Charles & Colvard Ltd (CTHR) 2013 Q4 法說會逐字稿

Hello and welcome to the Charles & Colvard Limited fourth-quarter 2013 and fiscal year results conference call. (Operator Instructions).

The Company's management 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 they discuss here.

These risk 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, SEC.gov.

Please also note this event is being recorded. I would now like turn the conference over to Mr. Randy McCullough. Mr. McCullough, the floor is yours sir.

Thank you. Good afternoon and thank you for taking time to join us in recapping Charles & Colvard's fourth-quarter and fiscal year that ended December 31, 2013. This past year represented the latest step in our four-year long progressive growth of the Company, a journey that we began in late 2009 when the Company reached a low point with the market cap of approximately $10 million. We achieved compounded annual revenue growth in excess of 30% for the past four years and made investments in management and infrastructure to prepare for the opportunities in 2014 and beyond.

Let me take a minute and frame our recent results compared to the industry statistics as reported in the February 2014 Rapaport news. US jewelry stores sales rose 1.6% year-on-year to $6.5 billion in December, the weakest sales increase of the year. Despite the lackluster sales growth rate, for the most important retailing month of the year, jewelry store annual sales increased 8% to $34 billion in 2013.

Comparatively preliminary annual sales for jewelry for all channels in 2013 rose 7.7% to $71.3 billion. Jewelry sales and store sales performed extremely well during the year when compared with the department store chains where total merchandise sales declined 4.7% to $174.7 billion.

I am proud of the extraordinary efforts Charles & Colvard people have made to keep our Company growing through a very demanding economic period. While we believe we rank among the best performers in our industry with annual net sales growth of 27% compared to the industry average of 7.7%, we must continue to work on our long-term annual objective of high single-digit to low double-digit earnings per share growth rate that is designed to create long-term shareholder returns.

To accelerate progress down this path, we are focusing on growing our business profitably on several fronts including pursuing additional new customers and sales channels. Our key areas of focus are continued top line and market share growth, expanding sales channels, accelerating growth in e-commerce market places, building our brands, innovation for growth through systemic enhancements and proven operational effectiveness, efficiency and cash flow securing a long-term silicon carbide supply source.

We are expanding and realigning our sales organization in order to maximize our growth opportunities in a global jewelry market that exceeds $120 billion. We have engaged an outside commission sales representative, a 30-year wholesale jewelry veteran, to increase our opportunities with midsize and major retailers including department stores.

We have added a VP of Wholesale E-Commerce Sales with nearly 20 years of direct-to-consumer and e-commerce experience to focus exclusively on increasing sales to our online e-commerce sites for significant specialty and major retailers. This is just replicating what we accomplished with Kohl's and Helzberg this past quarter.

In addition, we believe Lulu Avenue and Moissanite.com are positioned to drive incremental revenue while unfavorably impacting our bottom line as we invest in these direct-to-consumer initiatives. We recognize, in order to grow our business, we need for fully integrated marketing and branding that provides Charles & Colvard with the core competency and strategic differentiator of a leading sales marketing and branding organization.

To that end, we have hired a new VP of Marketing and Branding with over 20 years of luxury consumer products experience to the Charles & Colvard team to develop and provide leadership of our branding strategy. Her branding experience includes 12 years at L'Oreal, five years at Chanel, and seven years with Calvin Klein.

Some of the responsibilities she takes over were handled by our previous VP of Marketing and E-Commerce who recently left the Company to pursue other alternatives. We thank Craig for his efforts and wish him the best.

We are consolidating all corporate marketing and branding under this individual. This new marketing team will be responsible for the following -- developing and executing a long-term brand strategy; be the brand czar for the organization and lead this strategy; delivering a consistent, compelling message to our customers across all channels and position our products ahead of changing trends; identifying market needs and opportunities while overseeing programs to optimize our investment in advertising, PR and social media to reach target consumers, influencers and end-users.

Historically women who self purchase jewelry comprise over 75% of our estimated sales making them our primary consumer. In the future we will improve our communications, offerings and messaging to better target the following segmented consumer buying groups in order to appeal to more women.

First, the aspirational buyer who desires fine jewelry, is status seeking but may not be able to afford large diamonds. Next is sophisticated buyer who has a higher income, appreciates designs, knowledgeable, can afford diamonds but is proud to say she bought an affordable luxury alternative. And last is the environmentally sensitive buyer who does not like to purchase conflict diamonds and prefers a more sociable, responsible alternative.

We are excited about the opportunities we believe will help develop the Forever Brilliant brand into a well-known and affordable luxury brand. Our objectives are to educate consumers to recognize Forever Brilliant as an intelligent alternative to a diamond, position us as a strong brand with superior quality which coupled with competitive price points should help position us against competition that may arise in the future, add additional Forever Brilliant brands to portfolio.

We will be announcing in the near future the Survivor Collection featuring Forever Brilliant, an exclusive collection of philanthropic jewelry featuring a pink center stone flanked by two white stones symbolizing before, during and after cancer recovery. We believe this brand has the ability to enable us to partner with national cancer organizations and increase awareness. In addition we hope to announce an additional new brand at the upcoming JCK Jewelry Show in late May.

Another key objective for Charles & Colvard is securing a long-term exclusive agreement with the supply source of silicon carbide which is the raw material Charles & Colvard utilizes in the production of moissanite jewels. This supply source which we are actively pursuing is targeted to provide our Company with the competitive edge in quality and pricing.

Our objective is to sign a new exclusive supply agreement prior to the expiration of our current agreement which expires in the summer of 2015. Due to the sensitivity of our current negotiations, I am unable to comment further. I would now like to turn the call over to Steve Larkin, our Chief Operating Officer.

Thanks Randy. With Q4 being the largest quarter of the year, the enhancements we made to order management, quality assurance, barcode scanning and EDI drop-ship capabilities were put to the test.

Our performance, efficiencies and speed were dramatically improved not only by our internal measures and metrics but also by the measures from our customers. We are targeting to expand our existing partnerships and scaling new businesses in our wholesale, drop-ship and direct-to-consumer channels.

In the fourth quarter of 2013, the key operating metrics for our direct-to-consumer businesses were up versus prior year as well as sequential quarters. Moissanite.com had healthy increases in traffic, conversion as well as average order values. Lulu Avenue had healthy increases in active style advisors, numbers of parties and sales per party.

Our direct-to-consumer businesses give us front-line consumer feedback of our products and services. We are collecting and utilizing data from consumer behavior, actions and trends. We are utilizing that data in decision making across all areas of our business.

We are listening to our customers and they are very passionate about our gems as well as our jewelry. I will now turn the call over to Kyle Macemore, our Chief Financial Officer.

Thank you Steve. Good afternoon everyone and thank you for joining us today.

As announced today's press release, net sales for the fourth quarter of 2013 increased 6% to $8.6 million compared with $8.1 million in net sales during the same period of 2012. Net sales for 2013 were $28.5 million compared to $22.5 million in 2012, an increase of 27%.

The Company's net sales for 2013 were the highest level since 2006. Wholesale net sales declined 1% this quarter compared to the fourth quarter of 2012 to $7.3 million and comprised 85% of net sales. The decrease in the fourth quarter of 2013 was primarily due to a decline in sales to international distributors.

A couple of international distributors placed orders in the third quarter of 2013 instead of the fourth quarter as they had done in 2012. The Company's direct-to-consumer business increased 69% in the fourth quarter to $1.3 million or 15% of our net sales. This was the first quarter that net sales of the direct-to-consumer businesses exceeded $1 million.

Net sales for our wholesale business for 2013 were $25.6 million, an increase of 23% from net sales in 2012. Direct-to-consumer net sales were $2.9 million for 2013, an increase of $1.3 million or 78% from 2012.

Net sales of loose jewels increased approximately 12% to $5.2 million in the fourth quarter and comprised 61% of sales this quarter compared with $4.7 million or 57% of sales in last year's fourth quarter. For the full year of 2013, net sales of loose jewels increased approximately 23% to $18.5 million compared to $15 million in 2012.

Net sales of Forever Brilliant loose jewels in 2013 were just over $7 million. While the Company expects our premium Forever Brilliant brand to be a higher percentage of loose jewel net sales in 2014, our classic brand continues to be in popular demand.

Finished jewelry net sales during the fourth quarter of 2013 were $3.4 million, a decrease of 3% as compared to the same quarter in 2012. Finished jewelry net sales for 2013 were $10 million and comprised 35% of our net sales compared to $7.5 million and 33% of net sales in 2012.

US net sales for the fourth quarter were $6.3 million, an increase of 18% over the same period in 2012. International net sales for the fourth quarter of 2013 were $2.3 million, a decrease of 17% compared to the fourth quarter of 2012.

US net sales for the year were $20.7 million in 2013, an increase of 23% compared to $16.9 million in 2012. International net sales for 2013 were $17.8 million compared to $5.6 million in 2012, an increase of 40%.

Gross margin percentage for the fourth quarter of 2013 was 47% compared to 48% in the fourth quarter of 2012. Gross margin percentage for 2013 was 49% compared to 56% in 2012.

There were several factors that impacted the gross margin percentage in 2013. The Company invested in operational resources to handle increased sales volumes and processing of new materials to finish stones. In 2013, the Company began allocating information technology-related cost based on headcount to more actively assign the operating cost on income statement.

This allocation in 2013 resulted in a $484,000 increase to cost of goods sold when compared to 2012. In addition as finished jewelry increases as a percentage of sales, it tends to negatively impact the Company's gross margin percentage.

The Company expects gross margins in the future to range between 40% and 50% which is consistent with the results of the last three quarters. As the Company continues to manage a product transition with addition of Forever Brilliant, we anticipate more aggressive pricing of selected classic brand loose jewels. Our objective is to expand our consumer base with the whiter stone, Forever Brilliant, while maintaining an ongoing percentage of our business in the original classic stone.

Operating expenses totaled $4.2 million in the fourth quarter of 2013 compared with $3.6 million for the same period 2012. Operating expenses were flat sequentially from the third quarter of 2013.

Operating expenses for 2013 were $15.5 million compared to $12.2 million in 2012. The increase in operating expenses was due primarily to a $2.4 million increase in sales and marketing expenses to support the direct-to-consumer businesses, Moissanite.com and Lulu Avenue and product branding initiatives.

The Company recorded a net profit of $105,000 or $0.01 per diluted share during the fourth quarter of 2013 relative to net income of $4.1 million or $0.20 per diluted share during the fourth quarter of 2012. The fourth quarter of 2012 included a $3.8 million tax benefit resulting from the Company's reduction of a valuation allowance on certain deferred tax assets.

The Company recorded a net loss of $1.3 million or a net loss of $0.06 per share in 2013 compared to net income of $4.4 million or $0.22 per diluted share in 2012. Included in the net income of $4.4 million for 2012 was approximately $4.1 million of tax benefit due to reversals of certain valuation allowances.

The Company ended the quarter with $2.6 million of cash and cash equivalents on the balance sheet which is down from the $6.2 million of cash and cash equivalents at the end of the third quarter of 2013. This decrease was primarily due to a $2 million increase in inventory, a $1.4 million decrease in accounts payable and a $1.2 million increase in accounts receivable.

The Company ended 2013 with $42.4 million of inventory. Loose jewel inventory was $32.9 million and finished jewelry inventory was $9.5 million. The $32.9 million of loose jewel inventory was comprised of $3.3 million of raw materials, $9.5 million of work in process of which approximately $8 million was new material from Cree.

Approximately $20 million of the loose jewel inventory was finished stones which included approximately $2 million of Forever Brilliant. While loose jewel inventory is higher than the Company prefers, the cycle time to convert raw material into finished stones is generally 90 to 120 days. Due to this cycle time, the Company invested heavily in raw material in 2013 in order to build a stock of Forever Brilliant to support future orders.

The Company expects inventory to decrease in 2014 primarily from classic inventory and become a source of positive cash flow. I would now like to turn the call back to Randy.

Thanks Kyle. Before I turn the call over for questions, I just want to reiterate we intend to focus on strategies that we believe are right for the long-term health of the Company with the objective of delivering shareholder return, our core markets such as the US to strengthen and grow our business, our investments on the categories and businesses with the largest opportunities and realigning resources to create incremental value.

This concludes our formal remarks this afternoon and now you would like to open the call to any questions that participants in the call may have. Operator, could you please open the floor for the Q&A session?

(Operator Instructions). Mark Wright, investor.

Hello everybody. The whiter moissanite, Randy, that was intended to give us more access to Asia markets and retailers.

Is Forever Brilliant increasing sales in Asia? I see kohls.com where we do the fulfillment but are retailers carrying Forever Brilliant?

In Asia or the US? You went back and forth there.

I am giving you both choices. Whiter moissanite was supposed to increase our sales in Asia and also give us more access to retailers. I am asking are you seeing that increase in Asia, are you seeing that increase in retailers?

Mark, we sold $7 million of Forever Brilliant during the course of the year and the vast majority of that was in the US. There is some of that in Asia that was not in there in any prior year.

And I'm sorry Mr. Wright, was there a follow-up questions sir?

No I do not think so. Thanks.

Gerald LeVan, Morgan Stanley Smith Barney.

Hello, I've been on these conference calls the last three or four, and I have noticed that the inventory creeps up, creeps up, creeps up and then it catapulted up this quarter. And of course this causes a drain on your cash and cash is down low. I would like you to address in greater detail the rising inventory and why it is good getting out of hand using your own words and are you going to need some cash in 2015 to continue to operate the business?

Thanks for the question. This is Kyle. So let me take this in a couple of points.

So on the cash position, we believe based on the cash we have on hand, our accounts receivable and the amount of inventory we have that we can continue to proceed to run the business. We do have a line of credit in place which we have not used and as we discussed in our prepared remarks we expect inventory to be a source of cash and come down over the course of 2014.

As it relates to inventory in general, we did start buying new material from Cree in 2013 and a lot of that inventory as we discussed in the prepared remarks is still in work in process. It takes us a fairly reasonable amount of time, 90 to 120 days, to take that raw material and turn it into finished stones. So we consciously made the decision to purchase that raw material and increase the Forever Brilliant inventory.

To follow up, what is the size of the line of credit you have currently?

$10 million.

$10 million?

Yes.

You say you expect that inventory will be a source of cash in the current year. But as I mentioned, the inventory has been creeping up for quite a while and the fourth-quarter increase was significant.

What leads you to expect that the trend will be reversed? What specific reasons?

Gerald, It is Randy McCullough. I do not know if you attended our shareholders meeting in May of last year.

Did not.

Well at the shareholders meeting last year in May I told the shareholders that we would be bringing on a new line of material from Cree to fulfill the Forever Brilliant brand. It is no different than in a store. If you have a small store and you were selling wheat, whole-wheat bread and all of a sudden you decide to add to that white bread, you have got to buy the inventory.

You got to buy the stock. You can't turn whole wheat into white bread.

So we've made the investment, we've sold off about $7 million and what we have in work now in material and supply is all based on anticipated sales, For the next two quarters we have to stay two quarters in front of our self and we have to have on the shelf what we would deem, based on historical sales, the best-selling sizes and the best-selling shapes.

So we have worked towards making the appropriate adjustments. Now we do want and have been working towards lowering the older classic inventory.

It started, when I came on board that inventory was right at $40 million. Today it is about $18 million left of the older classic inventory.

We are -- when we cut from raw material, when we cut and polish, if we cut and polish 1,000 stones, 700 of them approximately end up as Forever Brilliant and about 300 or 30% end up being graded into classy. So we will always have a supply of classic feeding in.

We are trying to focus at on again on our bestsellers. And then obviously if we get a large special order, we have to process that through. We are leveraging the existing inventory, we are managing our relationships with our customers IE. the majority of our distributors who service the independent jewelers have migrated toward the Forever Brilliant.

And that is a much more acceptable stone for them because a lot of them use it in a semi-mount that they already have in their inventory. And that stone being a much white stone matches what is in the mounting with the diamonds so that it is usable and gives them a price point that they can enhance their sales.

Now when you look at someone like JTV who their consumer base is quite different, then they are more focused on running the classic which is good. It provides a value and they are able to take and private label brand that under their fire brand. No different than you would see a Target or anyone else do.

And so we analyze the inventory, we have a plan in place, we know we want to bring dollars out of the classic and the Forever Brilliant is about where it needs to be. So at this point we will buy more of what we call a maintenance mode based on future projections. Now if we bring on new customers and Forever Brilliant ramps up, than we will have to buy more material to manufacture or polish the stones in Forever Brilliant.

I know this is a long-winded explanation but we are not just a jewelry company. We are stone manufacturer manufacturing two qualities, we currently sell two qualities, we will be selling two qualities forever. We are also a jewelry manufacturer and we manufacture jewelry to fulfill our jewelry customers like JTV and Kohl's.

Thank you very much for a very comprehensive answer.

No problem.

Lenny Brecken, Brecken Capital.

Thanks, I have a couple questions. Kyle, did you say you had $2 million of Forever Brilliant in finished goods?

$2 million of finished stones. We have about $8 million of new material that is either in raw material form or work in process. And as Randy said, most of that will convert to Forever Brilliant we turned into stone.

Okay, that is very good. So the majority of -- and what is the composition of the finished jewelry, the $9.5 million?

It is a little bit more difficult for us to break out but most of that is classic. There is some Forever Brilliant in there that we're using for direction to some of our customers but I would say it is still the majority of classic at this point. Plus there is some inventory for Lulu Avenue in there.

And Lenny I am going to jump in on that one too. What you have to understand is at the end of each quarter that is a snapshot of your mounted inventory.

You could have $1 million or $2 million that is already allocated to orders that is come in the door, but we can't ship them until the ship date. They do not want to take it in their quarter so we may ship it in the following week. So that inventory is a moving target.

Okay, no I understand that but at least have a snapshot to look at overall so we have to go with what we have. But it is fair to say then the Forever Brilliant overall is still the minority of inventory and from my calculations on the $7 million you gave in sales, it represented virtually all the growth in 2013 and is probably running 30% to 40% of sales, Randy is that about right?

Kyle gave that number. I think it was --

It is about 38% of our loose stone sales.

Okay, that is very encouraging. So when do you guys think the two are going to cross? Meaning Forever Brilliant is going to be over 50% of your business?

Lenny, it could happen this year, it could be early next year. That is a one that is tough for us to predict because we just don't have enough data from the old -- enough history in Forever Brilliant yet to project that.

Okay. While I have you, just one must question and then I'll go back into the queue. Randy, can you just outline the perception is that Forever Brilliant, you have got a few retailers but the perception is that overall things are happening slower than what many investors hoped in terms of adoption.

Can you just summarize where you are with retailer discussions and why if that is true there has been some slowness in terms of adoption. What the reasons are? Thank you.

Sure, Lenny as with any new product sales are going to mimic the flow through of the finished inventory. As you can see we're sitting on $2 million of finished inventory and obviously we are almost at the end of the first quarter.

That inventory is moving at a pace that consumes almost as quick as we bring it in. The sales I mean could $7 million have been $8 million, $9 million maybe. But if we had had $15 million or $20 million we probably would have not been able to fulfill it at that point.

We are ramping up for that. We are building inventory as you can see with the raw material. But we're also trying to be conservative and just be economical in the way that we are approaching the retail market with it.

We are making presentations weekly with all the majors that we can get our foot in the door. And that just continues around the clock. We do not sit back and wait to sell this product.

We believe in Forever Brilliant, we like Forever Brilliant. Consumers love Forever Brilliant. Just on our website or any website out there selling it and read the consumer feedback.

It is off the charts. Go read Kohl's feedback. I mean it's absolutely off the charts.

But Randy is it a fact that you don't have enough inventory a problem with getting brick-and-mortar then? Is that the problem? It doesn't sound like you have a hell of a lot of inventory.

I don't know about whether or not we have a hell of a lot of inventory, we have a lot of inventory for the volume that we are doing. But when you say the problem with the bricks-and-mortar, what we've got to do we have got an opportunity with Kohl's and we have proved to Kohl's that our product will sell.

And that could possibly open up some new opportunities with Kohl's. I can't go further than that because we are in discussions. But we have had discussions with other retailers and we will continue to have those discussions.

We think Forever Brilliant has in these last two quarters has proven the sell through to the industry and they are watching it close. And we think or we feel that it is going to open the doors for some new opportunities. It is not easy out there right now, Lenny.

I understand that. But one last thing I forgot to ask you as well.

You had mentioned Canadian TV or international closing some last-minute terms from a discussion on the video back in the end of last year. Can you us update on that, the status of that? Thanks.

Yes, we are still talking to the Canadian TV company. And hopefully we will get a deal consummated here fairly soon.

Just so you know, these TV organizations typically are planned six months in front of themselves. They have allocated their hours and they know who they're going to have on.

They are building to inventory. You have to allow three months just to have the inventory ready.

I got you. All right that is good. Some we are closing in on the six months.

But understand this in terms of investor perception I think when your revenues cross, your problem right now is getting managing that classic inventory down. I think that is your problem. I think that is what everyone is concerned with.

And hopefully I will follow up and ask you a few questions with that. So I appreciate all the color. Thank you.

And we absolutely agree with you on managing the classic down. I think the Company has done an excellent job in cutting that more than half.

We have lowered by over $20 million. I know it is taken four years to do it but we have brought in a new brand to help position the Company.

Abba Horwitz, Old School Fund.

Hi, good afternoon. A couple of questions here is could you talk about the Amazon business, how that did in mid-quarter and is that improving at all. It was off to a rough start, I wanted to know if maybe it was picking up there?

This is Steve Larkin. We are disappointed with that business. We brought them on as a wholesale client.

They put some goods in. We were disappointed with the execution of that. We now as you saw in the initial remarks have brought someone in with expertise to specifically handle that and all other e-commerce type sites be they pure plays, be they e-commerce sites of specialty stores, department stores, marketplaces, etc.

So we're really going taking another run at that with almost a fresh start. And we are expecting to see much, much better execution.

In the meantime though let me just add to that. Subsequent to that we went into Kohl's and we also went into Helzberg. Both of those sales had been very robust.

And both have worked with us to expand the assortment. You'll likely see more SKUs coming on their sites over the next month or two.

Okay, that is very good. Can you give us some color on how the first quarter has gone? You have just a few days left for the quarter, I was hoping maybe you'd give us some insight as to the Q1.

I'm going to take this one Abba. Let me just say this. The trends we saw the fourth quarter are continuing in this quarter, the first quarter, with our direct-to-consumer businesses showing good growth and our wholesale business being a little bit more challenging.

We believe that the changes that we have talked about in realigning and refocusing some of our internal staff and adding additional staff where we see the opportunities there. We'll capture additional wholesale opportunities during 2014.

Okay. Just final question. Lulu Avenue, you put out a number but it would be .com as well with the Lulu Avenue.

I was wondering if you could give us some insight about that, some numbers, some metrics that we could understand what is going on here. I know that the woman who will receive this has done a very good job. But maybe we can get some metrics and you tell us about what is going on here?

Hey this is Kyle, I will take that. So as we said, in the prepared remarks, our direct-to-consumer businesses did $2.9 million this year and increased by $1.3 million. I would say that both of these businesses, both Moissanite.com and Lulu Avenue had very high growth rates year-over-year.

I will also say that at this point Moissanite.com makes up the majority of the revenue in that direct-to-consumer segment, but we don't split that segment out to the individual businesses, in part for competitive reasons. So at this point, that is kind of all we can say about those two businesses. I think Steve also alluded in his comments about a lot of the metrics internally that we track whether it be conversion rates for the website or number of style advisors are trending in a very positive direction for us.

Okay. At what point will you feel comfortable to give us those kind of numbers, break out those numbers?

I think that is something we will always consider and look at in the future in discussion with management and the Board and other parties but right now we think that that it makes sense to report that as one segment. That's how we manage it.

Okay, but it's not something that -- it is something that right now you are encouraged to continue with. Because it is costing you quite a bit of money.

Yes, we continue to invest, and as Randy talked about earlier we think that those two businesses provide the unique opportunity to reach directly to consumers. So through all of our other businesses we are going through a distributor or a retailer to get to the end consumer. For those two businesses we get straight to the end consumer which is positive in our eyes, gives us a lot of good feedback and information.

Okay, great thank you.

Marc Robins, Catalyst Research.

Thank you very much. Randy I guess maybe this would be best directed to you.

One of the major problems we have all kind of discussed out here regarding Charles & Colvard and their quest to gain sales is really the lack of brand that moissanite has. And you have tried to kind of repair that situation with Forever Brilliant.

I think a good update on what do you think the acceptance is for moissanite now that you have been working with the Forever Brilliant brand. And are consumers a little more aware of what the product is and do we have the huge void of unfamiliarity we have had to contend with over the last couple of years?

Well, obviously the void narrows every year. Through our marketing and PR efforts we are reaching literally millions of consumers.

The other piece, you have JTV and ShopNBC out there reaching their audience, both of their audience exceed 20 million. The Company did not have that in 2009 or 2008.

The social media has actually been phenomenal for the dollars that we invest in it. And that is something we will be leveraging even stronger. And the Forever Brilliant brand, I have had no retailer, no distributor, no one that has the brand give us any negative feedback.

Consumers are off the chart. They love this stone. They absolutely love it.

And it is just a matter of getting it to more consumers. Now you bring it up, it is not easy to convince a jewelry store or chain of jewelry stores who has been in the jewelry diamond business for decades and decades to put an assortment of moissanite in there beside it.

And I'll be honest with you, they are afraid of it. They are afraid that it will cannibalize sales from their diamonds and they have already made the investment in their diamonds. So we are seeking alternative sources where we are focusing primarily our efforts but we will never walk away from the opportunity of getting into those but we are focusing our efforts on the major big boxes and other alternative retailers that could really benefit well.

And I will just use an example like a Chico's with women's clothing that has a obviously a huge population. And we think what we have been able to produce with Kohl's and Helzberg will certainly get those type of people to at least allow us to prove ourselves on their e-commerce site.

Because we do the fulfillment they have essentially got no investment there. And the new guy we brought on board, that is his sole focus in life is reaching out and contacting those people.

We were thrilled with the results that we got from Kohl's and Helzberg e-commerce and we want to go out and replicate that as much as we can. And what we are targeting is alternative sites that have the right demographic. And these sites absolutely have the right demographic.

I guess you are really riding a double ablative sword here. On one hand if you go to the jewelry stores, they are going to fight this product because the contribution margin per sale is going to be way lower than it is for diamond. And then conversely if you go to a site like let's use Amazon just as for example, there might not be the familiarity that you can drum up on your own sites or on allied sites to get a sell through to the ultimate customer.

If I go to Amazon I would look for books, I may not look for quote unquote moissanite or Forever Brilliant. I mean isn't that kind of the battle you are fighting?

No actually Marc you made a big faux pas there and I'm going to help you with this one. The margins on diamonds, in my 42 years in the business, are the lowest I have ever seen them and every retailer is constantly screaming about it as is every distributor.

The margins, especially in the mall-based stores, the margins are so thin today on diamonds. And there is a host of reasons as that is happening that by the time they pay the overhead and pay the salespeople, they simply can't make money and they are having to realign their whole model. But our margins typically on moissanite classic or Forever Brilliant will give any retailer an additional 10 to 15 points.

Geez, that just seems bass ackwards but I could understand how the market could be kind of topsy-turvy like that. Okay.

And again one of the other things, this is one of the other benefits of Lulu Avenue, if you have got say 10,000, 20,000, 30,000 women out there selling to other women, there has got to be a way to increase awareness and brand familiarity. So this new stone called moissanite isn't quite as challenging to understand and the value proposition is better conveyed. You have to have it in hand to see how absolute luxurious it looks.

I agree, absolutely agree. And the moissanite sales in Lulu have increased substantially. We are not giving percentages yet but they have been really encouraging for us.

Okay, I will get back into and come back again. Thank you sir.

Joseph Goldstein, Investor.

Hi Randy. I think the last person's question kind of pretty much along the line what I was going to say. I agree with everything you said, people love moissanite from my experience and in all the moissanite we have, ladies love it.

And the way they love it is they see it firsthand, maybe next to their diamonds or even without their diamonds. That happens, as we all know, the best in brick-and-mortar stores and we were successful in having so many stores carrying it.

The issue I believe, correct me if I'm wrong, that a lot of them stopped carrying it is they didn't get as much business, new business, in because of awareness. And ladies wear moissanite most of the time as a diamond, not wearing it as moissanite.

And as I have heard the word used, they do not have a lot of third-party referrals. So what do we think we can do, and Lulu Avenue maybe there's a few people out there that see it but not in the numbers that you need at least so far. What are we going to do in the awareness area to get this into places where people can see it on their hands and around their necks and in their ears?

Yes, that is one of the reasons that we looked out and took a rather long hard look at potential candidates to come in here and help us put together a marketing and branding, but not just a marketing. We don't need people to just throw an ad out or to go out and try to hire a celebrity.

That is not going to get us there. It is a very comprehensive branding effort all the way from product design to presentations to everything involved in it.

You understand that because you were there. And what we found was that the people in the jewelry industry really struggle with it. But when we presented it and spoke to people outside the jewelry industry, especially from the cosmetic industry, they had creative ways to take this to market especially through the big boxes that we never dreamed of.

And we chose the lady that starts with us next month. And obviously through her 20-some-odd years of relationships with the big boxes, she is able to get a lot of doors to at least take a look. And I am very optimistic that this is going to be our year to get this back out there.

I am not going to address what went wrong in the old days because I wasn't here, I don't know, you were here. And all I know is what I face when I go and talk to those people today, they all want to know what is going on with it.

And I'm talking to the jewelry industry specific. They all love actually love this new stone.

Guess what? They are all buying it for their wives. I mean that is what I get from them.

I go in and show it to them and they say, well, philosophically I'm struggling putting it in the store but by the way, I need you to make me a 2 carat pair for my wife. It is the darndest thing I've ever seen.

So we've just got to work our way to get to the consumer in the avenues that will work with us and get there. But it's got to be in volume. You are absolutely right.

I was going to say, back as you said, back in the beginning, there was lots of people, lots of jewelry stores that carried it. And because the awareness didn't spread fast enough, their business went down and down and down and now we are where we are.

My business did not go down at Samuels. I had it in 200 stores in 2005. And I was taking it on consignment through a program through Riis Park and we were doing quite well with it.

And then JCPenney promoted it at about 40% less than we were selling it. I went ahead to drop my margins to 10% in order to compete with that and I boxed it up and sent it back. It didn't work that way.

And we're going to make sure that when we put it -- when we do -- and we did it with Kohl's on their website. We insisted there was a floor that the price could go to and we are just not going to let that happen going forward.

Well, I am rooting for you.

Alright man, I appreciate it.

Lenny Brecken, Brecken Capital.

By the way I love the discussions. I am learning a lot from other questions and you guys being so interactive so I really appreciate it.

Randy, I guess everyone -- the picture is the product is great. The retailers seem to be resistant for whatever reason. Maybe because of the diamond -- what?

The jewelry retailers.

Yes. Well, I don't know. Maybe it is the Kohl's too because we haven't seen another agreement nor things are going so well at Kohl's we haven't seen them sign up for brick-and-mortar yet. So there is a lot of questions.

But my point is, why not retailers are driven by exclusivity. We saw -- I mean I know the old strategy was driven by exclusivity. Have you ever put a thought to really get this thing kick started to really create an incentive of strategic partnership with a big retailer, it could be Kohl's, it could be Macy's, it could be someone in that category, to really get this product the recognition it deserves because you know what the tragedy of it all is when it is in the channel, it sells.

My surveys prove it. It is everywhere you have the product, it sells really well. The market share is well above your overall market share of the diamond market, if you want to look at it in that way.

So why hasn't management then said, looked back and said well we can throw this thing out to 20 retailers see if they take it, why don't we focus on the leaders in their respective categories, Signet, Zales now, whoever it may be and say hey, why don't you take this product, not just bought it because it is going to give you points on a margin but because of its properties, because we are going to give you an exclusive to really sell this product and it sells everywhere else and really make it happen. Create a partnership rather than just making a sale and seeing if it sticks.

Did you ever put any thought to that? That altering the strategy a little bit in making that happen in that way?

Lenny, I have to chuckle. Are you filibustering or what?

No, I'm trying to think. I chuckled because I see how well it sells in respective channels but it is not (multiple speakers)

Lenny, we have got a lot of people on the phone and you're chewing up a lot of time. Let me answer your question.

Go ahead sorry.

I just had to get a little chuckle in there. Do not take it personal.

You have got Steve Larkin in here with over 40 years experience, myself with 42 years experience, I could just go on and on with the experience in here. Do not think -- how can you say we didn't go out and do that? That's nuts.

I didn't say you didn't go out and do that. I said --

You did say that. Now listen to me Lenny. We do that.

Every time we are out there we're talking to all the majors. We have offered them deals. We have offered them deals where we made no margin for a year.

Trust me, we are on this. We're going to make this happen.

We will get it done. If it can be done, we will get it done.

I am not going to comment on making such an offer to a retailer and then not getting turned down but one other thing. Charles Winston keeps on referring to price increases on JTV. Can you just in light of the fact that Kyle said actually you're going to be more aggressive in price in classic going forward, can you corroborate the two?

No, I cannot corroborate. I can tell you exactly what is happening.

We have asked Charles not to say that. I do not know why he keeps saying it.

The conversation that happened at JTV was that at some point in the future, it could be six months, it could be a year, it could be three years you are going to chew away at the older material and we're going to have to migrate to the newer material which is much more expensive, not much more, it's about 25% more cost per gram for us to buy the raw material. And at that point were going to have to move the prices.

Got you.

And they ask us to lock in this year and I said I just can't do it. I will make every effort because you guys are doing great. We want to maintain the pricing because it is working.

Charles just had -- he just had 14 hours this past weekend, it was the best he has ever done. And they were concerned about adding the extended hours because he has never ran that many hours in one weekend.

And he absolutely nailed it, hit the ball the park. But there are certain sizes, the bestsellers are always the 6.5 millimeter 1 carat and the 8 millimeter 2 carat round stones and that is in the new material. And when we use that for anybody's product, we have to price it accordingly.

So they are taking shorter markets on that. We working as tight as we can work in order to keep the price points similar to where they are where, have been in the past. But we're also migrating to, if you are doing a halo earring with stones around it, we can substitute a 6 millimeter and just beef up the outside stones and still get the same total weight.

So we're working doing workarounds. I do not know why Charles keeps saying that, we have asked him not to. And we're going to have that conversation again with him.

(Operator Instructions). Rodney Baber, Newport Coast Securities

Do I have to follow Lenny?

Yes you do.

Randy, we still aren't getting transparency on direct to the consumer with Lulu and .com, and just a quick thing to update us. I'd like to hear just briefly why we are not offering of transparency.

Is there a competitive reason? My real question is not that, it is I wish you would just unpack these two items for us. Obviously Lulu Avenue has the potential to be an absolutely huge opportunity for us but these things take time.

I mean we all know that and we've all been waiting for the kick in in Lulu. And .com is something that works well when it is done properly but we haven't seemed to be able to ramp that.

So do us a favor as stockholders if you would to just share some insights on what you are thinking about those two. The losses keep piling up. Is this is something we are forever committed to?

Do you see the light at the end of the tunnel and it is going to actually happen? Or something that we can kind of bite into. I think everybody would appreciate knowing how you are thinking about that.

Let me give you a little history first. When we put together a direct-to-consumer strategy, the Board, when I say we, the Board sat with our outside auditing firm and discussed what the methodologies that we could use.

And we chose to do it as one unit, a direct-to-consumer. And we are locked into that. If I broke that out then I have got to change our entire recording and reporting mechanisms and we are just not prepared to do that, especially not today.

Is it going to come in the future? Probably, probably sooner than everybody would expect because sales are ramping. And we are very happy with both channels.

I think Kyle alluded to the fact that Moissanite.com was ramping up faster. And obviously if they're ramping up faster they're going to hit a break even and a profitable number first.

It is just going to happen. But Michelle is an absolute home run. And my only regret is we didn't have Michelle from the very beginning.

We made investments, we lost some time, we had to do a restart but we did build the infrastructure. The infrastructure is solid, go work the website, look at it.

Look at the training materials on the website. They are changing things daily. They have video training video, they are doing conferences on a weekly basis.

The catalogues are nothing short of fabulous, the merchandising is fabulous, the moissanite sales continue to increase as a percentage of their sales. I mean these women are on fire.

What about the uptake from the women. We do not hear anything about how many women involved and all those kinds of things.

There is a reason for that I am sure. How is the ramp up actually going? And can you clarify that at all?

I cannot quantify it because then I break out what we elected to do and that was reporting the consolidated, too. But she is exceeding everything that she projected to us when we put our numbers together last fall.

And the .com, there has been a change in some management there. Is that what you said at the beginning of the call?

And Rodney you probably know best, Steve Larkin has a phenomenal e-commerce background. And rather than go out and put someone in between that we just said you know we will just let that segment just report direct to stay. And he has got them on fire, they are rocking and rolling.

Super. All right, anything else on it before let you go.

No, I do not want to say anything bad about Lenny, though, we like Lenny. He's a good guy.

Thank you guys. Appreciate it.

Lenny Brecken, Brecken Capital.

You see now I got to come back at you. No, I am only kidding.

Guys the drag on the business for the entire year is going to be probably the classic as the Forever Brilliant ramps. But I am still, my follow-up question from the last time around, I am still not clear how you are going to change the selling dynamic. That is what I am trying to get at.

How are you going to change the selling dynamic to try and penetrate traditional retailers? And also the .coms because your proposition is really riskless to them and we still haven't seen a great many sign up.

So I'm just going to get at what is your change in dynamic going through the year? Thanks.

Lenny, what you're telling me is I need to go back and do this whole presentation over because you missed the fact that we hired a guy that is going to nothing but focus on the large volume .com companies whether it be a Macy's.com or whoever, Ice.com and drive that business. That is the sole function in life. He wasn't here.

Until we can go he was not a part of this team. So he's got --

Randy, you made those calls already. I listen to that. I heard that.

It is very encouraging that you have hired a marketing VP. Thank you as a shareholder, I really appreciate it. I am not dismissing that.

But I don't see the change in the selling dynamic. I mean how are you going to reposition the stone to get in there? I want more specifics I guess, that is what I'm asking.

Lenny, it is Steve Larkin. Let me give you some specifics.

It will be everything from the sales pitch and the proposal in terms of making it simple and easy to working with those potential retailers and wholesalers as well relative to presentation, positioning, messaging, promoting, training, etc. So what we really do not want to have happen is get distribution out there and, like it had happened in the past, not basically be well executed and sell through at retail.

So we have got a VP of marketing coming in who is going to assist us in many of those efforts. We have got someone who was going to be calling on brick-and-mortar accounts who has got experience and relationships in doing that. We have got somebody handling the digital channels.

Again as of a couple weeks ago we didn't have that. So we now think we're going to go to those people with a much, much stronger program with way more insight, way more expertise, a much higher level of service during the sale as well as after the sale. And obviously we want them to be successful and then hopefully we get some leverage and a little bit of what we want is some disruption quite honestly and a tipping point.

We want it to work, we want it to get noticed, we want it to get recognized and we want it to expand. So that is what we are looking to do.

I think all of us, and everybody has commented on the call, we have got a great product. Women love our product.

They are our best advocates when we get it. We just have to get it in front of more people and get it into more people's hands.

All right. Amen Steve. Can you just name the two things right as you see them, because you have the most insight and I thank you for that detail, on the two top reasons why you think retailers don't take the product.

I think Randy alluded to it earlier. I think one of it is some degree of fear of cannibalizing an existing business. I think the other thing in all honesty is 2013 was a pretty challenging economic environment out there between weather and the new healthcare and everything else that was happening, the ability to get people's attention and time and facilitate just an appointment and the ability for people to get behind something and execute it was challenging this year.

And I think that was true not only of us but a lot of people out there in the manufacturing, wholesale and retail environment. So we have got the back half of this year ahead of us. And we are getting into the time of year when people are planning, in the jewelry industry the all-important back half of the year and holiday.

We are really excited about the things that we're going to be doing, showing, and the meetings that we're going to be having in the Vegas show at the end of May. So we're really gearing up and getting these people well armed to produce and pay off as soon as possible.

Some of the direction that we have given, and I have given, is leveraging the existing inventory and turning it into a cash as soon as possible. So we are arming these people we've brought on board to go out there and do that.

There is one other piece that I will bring up. This is more with the e-commerce guys, the larger e-commerce guys, were extremely concerned whether or not we could handle the fulfillment because we had no history. We have zero history.

Now what we have is a fourth quarter with Kohl's where we scored and A-plus every month. They give a report card every month and we have it. We can show it.

They give us a monthly report card, very, very detailed. But from a high level it is inventory in stock, it is speed of delivery, it is quality of delivery, it is the EDI communication and the speed and validity of that. And as Randy said we received an A from them every quarter.

And we have got the ability to scale that business. So that is what we are looking to do. We have proven we can do it and we are really happy with that business.

But guys you have no holy Grail to fight against the resistance of the diamond knockoff substitute at retail and the fear it is going to cream gross margin dollars. Is there no holy Grail, nothing down the pike that we can say, hey, we're going to overcome that anytime soon?

Part of the holy grail and Randy mentioned it earlier is the fact that we can actually from a pure profit standpoint add more dollars to many retailers' bottom line and we view it in many cases as incremental business, not specifically cannibalized business. So you know the best example you can give is someone goes into a store looking to buy a bridal piece and they see what they like in diamond product and they like the setting and they like the semi-mount and when you add the center stone in it, it becomes prohibitively expensive A, from an economics perspective but also from a credit approval perspective.

Most of these purchases get put on credit whether it is a house credit card or a bank card, and the approval to get a $4,000, $5,000, $6,000 ring approved is not a very easy process in this economy. We provide an alternative to that.

They do not have to sacrifice the size of the stone, they do not have to sacrifice the quality of stone. And I've got to tell you inside the industry with people I have spoken to, there is more -- it is coming slow, it is not an avalanche but there is more acceptance to diamond alternatives, to quality diamond alternatives.

That could be using sapphires as center stones. That could be using other alternatives inclusive of moissanite.

So we feel that is really an opportunity that we are a incremental profit, revenue and profit opportunity to the retail community as opposed to being a cannibalization potential. That is one of the angles that we are taking and that is part of that selling proposition.

Is that new by the way Steve? Is that angle new or is that something that you have been always --

I think we have intensified it dramatically.

The issue we have had in the past Lenny was the color separation. The diamonds that they carry are usually a fairly white like an H-I color. And the moissanite was glaringly darker in saturation.

But with the new Forever Brilliant it is a perfect match. So now with the newer stone it is gaining a lot of respect. It's opening some doors.

Let's hope. All right, go get them guys. Thank you.

Thank you.

That concludes our question-and-answer session. I would now like turn the conference back over to Mr. Randy McCullough for any closing remarks. Sir?

Thanks operator. Once again I would like to thank everyone for taking the time to participate in our call today and most of all thank our employees for all of their hard work and continued dedication.

I would also like to remind everyone that our Annual Shareholders Meeting will be on May, 21st 2014, here in Durham, NC. It is the Sheraton Imperial. And we'll be sending out information to our shareholders.

Those of you that we are able to reach. You can always call Bernadette here at the office and she will be glad to give you information.

I look forward to seeing you there and hope you guys are able to attend. Operator that concludes our presentation.

Thank you sir and to the rest of the management team for your time today. As a reminder to all parties, to access the digital replay of this conference, you may dial 1-877-344-7529 or area code 412-317-0088. Again, that is 1-877-344-7529 or area code 412-317-0088 beginning at about 6 PM Eastern time today.

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The conference is now concluded. We thank you all again for attending today's presentation.

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