Charles & Colvard Ltd (CTHR) 2010 Q4 法說會逐字稿

Hello and welcome to the Charles & Colvard Ltd. fourth-quarter 2010 conference call. (Operator Instructions). Please note that this event is being recorded.

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 for 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 website at www.charlesandcolvard.com. They are also available on the SEC website, www.sec.gov.

I would now like to turn the conference over to Randy McCullough. Please go ahead, sir.

Thanks. Good morning, everybody. I would like to thank each of you for taking time to participate in our 2010 earnings conference call today. Now that I have completed my first year as Chief Executive Officer here at Charles & Colvard, my vision for our Company has shifted slightly. Not from the grassroots foundation of creating branded jewelry that can be positioned in the marketplace to enhance Charles & Colvard's market share, but to take the lead in driving this initiative. While we will continue to seek out opportunities with new and existing partners to expand our business successfully, our new focus is primarily to build customer awareness of moissanite as a catalyst for sales growth.

To accomplish this objective, we are expanding our Internet presence with a comprehensive social network marketing initiative, a series of projects that we believe will increase sales and market awareness of moissanite are well in development and should be completed and deployed soon.

Charles & Colvard has employed experts in this arena, [Charles & Berry], out of Memphis, Tennessee, to assist us in this critical undertaking. After 33 years of marketing, Thompson has evolved into a multifaceted, all-encompassing marketing communications firm with offices in Memphis and Nashville. While they have specialists and depth in key market services, their most valuable contribution to clients involves the creative talent that contribute unique viewpoints to a process they call brainwoo. Being empowered by brainwoo is the essence of everything they do. The brain is how they get inside the hearts and minds of consumers, and the woo is the use of that knowledge to win them over. That is why Thompson is in the business building business. They are neither an ad agency, a PR firm nor a social media firm, but all of these and more with a singular focus to win consumers over to our brand.

The question I hear over and over is, when is the Company going to start taking control of the message to the consumer? To answer this question, let's look at the historical lessons learned from past initiatives. Charles & Colvard spent over $39 million between 2004 and 2009 on traditional advertising. That resulted in less than 8% consumer awareness. I don't think anyone wants to do more of the same.

For a company to be successful, its marketing philosophy and strategy must be integrated throughout its entire organization. In today's world, incorporating a comprehensive social media strategy is crucial and represents a logical and powerful evolution in the way we communicate.

The tools we use for social network marketing are relatively new. They include such platforms as Twitter, Facebook, YouTube, Foursquare and many others.

Now I cannot tell you if Twitter will be around here 10 years from now, but I can tell you that the idea behind Twitter -- fast-paced micro-blogging and networking -- absolutely will be. It might be called Twitter. It might be called something else. But we are social, and we are relying more and more upon our computers, smartphones, iPads and other Internet-enabled devices, and that is not going to change.

Erik Qualman, author of Socialnomics, just released Social Media Revolution 2, an updated version of Social Media Revolution, the YouTube video that swept the Internet last summer. If you are thinking this whole thing is a fad, consider this.

The statistics are astounding. If Facebook were a country, it would be the third largest country in the world. It surpassed the US population in early 2010. Facebook tops Google for weekly US Internet traffic. More than half the world's population is under 30, and 96% of the next generation have joined a social network. But it's not just for kids. The fastest-growing population group on Facebook is comprised of 55- to 65-year-old females.

Social media is not just Facebook and Twitter. Blogs, discussion boards, photo sharing, these are all forms of social media. Our customer base, our future workforce, our competition and the reporters who write about our industry are all online. Now is the time for us to be there, too. People are talking about moissanite and Charles & Colvard online every day. It is time for us to join the conversation.

Another friendly reminder is that branding is not just what we say about ourselves. It's the consumer's interpretation of how the brand is represented. The message received may not lead to the intended impression. I question whether current online activities are forming the right impression.

To address this, Charles & Colvard began a long and tedious process of building an e-commerce site that will set the standard for presenting moissanite jewelry to consumers starting in mid-2011. While I would like for the new moissanite.com site to be available immediately, it is much more important for it to be state-of-the-art and to represent Charles & Colvard brands in the most positive manner.

With this in mind, our e-commerce site will operate in a beta test mode for a period before we open it up for the general public. As we endeavor to build consumer awareness and introduce brands to the marketplace, we have been working to increase the number of outlets where the consumer can experience and purchase jewelry featuring moissanite. We reported to you last quarter during the conference call that moissanite jewelry was now being offered in Ultra Diamonds, which operates stores in the US and regional shopping centers and outlet malls as well as Filene's Basement and the Burlington Coat Factory, the Army and Air Force Exchange Service in the US, Europe and Asia, which has provided products at competitive prices with superior service to American armed forces personnel for over 115 years. ShopNBC, a multichannel electronic media retailer, has broadcast to millions of homes, selling product live 24 hours a day, 7 days a week, including the Internet. Jewelry Television, known as JTV, one of the leading home shopping retailers of fine jewelry with an estimated coverage area of over 65 million viewers in the USA. Landau with more than 60 boutique stores located in some of the finest, most exclusive retail shopping venues throughout the United States. TuesdayMorning.com, a leading retailer out of Dallas, Texas, with over 850 stores across the US. Continental Buying Group, an organization of over 300 of the most prestigious and largest independent jewelers in the US. Sanguine Industries, one of Charles & Colvard's distributors in India, which is adding 28 more stores by the end of this fiscal year to its existing 22 moissanite-branded Fiona stores across the country. Kim Tai Jewelry with outlets in California and Vietnam. Moi Moi Fine Jewellery, Australia's moissanite specialist with two stores and plans to further expand its retail store presence in various cities throughout Australia. Ideal Shopping Direct, a leading digital retailer that sells products to consumers through its television shopping channels and over the Internet in the UK.

In the fourth quarter, we also added the following retail customers that are currently or will soon be selling Charles & Colvard's finished jewelry, thereby expanding our reach to a new consumer audience. Posh TV, a new national 24-hour shopping network showcasing designer jewelry, gemstones, accessories, handbags and shoes that premiered in November 2010 just in time for the holiday season. The network is available on DirecTV channel -- that is channel 314 -- and reaches 19.3 million viewers in all 50 states. Posh TV also launched its contemporary online shopping site at www.poshtv.com that includes a live feed of the television broadcast.

Ross-Simons, a thriving multichannel retailer with a dominant Web presence and 14 retail stores in seven states. The Company also mails more than 50 million catalogs annually across the globe, providing exceptional quality jewelry and luxury items at affordable prices. Fingerhut, a small enterprise business established in 1948 that grew into nationwide direct retailer, delivering shop at home convenience and a wide selection of products both online and through regular mailings to its customers. Fingerhut also offers many products exclusive that you just will not find anywhere else.

As we add new customers, we continue to work diligently with our valued existing partners to develop programs designed to extend the reach and messaging of moissanite.

In 2011 we will continue to expand our moissanite-finished jewelry business and look for the right retailers and wholesalers to partner with in this initiative.

We also expect to create new and exciting ways to promote moissanite jewelry, including the use of celebrity endorsements and recognized designers that will support our exclusive jewelry collections.

In addition to our e-commerce site that we will be launching in mid-2011, we are also beginning to explore new sales channels for moissanite jewelry, including home parties similar to [Lea Supoda] models and franchise store designs and merchandise by Charles & Colvard similar to the Pandora model. We believe both of these initiatives could gain some momentum in a test mode during 2011 while providing more control over the end product and leveraging our social media and branding connections with our consumers.

At this time, I would like to turn the call over to our CFO, Tim Krist, who will review our financial results for the fourth quarter and year ending December 31, 2010.

Thank you, Randy. Good afternoon, everyone. Thank you for joining us today. I will discuss the financial results for the fourth quarter and year ended December 31, 2010.

As announced in today's press release, net sales for the fourth quarter of 2010 increased 48% to approximately $3.5 million compared with approximately $2.4 million in sales during the same period of 2009. Domestic sales for the quarter increased 99% from the same period in 2009 to approximately $2.9 million and represented 84% of total net sales. International sales for the quarter decreased 37% from the same period in 2009 to approximately $559,000 and represented 16% of total net sales.

Net sales for the year ended December 31, 2010, increased 53% to approximately $12.7 million compared with approximately $8.3 million in sales during 2009. Domestic sales for the year increased 56% over 2009 to approximately $8.3 million and represented 66% of total net sales. International sales increased 46% from the prior year to approximately $4.4 million and represented 34% of total net sales.

A significant amount of our sales came from new customers as we build our business. Our full-year comparable sales increased 14% when compared with the previous year. We define comparable sales as active customers with which we generated revenue during both periods on which we are reporting, and we use this as a metric to measure sales growth with our existing customer base.

We achieved our fourth consecutive quarter of profitability with net income of $452,000 or $0.02 per share, representing an approximate $977,000 improvement over a net loss as adjusted of $525,000 or $0.03 per share in the fourth quarter of 2009.

Net income for the year ended December 31, 2010, totaled approximately $1.6 million or $0.08 per share, representing an approximate $5.2 million improvement over a net loss as adjusted of approximately $3.6 million or $0.19 per share in 2009.

Operating expenses totaled approximately $1.7 million in the fourth quarter of 2010 compared with approximately $1.9 million for the same period of 2009, a decrease of $236,000 or 12%. Included in operating expenses for the most recent quarter was a non-cash bad debt expense of $366,000 related to our allowance for doubtful trade accounts receivable. Operating expenses approximated $6.6 million for the year ended December 31, 2010, compared with approximately $8.2 million in 2009, a decrease of approximately $1.6 million or 20%. These decreases are primarily due to ongoing cost control initiatives that commenced in the latter part of 2009 and a nonrecurring impairment loss on long-lived assets of $146,000 in the fourth quarter of 2009.

We ended the year with an improved cash and liquid long-term investment position relative to the end of the previous quarter. Cash and liquid long-term investments totaled $8.8 million, up from $8.3 million at the end of the third quarter. During the quarter, $3.25 million in bonds were called by the issuers for a total of $4 million called during the year. We have reinvested $1 million of these proceeds in similar liquid long-term investments with the balance invested in very short-term certificates of deposit so that they are available for future investment in the business.

We generated approximately $632,000 and $1.5 million in cash from operations during the fourth quarter and year ended December 31, 2010, respectively. Total inventory, which includes long-term and consignment inventory, approximated $37.4 million at the end of 2010, down from $39.1 million at the end of 2009. This decrease is primarily the result of higher sales, offset in part by purchasers of silicon carbide and jewelry castings, findings and other jewelry components, as well as limited production of moissanite gemstones.

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 1, 2010. The effect of this adoption was that prior year results are shown as adjusted with cost of goods sold for the fourth quarter and year ended December 31, 2009, increasing by $85,000 and $218,000 respectively and net income for those periods decreasing by the same amount.

In addition, inventory decreased by approximately $2.2 million as of December 31, 2009, due to the cumulative effect of the change in accounting principles.

With that, I would like to turn the call back to Randy.

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

Would you open the call to questions, please?

(Operator Instructions). Bogart Holland, UBS.

Good job, fellas. My question is, where do you project the cost of goods sold to stabilize given your new product mix, i.e. the finished jewelry?

I think you are referring to the margin percent?

Yes.

Yes, here is what -- let me try to give you that. Today about 90 -- or in 2010, over 90% of our sales were in loose stones.

In loose stones, okay?

In loose stones and obviously the margin percent is much higher in the loose stone. So we take that loose stone; we add gold and labor. The gold and labor, that piece of the equation, the industry standard is about a 35% markup. And when you're presenting product to whether it is a ShopNBC or JTV or anyone out there, or had it been Samuels. When I had Samuels, we break it down the same issue as you when you are building it. We know the recipe and that is kind of the acceptable number. If you come in and you are trying to sell me gold and labor at 50%, 60%, 70%, I am not going to buy it.

So we are locked into a norm in the industry on the labor side in what I call basic products. So that blended margin is going to come in probably about 10 points less than the loose stone margin, but the margin dollars will almost be doubled. So you are doubling the revenue. A one carat stone that is -- and I'm just going to use a fictitious number -- that is whole selling for $150 in a metal and labor situation. Now you have got a $350 revenue sale with double gross margin dollars but about 10% less gross margin.

That percent of the mix will continue to grow because we really just brought up most of the home shopping networks, and they are going through some significant numbers. JTV just informed us they are averaging over 100,000 a show, and we know that ShopNBC had shows exceeding 200,000. And these were in one-hour. And Posh is pretty consistent around 50,000. So obviously those sales are going to increase as we get into 2011, and they are running pretty regular schedule of moissanite shows.

Where we can extend that margin is to the extent that we can create a special branded item that has a unique proposition and differentiates itself from what is common out there. And we are developing some product that we are going to be bringing out, and we are working with some designers to bring out lines that will have a unique proposition and will carry a little higher margin percent.

(Operator Instructions). Rodney Baber, Morgan Keegan.

Good job on the report, and I just wanted to ask you to do something that would discuss a little bit some of the new strategies that you have. I thought Jerry Falkner did a good job on his report, and it listed a number of new initiatives including a direct sales effort, a website effort, more involvement overseas internationally. But it did not give us a lot of the details on that. I looked at it from a top-down. Could you just take a few minutes and kind of explain to us what you see going on in those areas and anything else that you think might be helpful for investors to understand about how you are going to go forward with this?

Okay. I can do that. And, again, these are my views. Internet, when I look at the Internet for moissanite, there is in excess of at least 50 if not 100 Internet sites. You have got some doing a fairly good job, some doing a mediocre job, and some are out there just trying to hammer the lowest price, the lowest price.

What we see is the opportunity to do similar to what a Blue Nile did, and that is kind of create the standard. It is not about price. We are not looking to go out there and push the market down. We are looking to support the market and invest dollars, serious dollars, that the current Internet sites are not able to invest, to bring traffic to the websites. Obviously our own site will be a portal to sell product, but we are also hopeful that we can drive traffic to others. We will not have every style and will not be able to offer everything. But the Internet gives us not only a base to increase market share awareness, but it also gives us a base for the one that I really get excited about, which is the home parties or home trunk shows. Currently that is being done in several products whether it is dresses, whether it is food. The success in home parties over the past three years has been astounding.

And let me just run some numbers just to show you how it could be. I'm obviously very familiar with several sites that have in excess of 2000 ladies selling at home. Those ladies, they average two to three shows a week, and they work 50 weeks a year. They are doing between 100 and 150 shows. Let's just take the equation at 1000. If we had 1000 ladies doing two shows a week at 50 weeks a year, you are talking about 50,000 shows. And if those 50,000 shows -- right 50,000? I have got Tim checking my math over here. 50,000 shows if they average $100, which is just insanely low, you're already over $50,000. If they average $1000, you are at $50 million. If they average $2000, which is not unheard of especially in our price point, you are over $100 million in sales. So you can do the math on that model and see that -- and moissanite is such a perfect piece of jewelry to be offered in the home. That is a venue that women would probably most be receptive to moissanite jewelry.

We all know from all the market research that has been done over the years that the vast majority have all stated that they bought it because nobody knows the difference and to be able to buy it in the comfort of their home and to be able to wear it and nobody knows the difference is a major driver. That is one initiative that you are going to see me pursuing very heavily.

Would that be direct sales for people that work for the Company, or would they have a franchise where you might have several ladies in a city that would work on it together or independently? How do you set something like that up?

They will be -- the way it is done in the industry, they are commissioned representatives. So they are working making a commission on the sales. They are not direct employees, but they are 1099 if that is the question you are asking.

You're not selling the product to a separate company. You are supporting them in this initiative. They are contract laborers is another way of looking at it. There is a lot of information on the website. I mean it is worth a read to go out there and -- because the formula is laid out pretty clear. Obviously we will be retaining someone who has been there, done that with a host of knowledge to oversee this initiative, and fortunately we have Laura Kendall on our board who is with Doncaster -- Tanner is the company, Doncaster is the brand and they have close to 2000 women selling women's clothing in homes not only in the US, they are going global.

What would be a realistic ramp on something like that from a standpoint of how quickly you could rate 1000 women to work on something like that? How many years would that take?

You know, I have got to be honest with you, Rodney, I cannot go there on that one.

Okay. But you don't blame me for asking do you?

I don't blame you for asking. And I will say Stella & Dot, you should Google Stella & Dot and read what has happened with her line. She increased from $33 million to $100 million in 2010, and their average price point is about $75 to $90. Obviously we would be at a higher price point, but we're also creating jewelry in silver that we think we can hit these lower price points also. It would be a product that we developed exclusively for the home shopping.

Okay.

And the other one, I have always had stores. I love the Pandora model. I'm just passionate about getting a couple of those up and see if we can get a franchise model working. It could be very productive. Don't know the -- I mean I know what the model can produce on a per store basis or feel like I know what it can do, but I'm not ready to make those numbers public yet.

And the other thing, too, that is on my mind is the international operation. Because I know we have had mixed results on that over the years, some good stuff and bad stuff. Could you just update us on your thinking about the international market and what you think could happen there?

Yes, I mean that is where most of our new distributorship has been. We have opened up in India, and we have several distributors there that are doing a fairly good job. They are expanding, as I mentioned, with Fiona. They are doubling their store base. So we are excited about where that is going, and we are actually seeing some nice inroads into China.

We have got -- with partners over there, we have got a store in Beijing open now that is under the moissanite name. And there are two in Shenzhen that -- I don't know how to pronounce these Russian cities, I mean these China cities. So there's two stores open there that one of our distributors opened, and he has plans to open four more over the next few months.

Actually Tom and I will be there. We are flying over Monday, so we will be there for the next 10 days working with these guys and seeing if we can get the distributorship even improved in that area.

I will let somebody else ask a question. Thank you.

[Dennis Dobbs], private investor.

I was encouraged to hear you talk about Charles & Colvard now controlling the message getting out about this great product, and that raises another question with me in terms of controlling the message is good, but what will that message be in this Internet-connected world? It pretty much has to be a consistent message everywhere worldwide, or else it will be confused I think. Maybe you have some thoughts on that.

And when I see in the press release, for example, words to the effect of delivering outstanding value to consumers for whom high quality diamonds have become too expensive, that seems a little counter to at least my own personal experience of why people would buy a fine jewel like moissanite. I don't know if that is any indication of where you are going with the messenger. Can you give us some idea of what the message will be that you control and the things that you see that are problems out there that are bad messages that you were talking about or what you see on some of these places now?

Okay. Good, Dennis. I can do that. First off, with the vast amount of moissanite that is out in the marketplace, trying to control the message is equivalent to trying to herd cats. It is not going to happen. We can try to think it is going to happen, but you would spend a vast amount of money and get very little results trying to control what everybody says about moissanite in every venue that is out there, including eBay and hundreds of websites.

What you can do is create a message and venue that they see is working, and that's not dissimilar as I will repeat again Blue Nile did. And once people see success, they want to emulate it. So then you become instead of a push, you become a pull society so that you are pulling them to the message that works the best to position -- not only position Charles & Colvard's moissanite at whatever brand we make that. And we will be announcing that soon, but we are not going to announce it today.

And just to -- I think I talked about it on the last quarterly call. But this Company over the past five years has spent over $750,000 in market research with several different firms, not just one. And they all conclusively came up with the exact same result, and that is talking to thousands and thousands of women who have bought moissanite or who would consider buying moissanite. They are all buying it for the same reason. They want to where a one carat in each ear that they can't afford in diamonds. That is a reality.

Now we can swim against the current and try to create some unique new gemstone in this world that has been around for centuries, or we can leverage what works and create sales for this Company that drives the share price substantially up. And currently we are going after revenue. And I am relying on several marketing companies that we are working with to help us come up with the right message that targets the consumer. We know who the consumer is, and motivates that consumer to buy moissanite jewelry that we are going to be manufacturing.

Am I hearing that you are going to push the price aspect instead of the quality aspect?

Never. I made it very clear we are not going on the Internet focused on price. We are going focused on styling, styling being the key point, and it happens to contain moissanite. And then we're going to talk about all the attributes of having a piece of jewelry made with moissanite.

I mean the number one thing about moissanite is every woman aspires to wear a ring that has a 2-carat stone in it. Well, they can't afford it -- the vast majority. I mean there is a segment of the population that can afford it. And we are providing them that, but the stone is going to stay brilliant forever. Not a cheap imitation stone that is going to scratch and gray off and turn cloudy, and they have to throw it away in a year.

Are you going to be able to get that message across that it will stay brilliant forever, and without, you know -- because yes, if you don't get that message across, it's not competing with the fine jewels. It is competing at the other end of the spectrum, and then it becomes expensive.

No question about it. That is our primary focus. And we have what I think is going to be a great initiative to that end. I'm just not -- you know, it is like a cake that is half-baked. I don't want to pull it out and give you a taste of it. I want to get it finished. I'm actually going to present it to our board here in mid-March at a board meeting, and then we will have it up on our website and start promoting at that point.

But I am excited about it. I think we are dead on, and based on input I have gotten from several different areas, I think we are on the right track.

But it does seem important that first people understand that it is a fine jewel. It is high quality. It is going to last forever; otherwise, the price does not mean much. The value of it is not there without that aspect. Do you agree with that or --?

Absolutely. No question about it. Without that, you could not sell it at any price.

Right. I think that is probably true. Good. And you mentioned brand that you were not quite ready to say the name of. Are you talking about brand for a jewelry line or lines or a new brand for the actual jewel?

We are going to have both. There will be several jewelry lines, some exclusive for various retailers. And ShopNBC has taken on -- the company owned a brand called Estrella that was never really fully developed and implemented. We have signed an agreement to let them have Estrella, so the jewelry that we are creating for ShopNBC will be under the Estrella brand. We will have similar situations with others that they want an exclusive brand, and then there will be some brands that fit everybody. And also I am -- I think one of the things that we have to do in order to position ourselves for the upcoming 2015 is create a brand for the stone. So that we do have to compete, our stone is in the forefront of everybody's mind.

The perfect thing is Kleenex. Tissues are tissues, but Kleenex started it. They built a great brand, and when you think about it, you don't ask for a tissue. You ask for a Kleenex.

I exactly understand what you said. Long ago with previous management, that issue came up, and unfortunately the Charles & Colvard name is not something that lends itself to easily becoming that kind of brand. So I'm encouraged to hear that. I will be excited to see what it is when it comes out.

Okay, Dennis. It sounds good.

(Operator Instructions). Walter Ramsley, Walrus Partners.

Congratulations. I've got a couple of detail questions, I guess. The prices that you're having to pay to create and obtain a new inventory, are they trending lower or higher or staying the same?

In terms of inventory in terms of loose stones or jewelry?

No, the products you are buying from Cree, the raw material, I guess?

We don't disclose the price that we pay. But we have disclosed that the prices have gone up as our purchasing volume has decreased. But we are not currently purchasing it. During 2010 we completed our purchase commitment, so we have no further commitment.

No, I understand. I'm just wondering from their end, if the manufacturing costs are favorable or not over the longer term?

You know, Walter, I tell you having -- and I guess it is just the engineering side of me coming out -- one of the bigger yield -- the bigger gain from raw material is going to be improving the yield. Currently the yield is about 75% of material ends up on the floor being cut away during the entire process to make a loose stone.

In other industries, that is about 50/50 or at worst 60/40 being 40% yield ends up in finished stones. If we can get our yield up to 40% we would almost cut our costs in half. So that is where I am really focused, working with our engineers and some engineers we have on consulting.

And we are also working with Cree to not only improve the boules that we buy by maybe looking at different size boules that would increase the yield, but would also leverage their manufacturing so that it's a win-win for both of us. When we do go back into manufacturing, we are looking at several things to improve the relationship for both of us, not just one of us.

Yes. So looking out, say, two or three years, do you think it is reasonable to target at least maybe a 25% reduction in your cost of material?

Well, you know I cannot say that, and even if I could, I probably wouldn't because I would be afraid consumers would be listening, and they would expect the price to go down.

Okay. Also, the sales returns in the last -- 2010 were basically zero. What is your sales return policy now?

Well, our sales returns I would not say were zero, but our sales return policy is generally 30 days to return the product. And, of course, we at the end of every quarter we do a management estimate as to the sales returns allowance.

But Randy has said before, though, I mean typically it's a 30-day policy for damaged stones or stones that the customer decided that they don't want. But even beyond 30 days, we are willing to work with our customers to trade out various stones just to get the right mix of inventory on the shelves.

Let me speak to that for just a second because, Walter, you brought up another good point. What happens there, and let's just talk about our distributors. A distributor comes in. He says, okay, I'm going to buy a few hundred thousand dollars worth of stones. Here is my shopping list. We sell him those stones, and he puts them in his inventory and starts manufacturing jewelry. Well, if he finds out that three styles are really hot and they start selling fast and maybe they took a 6 millimeter stone and he has a large inventory left of 5 millimeter, then we are exchanging out. Because that's good for him, and that is good for us to help, once he figures out what is selling best, to help him leverage the rollup on that.

As far as the chip stones, you know, [Cedra] is chip stones. I don't care if it is mounting rubies, sapphires, emeralds, moissanite; it does not matter. They chip them. When we manufacture jewelry, they chip them. The great thing about moissanite is you can prepare a chipped stone. It is no different than the polishing that you did initially on it. We can go back and re-polish the stone for under $1.00. I will give you that number.

So I don't see a lot of exposure (multiple speakers) in the Company from that area. I have not seen it so far.

All right. Now, in the fourth quarter, the sales and marketing expense declined year to year. Was that just kind of an oddball thing, or what do you foresee that expense level running going forward?

Well, we feel that our operating expenses are in a good position to not increase much as we raise revenue, other than our sales and marketing line will increase due to our cooperative advertising and other advertising efforts that we will undergo to help grow topline revenues. But our R&D is pretty minimal, and it's really just some allocation of labor and some consulting fees to help study the various ways that we can improve the product, improve the yields and so forth.

The G&A is a pretty fixed number. It does not increase with sales, and to a certain extent, as we add sales, we will not need to add headcount, which is the biggest component of G&A. So I think we are in good shape there.

Okay.

But, Walter, on the marketing dollars, I'm going to jump in there just a little. We are really encouraging our distributors and our retailers. Anybody that we are selling jewelry or loose stones to, we are really encouraging them to use their co-op dollars. We don't want them to give up those co-op dollars. We want them to use it because there is no better place than to get the message out from the grassroots coming forward. So if I have got a jeweler in any town, Georgia, for instance, I would love to have a billboard up in his market because then we can pull him right to the store. And, again, it's a win-win for both of us.

I would rather do a few thousand of those than to have one ad in the New York Times. Because I'm going to get more results from it.

Okay.

That is just a proven fact.

Well, anyway, congratulations again. Thanks for taking the questions.

This concludes our question and answer session. I would like to turn the conference back over to Randy McCullough for any closing remarks.

All right. Thanks. In case you missed it, in my earlier comments, myself and our entire management team remain extremely excited about the potential for Charles & Colvard, the opportunity we have to enhance shareholder value going forward. Once again, I would like to thank all of you guys for participating in today's call, and I look forward to speaking to you again when we report our first-quarter operating results. Thanks, guys.

Thank you.

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