we have a good working relationship with the Cree folks, and we're actually working jointly on some projects to enhance the quality of the moissanite that we hope to be producing by the end of 2011.

Excellent. It sounds as though the relationship is such that Cree would not be foolish enough to, in effect, not allow the relationship to go forward beyond this particular contract period.

That's correct. And there's processes that we do to the material once we get it that Cree's not aware of how we do it or what we do, just as we're not allowed their formula for how they make the silicon carbide. But -- so, it would take someone a lot of research and development to get to the level that Charles & Colvard is at. And by 2015, we expect to be much further down the road on a much-improved moissanite stone.

Excellent. Well, thank you so much.

Thank you.

Thank you. Our next question comes from the line of Rodney Baber with Morgan Keegan and Company Incorporated. Please proceed with your question.

Any comments on the Baber part of that?

Mr. Baber, your --.

I'm set up for a good joke on that, but we can get back to that later. Listen, first of all, Randy, again, thank you for what you're doing for the Company and what the team is doing in trying to get Charles & Colvard on the right track and accomplishing all the things we've wanted to see the Company accomplish over the years.

And I had a pretty good list of questions for you, but your update was pretty completed. And then, the rest of the questions that have come in have answered a lot of the specific questions that I had. I mean, I have a couple of things that I could ask you about the margins and things like that, but I really think what I'd like to do is really just give you a chance to expound a little bit, because we're at a major inflection point, I think, on the Company right now, and if you remember a year ago, the stock was 40 cents.

And then, the -- got to [$3.25] not that long ago, and now we're back in the $1.80s -- eight range, which has been a reflection of the enthusiasm for the potential of the Company. And then, maybe a little bit of a reality check as the market has realized that these things take a while.

So, your comment about your enthusiasm about what's going on means a lot, because you're in the trenches every day. So, I guess what I want to ask you is, if you think about where the Company is and what you accomplished and what the potential is out there for us over time, I would love to hear your thoughts on what you think of this Company at this point? What can this thing be over time for those that are long-term investors like I am that have waited for this thing to really have the potential recognized? I mean, what are we talking about now?

And also, kind of incorporate your answer into kind of a reality check on what's really going on in the jewelry industry, because every time I talk to somebody in the business out there, they're talking about just how extremely difficult it is. Yet, you keep opening new accounts and bringing on new sales and things like that.

So, is that a question? I don't know if that's a question or not, but if you can give us your thoughts on this at this point, I'd love to hear them.

As you know, Rodney, some of what you're asking would be a little forward-reaching, so I got to be careful with that, but let's talk about the industry for a little bit. The industry is actually seeing an uptick, and all the latest industry analysts are projecting a 10% increase this Christmas season in jewelry purchases with an average price point in excess of $600, which we found to be intriguing.

But, in talking to various companies that I know out there, they're experiencing robust sales. Now, some of that is a result -- if you remember, our industry went through some real purging of fairly large companies. Service Merchandise is gone, Finlay is gone, which not only was in a multiple of department stores, but they had the Carlisle brand and the Bailey Banks & Biddle brand, both which were large brands in terms of volume -- jewelry volume. And Whitehall's gone, Friedman's gone. I mean, just between those two, you had over 1,000 stores. So, some of that is just -- that's sales penetration moving to other retail outlets.

And finally, coming back into the market as people work their way out of the debt that they've been in for the past couple of years -- and I'm not predicting a robust economy by any means, but I do think that we're going to be positioned to reap the benefit of that because moissanite, as you know, hits that real sweet spot in price points. And that's really what got the door open for us at the Continental Buying Group, which I can't express how much that means to this Company.

That group alone, as we penetrate more of their stores -- and we do have a sizable amount of their stores that will be testing the assortment of moissanite jewelry for this Christmas season, but again, the reason being -- and I always use this example, because it's so true with women to -- every woman aspires to wear a carat stone in each ear. And to do that in diamond today is a minimum $7,000, $8,000 investment for a lower-quality stone. And if they got a quality that would be similar our moissanite stone, they would be spending $10,000 to $12,000. And with moissanite, they can do that for under $1,000.

And it's just -- it's a natural. And I haven't shown a pair of those earrings to a woman yet that didn't buy the earrings. And I'm tempted just to hire guys to walk around with earrings and show them to every woman they meet. We'd probably do a ton of business.

if we weren't locked out, I would have been buying today and I would be buying in the morning the Charles & Colvard stock. I think it's a bargain.

Well, that's a good answer. It's -- is there anything else you can give us? I mean, one thing that occurs to me on a regular basis is who are our best customers right now? Where are we selling this? And I know you mentioned some today that you've brought on that are recent, but internationally, we're apparently doing pretty well.

What should an investor think when he thinks about where we're doing our business? Where is it coming from? And where do you think that'll be in a few years as you change the sales mix to what you want it to be?

Well, obviously, the previous channels that the Company was selling, and that being three or four large distributors, their business has consistently increased with the Company. Our number one supplier of jewelry to the trade is still our number one supplier - our number one use from us in jewels and number one supplier, and their business is up substantially. I don't know the percentage off the top of my head, but it's huge. It's not just a few points.

And -- but, interestingly, while they've experienced substantial increase in the independent jeweler side of the business, they've also had a substantial increase in the Internet sales, and the Internet has become a sizable portion of their purchases. And that's something that we're watching very, very close as we pay close attention -- and remember, I told you when I first came in here that our focus was going to be on sell-through, not, sell-in.

So, I'm not as focused when I -- they show me the reports of what the various distributors buy. What I'm more interested in is who the distributors are selling and how their sales are going to the consumer. And that's what we're really focused on. And again, the Internet -- the consumer is looking for places to get moissanite because some of the places have dried up from the past, and the Internet seems to be where a lot of them are turning.

Got you. Well, thank you and good luck.

Thank you, Rodney --.

Keep up the good work.

Thank you. There are no further questions at this time. I'd like to turn the floor back over to Randy for closing comments.

Thank you, operator. As you can clearly see, the Charles & Colvard management team is very excited about the Company's potential and the opportunity we have to enhance to shareholder value going forward. Once again, I'd like to thank everyone for participating in today's call, and I look forward to speaking to you again when we report our fourth quarter and our full-year operating results. Thanks, guys.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.