Charles & Colvard Ltd (CTHR) 2011 Q4 法說會逐字稿

Good morning and welcome to the Charles & Colvard Fourth Quarter and Yearend 2011 Results Conference Call. (Operator Instructors) After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded.

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

Thank you, operator. Good morning, and thank you for taking the time to join us in recapping the fourth quarter of the year and our yearend December 31, 2011. In addition, I want to take this opportunity to update you on the initiatives we are currently undertaking to further expand Charles & Colvard's business.

As I said in our press release today, we're thrilled with our outstanding results in the fourth quarter. Our top line benefited from our investments and new sales and marketing initiatives throughout our distribution channels. Let me take a moment and recap these with you.

Our television shopping network sales were strong as a result of our two largest networks, JTV and ShopNBC, significantly increasing the number of Moissanite shows during the fourth quarter. We expect this trend to carry on due to the continued success they have been experiencing.

We invested in Charles Winston, a known TV shopping talent who continues to host shows at JTV with results exceeding our expectations. Catch the dates and times for his future shows to be posted on our Facebook page. In addition we partnered with Quality Gold, one of our largest US distributors to develop a Charles Winston jewelry line that will be available through their retail customers. TV home shopping has proved -- proven to be one of the better channels for Moissanite in that the host has time to explain all of the benefits of Moissanite jewelry.

We're also in the process of expanding our TV reach in the UK and China. Our sales team continues to make in-roads into several international markets including India, China, Kazakhstan, Italy, France, UK, Turkey, Thailand, Indonesia, Australia, Brazil, Canada, the Bahamas, Singapore, Pakistan, and Russia. It represents expanded opportunities for Moissanite stones and jewelry with potential to continue providing incremental revenue for our Company.

Lastly, we experienced increased revenue from reorders indicating successful sale through with our highly-valued existing Moissanite distributors and retailers in both the United States and abroad. Over 2000 -- over 2011 we invested significant time and monetary resources improving our infrastructure and building a foundation to support expanding our wholesale business in addition to launching our new direct-to-consumer businesses.

These initiatives include staffing, systems to support the business plan, merchandise development, marketing, right down to furniture and fixtures, all necessities for future success. However, these investments did impact our profitability for the year. In light of this, finishing the year with $1.6 million in net income highlighted our ability to complete the year with a strong financial performance making our results even more gratifying.

Moissanite.com continues to expand its product assortment and many exclusive -- with many exclusive designs and improvements to site functionability and website features. We are currently experiencing revenue growth that we expect will continue to increase. Traffic during the fourth quarter exceeded 85,000 visitors and continues to grow month-over-month with February trending over 30,000 visits.

As a result, consumer awareness of Moissanite continues to increase supported by multiple social -- social media campaigns, increased bloggers activity, and satisfied customers spreading the word. An improved look and feel that leverages Charles & Colvard's brand to include extensive information about Moissanite's attributes, customer testimonials, video, and improved product images are planned to be implemented well before the 2012 holiday season.

As the sole supplier of Moissanite to the market place, we know exactly where our competitive advantage lies with the consumer, taking beautiful Moissanite jewelry to them directly. This firm knowledge backed by market testing in real-life home party situations has increased -- has created enthusiasm throughout the direct selling business for Lulu Avenue.

Our Lulu Avenue team, who have extensive fashion and jewelry sales and marketing experience in the direct sales market place have been pursuing field recruitment efforts while their merchandise and marketing folks have been developing the Lulu product line supported with catalogs and marketing collateral.

We are also finalizing the development of our direct sales front-end and back-office system that will support our Lulu Avenue field personnel and their businesses and also provide operational support to drive the business forward. We expect Lulu Avenue will begin to meaningful impact Charles & Colvard's second half of 2012 by taking Moissanite to the market place as a part of an overall jewelry offering that raises -- that both raises consumer awareness of Moissanite and has the potential to significantly add to our top line revenues nationally.

Sales and consumer response throughout the test phase for Lulu confirmed that our home parties were a great venue to introduce Moissanite to a new population wherein the majority of the participants had never been exposed to Moissanite. They also greatly exceeded our projections and goals, beating mature industry home party show averages by over 30%.

We are also continuing to define our brand strategies. In 2012, January of 2012, we entered into an exclusive agreement with Serenity Technologies, one of the world's notable laboratories for gemstone enhancement to create Moissanite gemstones with optical properties throughout the stone that are remarkably whiter and brighter than ever before. The results are coming out great.

The major advantage with the new whitening process is there are no restrictions. The stone can be recut, exposed to excessive heat from jeweler size and rings, and subjected to acids used in jewelry manufacturing without any negative effect whatsoever. This process actually restructures the ions within the stone and is absolutely permanent with no degradation to the surface as experienced with high temperature and high pressure.

We are introducing these enhanced gemstones as Forever Brilliant, a new premier brand of Charles & Colvard's created Moissanite currently available on our ecommerce site, Moissanite.com, and soon through our existing distributors. We believe this brand will become the new standard for Moissanite as we work diligently with the Levine Design Group of New York on several marketing initiatives to properly deliver our message to consumers and the jewelry trade.

We engaged the Levine Design Group from New York to identify a proprietary positioning that creates a new space and paradigm in the luxury jewelry market. Our goal is to clearly define and separate the brand and the Moissanite jewels themselves from the diamond universe, thereby creating a unique platform for future growth. The Charles & Colvard brand will provide an umbrella for which Forever Brilliant Moissanite, Judy Evans designer finished jewelry, Moissanite.com ecommerce, and Lulu Avenue direct selling sub brands can all be developed and optimized.

Looking ahead to our first quarter of 2012, we expect based on the to-date execution of our strategies including the development of proprietary brands and new product lines to experience continued stronger sales. We remain optimistic that our multi-channel sales and marketing strategies will play a key role in the accomplishment of our growth objectives.

Before I turn the call over to Tim, I'd like to reiterate what I said during our last call, that I firmly believe when it comes to successfully running a business, it's not enough that you have a desire to dominate a market place. You must create a business model that is in alignment with your consumer. Successful organizations find new ways to think about their business and provide something different or innovative in their space. They love questioning the status quo, testing things that people say can't be done.

In the process they develop products, services, or experiences that are innovative in the market place, like whitening our Moissanite gemstone to create Forever Brilliant brand. There is no right or wrong way to go about building a successful organization. Every company has to look at how they do business, both past and present, and identify which aspects of the business are working and which aren't.

From there you can begin to prune away the products, practices, or people that undermine the Company's success and build upon those that facilitate your economic model. Each situation is unique, and the strategies employed to align the operational model for success will vary accordingly.

The point is to remember that you must execute in ways that deliver what your consumers want. Success is not the result of marketing gimmicks. It takes hard work, operational alignment, complete focus, and 100% commitment from the entire team.

I would like now to turn the call over to our Chief Financial Officer, Tim Krist, who will review in greater detail the financial results of our fourth quarter and full-year 2011.

Thank you, Randy. Good morning everyone, and thank you for joining us today. I will discuss the financial results for the fourth quarter and year ended December 31, 2011. As announced in today's press release, net sales for the fourth quarter of 2011 increased 105% to approximately $7.2 million compared with approximately $3.5 million in net sales during the same period of 2010.

Domestic sales for the quarter increased 87% from the same period in 2010 to approximately $5.5 million and represented 77% of total net sales. International sales for the quarter increased 199% from the same period in 2010 to approximately $1.7 million and represented 23% of total net sales.

Our loose gemstone sales during the fourth quarter increased 149% from the same period in 2010 to approximately $4.8 million and represented 67% of total net sales. Our finished jewelry sales during the fourth quarter increased 50% from the same period in 2010 to approximately $2.4 million and represented 33% of total net sales. The improvement in net sales during the quarter is primarily the result of loose Moissanite gemstone orders from new wholesale customers and the timing of restocking orders from existing wholesale customers and robust wholesale finished jewelry sales, especially to television shopping network customers that are experiencing high levels of success as we continue to grow our finished jewelry business that we started in 2010.

Net sales for the year ended December 31, 2011, increased 26% to approximately $16 million compared with approximately $12.7 million in net sales during 2010. Domestic sales for the year increased 28% over 2010 to approximately $10.7 million and represented 67% of total net sales. International sales for the year increased 23% over 2010 to approximately $5.4 million and represented 33% of total net sales.

Our loose gemstone sales during the year ended December 31st increased 19% over 2010 to approximately $12.1 million and represented 75% of total net sales. Our finished jewelry sales during 2011 were up 57% over 2010 to approximately $4 million and represented 25% of total net sales. The improvement in 2011 sales was primarily due to the ongoing execution of our growth strategies including initiatives to increase consumer awareness of Moissanite through marketing support of our customer base, expansion of existing customer relationships, the addition of new domestic and international customers, and the increased sales of our finished jewelry featuring Moissanite.

Our fourth quarter comparable sales increased 76% and our full-year 2011 comparable sales increased 26% when compared with the previous year. We define comparable sales as active customers with which we generate a 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 recorded net income of $1.8 million or $0.09 per diluted share during the most recent quarter compared with net income of $410,000 or $0.02 per diluted share during the fourth quarter of 2010. Our net income for the year ended December 31, 2011, was $1.6 million or $0.08 per diluted share compared with net income of $1.6 million or $0.08 per diluted share for 2010.

Operating expenses totaled approximately $2.3 million in the fourth quarter of 2011 compared with approximately $1.7 million for the same period of 2010, an increase of $594,000 or 35%. Operating expenses approximated $8.1 million for the year ended December 31, 2011, compared with approximately $6.6 million in 2010, an increase of approximately $1.5 million or 23%.

Of these increases, sales and marketing expenses increased $747,000 or 228% and $1.3 million or 66% during the fourth quarter and year ended December 31, 2011, respectively when compared with the same periods in 2010. This was primarily due to our investments in marketing and branding initiatives to better position Charles & Colvard's product lines in the market place as well as key strategic personnel additions in support of our direct-to-consumer Moissanite.com ecommerce, and Lulu Avenue home party businesses.

We ended the year with a higher level of cash and liquid long-term investments on our balance sheet relative to the end of 2010. Cash and liquid long-term investments total $10.5 million at December 31, 2011, up from $8.8 million at December 31, 2010. During the year $4.25 million in government agency bonds were called by the issuers. We purchased $7 million in similar liquid long-term investments in 2011, and we also invested a portion of our cash in excess of current operating needs in very short-term certificates of deposit so that they are available for future investment in the business.

We generated approximately $1.6 million and $3.5 million in cash from operations during the fourth quarter and year ended December 31, 2011, respectively. Total inventory including long-term and consigned inventory approximated $35 million at the end of 2011, down from $37.4 million at the end of 2010. This decrease is primarily the result of higher sales offset in part by purchases in 2011 of jewelry -- jewelry castings, signings, and other jewelry components, fashion finished jewelry in support of our home party direct sales business, and limited production of Moissanite gemstones.

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

Thanks, Tim. This concludes our formal remarks this morning, and now we'd like to open up the call to any questions that participants in the call may have. Operator, can you please open the floor for the Q&A session?

Yes. We will now begin the question and answer session. (Operator Instructions.) And our first question will come from Neal Goldman of Goldman Capital Management. Please go ahead.

Good morning guys.

Hey, Neal.

Good morning.

Fabulous quarter. One, when do you start the direct selling operation? When does it go live?

You know, I actually have Kevin here. I'm going to let Kevin answer that question for you, Neal.

Okay.

Hi, Neal. Good question. We've been working on the systems, and we anticipate that in April it will go live.

Okay. How many tests did you do throughout the early period to see the success of this or to try to judge it?

We did in excess of 20 different test shows.

And what was the average revenues per show?

It varied quite a bit. My recollection is it was slightly over $1100.

Okay. All right. That would put you in the top tier of direct selling companies per show. And the average ticket price would be what?

It varied all over the board. I really couldn't give you an average, Neal. It switched a lot. Basically depending upon the makeup of the show and the number of items of Moissanite that were purchased.

One of the interesting things in the model is that we have both a good fashion line, which has an average price point of about $80 to $90, and then the Moissanite pieces, which are more like $300 each. That blending, it's almost as if there's a higher price ticket item average and a lower price ticket average item. So I'd hate to mix the two and give you a bad answer.

And I assume the offerings will be different than what's shown on JTV or what's shown at retail?

Absolutely. It's unique.

Okay. And price points relative to the other two markets?

The other two markets meaning Moissanite.com and on television?

Yes.

The price points will start off at a lower level, but they would approach the -- on the Moissanite pieces they're going to approach what you see on Moissanite.com.

Okay.

Though there will be some lower price offerings made of silver.

Okay. Randy, you made a comment that the momentum continues. I know there's big seasonality in the business. Could you just clarify that more?

Well, with the announcement of the Forever Brilliant, Neal, and if you were an industry veteran like some of us, the number one complaint with Moissanite over the years has been the color. And the reason is when I was a retailer and I had hundreds of stores, I obviously had hundreds of millions of dollars invested in inventory that I'm trying to sell.

The perfect example is one of the major brands is Tacori. And if you -- and if you have Tacori mountings in your store, which most of the major jewelers do, it's a significant investment. The guy comes in. He's got about $3500 to buy a ring, and that's about what the ring costs, $3000, right in that area. And then he realizes he needs another $5000 to $7000 to put a center stone in it, and his option is to put a CV in it, which really takes all the -- all the emotion of the moment away from his significant other.

What we experience by providing Moissanite was the fact that if she bought into it's a real stone, it's grown from a seed, and it -- and it provides all the brilliance if not more, certainly more than a diamond. And obviously if they ever wanted to trade it in, we offered them trade-in value also.

All of those things are being explored, but the number one issue we had was when we put the Moissanite in the mounting, the Moissanite stone was three -- three to four color grades darker and it stood out like a sore thumb, especially as you get to a bigger stone. The more body mass, the more the color shows up.

Today -- we just put one in a ring yesterday, and the body color of the baguettes on the side were in the G range, and we put a 9-mm, which is equivalent to a two-and-a-half carat stone, and it matched beautifully. Gorgeous.

And so relative to my question of first quarter sales?

Well we don't have -- we've got about 6000 stones in work that are in process as Serenity and should be back here over the next two weeks, so we have -- obviously we've made the announcement. The industries are -- they are aware of what it is and what the benefits are, so they're clamoring for this stone. So we -- we have a ready market reaching out to us through all of our distributors that as soon as we get it -- you couldn't have a better situation.

Okay. So the implication is we'll continue this kind of growth rate at least quarter over quarter type of thing?

Neal, this is Tim. Boy, that's 100% in one quarter.

What was your first quarter a year ago and the first quarter of '11?

About 2.9 if I remember correctly.

Yes, about 2.9. So we're certainly working as hard as we can to deliver great results, but --

Okay. Last question is relative to your total inventory, you reduced that long-term inventory somewhat, and I realize you're buying other settings and -- to make sure you can deliver a product that's attractive to the consumer. What's your target this year to reduce that long-term inventory by net?

That's a good question. You got him -- he's digging over there.

Well, a lot obviously depends upon how successful our sales are in what -- and what the product mix will be Lulu Avenue, because as you know, some of that inventory will be purchased and sold in the same year. So our current balance sheet shows short-term inventory at $6.8 million. So that would be what we would expect to use of our longer-term inventory based upon our forecasting model.

Now that doesn't necessarily mean that's all that we'll -- we'll buy and sell inventory in the same -- in the same period, so that's just the portion of the long term that we think will be -- that we're projecting will come down.

Okay. And how much -- what is your cost of goods relative to your end-sale product? What is the Moissanite part of it or the gemstones relative to a final sale on average? I know it's going to vary by market.

And depends on the size of the stone too. The smaller -- product made with smaller stones is going to have a much smaller ratio Moissanite to metal and labor than obviously if it's got a 2-carat center or larger.

Okay. Anyhow, great quarter. Keep it up guys. Thank you.

Hey, thanks a lot, Neal.

Our next question comes from Bruno of taglichbrothers.com. Please go ahead.

Hey guys. Again, great quarter, and Neal covered a couple of things, but on the direct sales, what's -- when it comes down to it, what's your -- your gross margins on that?

It's still very preliminary, but we think that our gross margins will be somewhere in the 55% range, but from that remember that sales commissions come out, so it's got a slightly higher margin to be able to accommodate that.

Okay, so 55 -- 55? But again, you got commissions in there?

Yes, and it's also very heavily dependent upon mix of product.

Okay. What do you -- I mean do you -- you know what? I'm not going to try to pin you down. All right, hey, listen, great quarter and look forward to seeing you guys again when you're in New York.

Great, thank you.

Great.

Our next question comes from Mark Wright of -- please go ahead.

Hi. Can you tell me is there still one grade of Moissanite being sold or are there multiple? And if there's multiple, in the future can we break it out -- break the results out by the different grades?

You know, Mark, we are preparing a new content for what is Moissanite, and we're going to release that content probably the beginning of March. So it'll be on our website, it'll be available through all our distribution points, and if you'll send Bernadette your email, we'll actually email it to you once we -- we have it all approved.

Being a public company, we have to run all that through the legal legals, so I wish I could give you all the details right now, but I can't.

Okay. So you -- you can't tell me if there's still one grade of Moissanite being sold?

I can tell you I am leveraging every bit of silicon carbide that we own, whether it's green, white, whatever we can do with it. We're experimenting with and having some success in taking the stone with micro-pipes and actually eliminating the micro-pipes. So I don't know where we're going to be six months from now or a year from now.

But the good news is we have a lot of product that we can make you, the investors, a lot of money on.

Okay. Can you tell us any updates on Judy Evans?

Judy Evans has several product lines in development. We met with her again. She was here last month I believe it was, and I've actually assigned her to develop some significant what I would call show pieces in preparation for the upcoming Las Vegas jewelry show in late May to early June.

We will be launching her line fairly soon on our -- on our website.

Okay. That's good to hear. I've been hearing her name for a while and just hadn't seen any results yet.

Yes.

So that'll be coming up fairly significant in the next quarter.

Well and I'll tell you what -- exactly what happened there. We went -- we do a lot of our model production in Thailand, and we were actually in Thailand late last year, and then the week after we left was when the floods hit, and some of those factories, including the two that we work with, were literally shut down for almost two-and-a-half months repairing from the floods. They were under water for over four weeks.

Okay. One additional question. It was a year or so ago there was a comment made about making more efficient use of the raw material from Cree. I was wondering, did you all make any progress there to utilize more of the material?

That -- that is a great question. The answer is yes we have. We've changed some cutting techniques from our end. We're having some exciting results from use of laser. We're sending slabs to be -- to be cut into preforms utilizing laser.

And then we are also exploring as a result of a road show that I did with investors a few weeks ago, they introduced me -- one of them introduced me to a company that specializes in water jet cutting. And it's amazing what it's capable of doing.

So all of those are being explored, and we think there's some significant change coming on the horizon. And the bottom line is, I'll give you one example. If I'm cutting a 4-mm stone, a round stone, and I've got a 3-inch slab that's cut approximately 3-mm deep for a 4-inch wide stone, I can -- I cut into little squares because that's the way a saw will cut, in diagonal squares to make round stones. So there's a lot of waste in the material.

But if I can go in there with a mechanism that will cut little round circles similar to looking at a beehive or a honeycomb and I can -- I can increase my yield almost 20% to 30%, I can get more preforms out of it because I'm leveraging the material better. That's where we're headed.

Exactly. I remember mentioning on the call, whatever brought this up previously, if you could patent this technology, that would give you some protection when your other patents expire here in 2015. I think that'd be very important to you if you can patent the cutting technology, if you can really increase that efficient use of raw material from Cree.

That's a good -- that's a good question. We'll throw that out to our patent attorneys.

One other question for you and then I'll drop off and let other people ask questions. Do you see any upcoming need to buy raw material to make specific size or shape stones?

We do no have any current need. We're sitting at about $6 million in raw material silicon carbide right now, but we continue to stay in close contact with Cree about our future purchases with them, but we currently have sufficient raw material.

All right. That's good to know. Okay I'll drop off and let somebody else ask questions and then I'll come back. Thank you.

Thanks.

Our next question comes from Robert Caruso of Singular Research. Please go ahead.

Good morning, gentlemen. First of all congrats on the stellar operating performance over the prior-year period and the full-year 2011.

Thank you, Robert.

Thank you.

Very impressive. My first question is, you mentioned earlier in the call you've been improving and expanding upon infrastructure to accommodate the newly-launched direct-to-consumer channels such as staffing, merchandising development, marketing, et cetera. Is CapEx spending already complete for this channel or is more spending required in order to ramp up the direct-to-consumer channel?

This is Tim. CapEx is not complete. We did invest quite a bit in 2011, but there are ongoing needs for not only our direct-to-consumer businesses in particular but also our ERP system that we are continuing to refine to accommodate the growth of the business.

There is -- there is the technology need such as servers and things like that. I don't anticipate that we're going to have a significant CapEx spend, but we have in our budget anticipated additional spending in 2012.

Beautiful. Okay. And also can you please provide the projected CapEx for 2012? Is that available?

That is not available.

That's fine. My next question is what would you say are some of the critical demand factors or patterns you observe with consumer demand, and are these factors likely to continue into the next quarter?

That's an interesting question. I think the one that probably stands out the most to me compared to prior years is the consumer acceptance and really reaching out for Moissanite set in silver. And we've -- we've taken a harder look at expanding our assortments in silver. JTV has had phenomenal success, and some of the lines that we're putting together we're going to have an entry level in silver.

That's probably the one that reaches out the most. The other one is obvious. If we -- in communicating with all of our various sellers, the number one reason for returning a Moissanite piece of jewelry is because of the color. So the fact that we're now able to produce and deliver a whiter stone really changes the whole game.

Perfect. Okay. And is it safe to assume these factors are likely to continue into the next quarter?

Well certainly the momentum that we're gaining in every quarter carries over to the next, and that is increasing consumer awareness, increasing our customer base, increasing reorders with our existing customer base. So yes, we're very optimistic that we will continue to improve upon our sales as we move forward.

But I will -- just to be clear, I'm going to reiterate Lulu really gets up and running in the third and fourth quarter.

Perfect. That'll be it gentlemen. I thank you. I appreciate your time.

Thank you.

(Operator Instructions.) And our next question comes from Noah Steinberg of G2 Investment. Please go ahead.

Hey guys. This is Josh Goldberg for Noah. How are you guys going?

Good, Josh.

Hey, Josh.

Can you just give everyone a sense of the size of the opportunity for someone like a Lulu Avenue just in terms of direct selling and maybe some of the benchmarks that you've seen out there, just to kind of get a flavor of that? Thanks.

Okay, Josh. Well, you asked -- you asked the question at an opportune time because Kevin Raulston, who is our VP overseeing the -- actually he's our General Manager overseeing the Lulu Avenue whole project, he is an industry veteran, has over two decades in the industry, and no one could better answer that question than him because he's got experience from former home party companies.

Yes, I appreciate the question. It's really why I think this whole initiative has been taken -- undertaken, Noah. You have a big range of people in -- that have done direct selling. Some of those companies have gotten very big. Of course, companies like Avon, they carry some jewelry and things. But you have specific jewelry focused direct sales companies such as Silpada, which was most recently, I think two years ago, bought by Avon I believe for roughly $600 million.

You've got also some privately-held companies like Lia Sophia, which don't release their numbers, but anecdotally the people we've talked to, they're well in excess of $250 million in revenue doing jewelry at a lower price point than we're doing it. Stella & Dot is another good one to look at. And they are held by private investors as well, so their numbers aren't released. But they're clearly within their last -- they're about six years old or so. By and large they're -- most people are thinking they're well in excess of $200 million at this point.

So there's a lot of potential, but I can't say that we're going to hit it or be limited by what they've done.

Does that answer your question, Josh?

Maybe you can just -- maybe you can just, on that same vane, when you look at a competitor like Stella & Dot and others, what is sort of the number of shows they do a month, how much money they make per show just to kind of get a sense of what the opportunity could be?

You know what? I'm going to give you a treat, Josh. I've got Ann Raulston here, who's our VP of Sales in the Lulu space, and she also has many years, although she doesn't look that old, in the business. And I'm going to ask Ann to answer that one because she's really the sales driver.

Well, good afternoon. I want to let you know that one, I'm incredibly excited to be a part of this. I've been in the industry myself for 20 plus years now, and having been out in the field and helping to drive this initiative, the response of the women who have never seen, heard, or understood one thing about Moissanite, they are completely new to the gem, are absolutely bowled over by it.

I would love for you all to have been a fly on the wall the evening when I introduced it to a group in Middle America. They literally went wild. And it is an incredible driver for our business that we have something unique in this field with this incredible gem. And the reaction and response we're getting is driving the opportunity forward, not only for other people to join us and become their own retail outlet for us, but also to introduce it to new customers, again most of whom have never heard of Moissanite and are falling in love with it just like those of us who have seen it a year ago have also done.

So I'm really excited by seeing how the market place is literally reacting to us. We have a lot of activity on Facebook also and consistently I am asked well, I'm already with such-and-such a company, again in the direct sales venue, but I'm loving what I'm seeing of what you're doing. How do I become a part of what you're doing?

So I think a defining difference, the Moissanite, is a huge driver in this market space. Very, very exciting.

That's the key, having that point of differentiation, Josh, really helps.

Yes, absolutely. Okay. Great. Thanks so much. Good luck.

Thank you.

Our next question comes from Rick Fetterman of Fetterman Investments. Please go ahead.

Hi, good morning.

Good morning.

I wonder if beginning late this year if you intend to break out the -- or segregate the results for the Lulu effort?

This is Tim. We -- we are evaluating an appropriate time to provide financial results by our operating subsidiaries. In 2011 they weren't -- they weren't really significant enough to do that, but in 2012 we expect that they will be. So we anticipate starting that practice in -- sometime in 2012.

Okay. And can you comment on the business without naming specific retailers, but with retailers in terms of how much business was done with just stocking new -- new folks carrying the line? What kind of activity, what kind of reorders you had?

I've done some research in that area, but I don't feel that I've got enough data today. I can tell you our distributors as a whole, as an entity in the US were up in excess of 60%, and that's all sell through. And that's the only number that pops out in my head right now. I know JTV was through the roof with their sales.

And also our comparable sales percent kind of gives an indication of that as well. In the fourth quarter we had a 70 -- a 76%, which is essentially our existing customers growing their business through reorders and so forth. And it was 26% for the year.

Okay. All right. Thank you a lot.

Yes.

Thanks.

Our next question comes from Rodney Baber of Morgan Keegan. Please go ahead.

Good morning. Randy, great quarter and just want to congratulate you and the team for what you're doing. I know how hard you guys have been working, and I remember back when -- I think it was November 6, 2009, I guess, you guys came on and started the process to change this company. And Josh actually got my question, which was to get into some more detail about the direct marketing and all that. And so you already answered a lot of my questions.

But I guess the thing I would just throw out that I wouldn't mind hearing your comment on would be this is a lot more than a Moissanite turn around story now. This is you guys changing this company and the long-term potential that it has by getting into a number of new things that you haven't been in before. So I wouldn't mind just asking you the question about philosophically what are you thinking that you can do with this thing over time?

I mean there are companies out there like Bry that has been around for 15 or 20 years that's doing over a billion and a half, and they have a division that's in the direct marketing area. They went from 30 -- I think it was $34 million to $231 million in one year. And I'm not trying to be promotional, I just know that there's so much potential and it's hard to size all the opportunities you have.

So I guess -- I guess I just want to ask you a philosophical question about what you think about this company and where you are and what you can do with it longer term?

Well philosophically you and I are probably in similar spaces, but Tim's not going to let me quantify a number. However --

Right.

I will point out that mine is -- the one I always point to is Stella & Dot who came into the industry, the home party jewelry space, with nothing different. They had no product differentiation difference from the others and drove $150 million in three short years, and now they're capping $200 million plus. And they've done it with a great team, a great marketing plan, and executing phenomenally.

And we intend to do all of those things with the advantage of having that point of differentiation with the Moissanite jewelry that's being designed specifically for the -- for the Lulu sellers. I mean, I think our wholesale division is properly positioned. I think with the -- recognizing early on that our biggest hold back was color, and now that we've solved that issue and we're able to bring the market a whole new paradigm on Moissanite and what the -- what the uses can be inside the jewelry space from a wholesale standpoint I think doors are going to open, more doors than we've ever imagined before. I am extremely optimistic.

Well let me ask you a question with Kevin there. Looking at Lulu Avenue's website you notice that there's a lot of stuff on there that's not just Moissanite. There's other product, and you obviously had to develop that I think to get people excited about having a more diversified product offering.

What percentage of your sales, Kevin, could be in non-Moissanite-related product over time, and how do you think that would ramp? And I know there's no definitive answer on it, but how do you think that blends in to the Moissanite thing over time?

That's a great point, Rodney, that we've looked at quite a bit. The revenue numbers are about 50/50 between Moissanite items and fashion jewelry that we're selling, which we view that fashion as a great entrée into the space.

During the test market phase we were essentially offering 14-karat gold settings with Moissanite almost exclusively. We only had a few pieces that had silver during the test. At this point you're going to be seeing in the next generation of the catalog a significant expansion of Moissanite being offered in the book with the majority of it being set in silver. So I think you're going to see even a higher percentage than 50% of the dollars from Lulu Avenue being a Moissanite-related jewelry product.

Okay. Well, I appreciate what you're doing and the feedback on it, and keep it up. Thank you.

Appreciate it, Rodney. Appreciate your support.

Our next question comes from Dennis Stubbs, a private investor. Please go ahead.

Good morning.

Good morning.

I have a specific question and then kind of a general one. Specifically, are we doing anything to get Moissanite jewelry into large retail chains where we'll see it out in stores, where consumers can actually view the product?

Yes, we -- and we're repeated this in just about every call that we've had. We constantly maintain contact with all the majors. Between Tom and myself, we know them. I personally feel that now that we have a whiter stone, which has been the number one complaint, that we've really got something to go back and talk about. And we'll find that out at the upcoming jewelry show. That's when all the appointments are made with those guys.

Do we have any hope of getting some -- that large national distribution out there by next holiday season, or were you looking at years down the road to get them back in?

I can't tell what's going on in those buyers' minds. I'd like to. If I could figure that out, I could figure out how to overcome their objections. But I go to sleep every night thinking that there's hope tomorrow that the deal is going to happen.

It just seems difficult to sell a product that's a visual product if you don't put it out where people can actually see it. I mean there's a lot of other ways, the shop channels and the internet and what, but getting it out there seems like an important thing for a jewel.

Well I think if you get 50,000 or 70,000 women showing this product on a daily basis, that's -- that's a lot of touches. You multiply that times ten or 15 people attending a home party show on a monthly basis, you're reaching probably more than Saks or Macy's or any of those guys are touching.

Well I can see how that can help, the word of mouth about it and stuff like that, but I mean the home parties have a certain atmosphere about them. It's a different thing than a fine jewelry store or chain of fine jewelry stores. And it's not as easy for somebody to just decide to go and see it. They have to have a friend who has a party or sign up. It's a little -- both could work, but how we do it without having it out there I'm not sure.

And both will work. Believe me, it's not because we don't want to be in those places. We're out there working them consistently. It's just you're -- you're at their beck and call. You have to have something that they want to take and get behind and promote. And believe me, we know that space. We've been in that space. We've sold product in that space with other companies. And if the opportunity comes, we'll be on top of it.

Yes, I was happy to have some people around who knew that space, and that's a good thing. Hopefully you guys can sell them on the idea of taking this product in.

That led you to talking about the whitening of the product, the Forever Brilliant brand. Just in general, if we're going after whiter, aren't we kind of going after what diamond does? Are we taking advantage of anything of the uniqueness of our Moissanite jewel to make that argument instead?

I'll tell you what we're doing is what I said earlier. We're listening to the consumer and we're asking that consumer what do you really want? Why aren't you buying more Moissanite? And consumer feedback in general is we'd like to see a better color. My other jewelry is a better color. I want to be able to wear it consistently with everything else I've bought over the years or received as a gift, and the fact that we're now able to overcome that objection and put it out there, it's still all from what the Moissanite that was out there before.

They've got a choice. They don't have to buy one or the other. And I think it just opens up more avenues, positions us in a better position.

Well we'll watch and see how that goes. My bigger question has to do with where the company is headed? A previous caller kind of got into it. Long term, and we see numbers that look good on a quarter-over-quarter basis, but historically we've been bigger, and I think long-term investors wanted to see much bigger things out of this company with this jewel. Can you shine any more light on it? Do the things you're doing target getting there?

I would think so. If it didn't, I wouldn't be here and I wouldn't have invested the monies that I've invested in the Company also. I happen to be a pretty big investor in this Company, and I firmly believe that we're doing all of the things to build a solid foundation that once we get there, we can maintain it. We don't fall off the cliff.

That's also important. Okay, thank you.

Thank you.

Thanks.

Our next question is a follow-up from Mark Wright. Please go ahead.

Hey guys. Just a few more questions. With the Serenity partnership, will we be selling colored Moissanite now?

We are looking at that. Now that's a different process. That does not realign anything structurally in the stone, so you can't say that that is permanent. But what we can offer if we go into that, and we probably will because there's a need for it, it's actually impregnated is the best word I can use, to the bottom part of the stone.

The bottom part of the stone from the girdle down is called a pavilion. And the same process is used with diamonds. A lot of the pink diamonds you see out there and others, that's what it was developed for. But they impregnate a mixture of gases and other things. It slightly penetrates the surface of the stone, if you can imagine that. It's pretty resilient to most things that it gets exposed to, but my experience has been that if you get too much heat on it from a jeweler re-tipping a prong or something like that, that it can affect it.

But the good news is you can reapply it. So if we go that route, then we'll also guarantee it that should it ever give you an issue, then just send it is and we'll have it redone for you.

Okay, so it sounds like the answer is that it's something you're going to be looking into?

Absolutely.

Okay. From my understanding it's more of a coating where as it sounds like this whiter Moissanite really does affect the entire jewel, so it's a different process.

The white Moissanite, you can literally saw the stone in half and it's all the way through. It changes the structure internally of the stone so that it filters -- in the past it obviously filters out white and gives you the flashes of yellows and faint greens, and it changes that structure so that it's reflecting back white.

Great. That's good to confirm that. Charles & Colvard has a retail store in Kazakhstan now. Are there plans to add more stores this year?

I've got Tom Pautz here. He actually attended the grand opening. If you go to YouTube you can see him cutting the ribbon, and I'm going to let him answer that one because he -- he knows that market better.

Good afternoon. The Kazakhstan store, just for clarification, it's Charles & Colvard, but obviously it's not owned by us, just for clarification. But they will have four more retail outlets here I would imagine in the next two months actually.

But we also are looking for opportunities with this partner in Russia, so that's -- that's where we're really very optimistic. Kazakhstan obviously is the population, you can look it up. We're anticipating good things, but more so in Russia.

Excellent. That's good clarification also. My last question here. Back in April 2010, there was a manufacturing agreement signed with Frederick Goldman where Goldman has the exclusive right to distribute and sell finished jewelry featuring Moissanite to certain national retail customers. Have there been any additional retailers added via the result of that?

No. Jonathan Goldman who owns Frederick Goldman is -- Jonathan and I have done business and known each other for well over three decades, and he -- he is probably one of the largest jewelry manufacturers in the -- definitely in the US and possibly in the world, and he has several of the largest majors that are big customers of his and most likely if a deal got put together with a major, it would be with Jonathan as a partner. We consistently have those conversations and we consistently have presentations together.

Okay. All right. Thank you for that answer. I'm going to throw one more out and then I'll drop off. The social media that you've been doing here for the last year or so, the Facebook, Twitter, YouTube. Is that working about as you expected, or you expect to see some more activity there?

I'm going to ask Craig Laing to answer that one. He's our VP of the ecommerce.

Hi. Thanks for the question. It's a good question. We -- the question was is it going about as expected? I would say that yes the foundation has been laid. We've reached out. We've tested some things independently. It's a -- it's a larger question than just sort of the ecommerce site or just Lulu or just Charles & Colvard. It's sort of across all of our web properties.

So we've actually -- we're going to make some changes here very shortly. In fact you can probably already see some of those changes happening in the last 30 days regarding sweepstakes, customer acquisition, cross-platform blogging and awareness, but that'll become much more robust shortly.

All right. Thank you. Thank you, sir. I'll drop off now.

Thank you. Good questions.

And our next question comes from Rodney Baber of Morgan Keegan. Please go ahead.

Randy, let me ask you a question about Moissanite.com, which doesn't seem to me that we've been hearing as much about that maybe as we thought we would back six months, 12 months ago. I know it's been a difficult roll out trying to get the SKUs up and all of that, but that area seems to have so much potential.

Could you give us just some updated color on what's going on with that, how you're feeling about it, how it fits in with your direct marketing versus all the other things you're doing, and just give us your read on it?

Okay, I'll take the last part, but first I'm going to let Craig give you a little flavor as to what he's working on currently.

Okay.

Sure. We have our site performance and features and functionality are sort of vetted and in place. We've got the right platform in place. Really where our focus is going forward will be on sort of a brand-centric position. It's pretty much the store works right now. I guess that's the best way to say it.

We did have some challenges in the beginning with SKUs. As of today I think we're at about close to 800, which is about 10,000 unique color waves and finger sizes and stone sizes. We believe that's probably going to grow threefold in the next 90 days or so.

But the most -- the most sort of intriguing numbers are that in parallel with the seasonality of the business, we're actually seeing growth through January and February based on visits, time on site, numbers of items added to their cart, et cetera. So even though we weren't 100% ready for holiday 2011, the indications past that in January and February are really strong and really positive.

And I think Randy said in his opening remarks, we're actually looking at February's -- February's numbers of people visiting the site are actually the -- are on pace to beat the peak of the holiday season.

Well this is an area that awareness obviously would help you a lot, and I'm curious about how you're going about getting people to the website and actually what kind of purchase they're making per purchase and the size of it and those kinds of things. Just any more metrics like that that you can share with us I would love to hear about.

And I know you don't know what this will be longer run, but it certainly seems to have a huge potential along with Lulu and the other things you're doing.

Sure. Sure. As Randy said in the opening remarks, we're looking at about 30,000 visitors a month. We get those through search. More than half of our site visitors come through search. Organic search on the terms Moissanite, Moissanite jewelry, et cetera are excellent. We're typically in the number one spot there.

We also do some paid campaigns. We did some work around Valentine's Day gift giving. We also did a President's Day Weekend event, which we're a part of the Google Ad Network. We did some content advertising. We also have a robust email campaign that we go through.

We have -- our average -- I'll go ahead and give you some numbers that you can work off of. Our average ticket is between $500 and $600. We -- as we said we have about 30,000 visits a month. I'm not -- I'm not going to divulge our conversion rate and some of the other metrics that we want to keep private.

Terrific. Can I assume that we've got good numbers on the conversion rate and that kind of thing, or is there maybe an issue there for some reason that --?

Well I think with any launch and before the catalog and the merchandise -- merchandising is complete, there's opportunity there without a doubt. When we look at targeted traffic that we bring into the site via email or via advertising, our conversion rate is very good.

We have -- we have, like you said in your first question, Rodney, we had some challenges with merchandising in the beginning that were certainly -- I mean today alone we launched a men's collection. We now have the largest men's Moissanite collection available anywhere in the world. We've done some searches. The most men's rings we can find are half a dozen rings here and a half a dozen rings there.

We launched the antique section earlier this week. We have a special collection, designer collection from Venezia. Halo collection launched last month. So that's really going to be the big piece for us is merchandising the website, having unique collections and unique assortment. It isn't cookie cutter like so much of the stuff you see out there.

Okay.

Hey Rodney, let me share with you though, because I track some of this too. What I've seen from day one, and I'm going back to even pre-Craig, is the increased assortment on the website drives more traffic and drives the conversion rate up higher. And based on what I've seen with other websites, not just Moissanite but throughout the jewelry industry that the kind of critical mass number is to get up around 3000 plus, and that's where we're -- that's where we're pushing hard.

We're about 30% of the way there, and I can tell you the increase in the results that we've had, if we continue to have those increases on a pro rata basis, when we hit 3000 we're going to be happy campers.

Right. Hey, do you release what the number -- on the $7 million for the fourth quarter, what part of that was the ecommerce or the Moissanite.com?

No, we have not released that.

We have not released that.

It sounds like maybe at some point you'll start breaking all this stuff out for us, you're just not ready to do it now?

Yes, 2011 was just not -- it just was not significant because the business there just started.

Well all your horses don't run at the same time. That's what's fun about this is if they all did you probably wouldn't be able to handle it. But it's nice to see you bringing on these different efforts, and they'll all kick in when they kick in. So it'll be fun to kind of see how that happens.

But anyways, thank you for the additional color on that.

Thank you for the questions.

Appreciate it. Appreciate it.

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

Thank you, operator. Once again I'd like to thank everyone for taking the time to participate in the call this afternoon, and it is afternoon now. We went past 12. I hope that you share our enthusiasm for 2012 and future years, and we look forward to talking to you again in our next quarterly update. That's it, operator.

This conference is now concluded. Thank you for attending today's presentation. You may now disconnect.