Charles & Colvard, Ltd.
Q1 2013 Earnings Call Transcript

Published: 25 Apr 2013

[Operator:]

Hello, and welcome to Charles & Colvard ltd. First Quarter 2013 Earnings Conference Call. [Operator Instructions] Please note that this event is being recorded. 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 actual results to differ materially from those we discuss here. Risks and uncertainties are available for you in the press release itself, as well as with the company's filings with the Securities and Exchange Commission. You may obtain these documents from the company's website at www.charlesandcolvard.com. They're also available on the SEC website, sec.gov. I would now like to turn the conference over to Randy McCullough, CEO. Mr. McCullough, please go ahead.

[Randall N. McCullough:]

Thank you, operator. Good morning, and thank you for taking time to join us in recapping Charles & Colvard's first quarter of 2013. I stated in our last investor call that our expectations for the first quarter of 2013 was for continued stronger sales. Our objectives are focused on steadily building a solid foundation now and for the long-term health of our business. We win with consumers by providing a secured [ph] gem backed with world-class service and to deliver total shareholder return that ranks Charles & Colvard among the best-performing companies in our industry. We remain confident that we're doing what is right and necessary to achieve these objectives. To that end, we are extremely pleased with our first quarter revenue, earnings and cash flow, which represent Charles & Colvard's strongest first quarter performance with this management team. With quarterly revenue growth of 56% and profit growth of 181% over the same period last year, we're seeing the results of our innovative efforts. Charles & Colvard continues to innovate and execute with consistence across all our businesses, maintaining an intense focus on our core competencies, our biggest innovation opportunities and expanding market share. We believe this will have the greatest impact on getting our company to higher levels of revenue and shareholder value as we continue focusing Charles & Colvard's growth strategy on our biggest opportunities. Those are

[Timothy L. Krist:]

Thank you, Randy. Good morning, everyone, and thank you for joining us today. I will discuss the financial results for the first quarter that ended March 31, 2013. As announced in today's press release, net sales for the first quarter of 2013 increased 56% to $6.5 million compared with $4.2 million in net sales during the same period of 2012. Domestic sales for the quarter increased 51% from the same period in 2012 to $5.1 million, and represented 79% of total net sales. International sales for the quarter increased 77% from the same period in 2012 to $1.4 million and represented 21% of total net sales. Our loose gemstone sales during the first quarter increased 77% from the same period in 2012 to $4.3 million and represented 67% of total net sales. Our finished jewelry sales during the first quarter increased 25% from the same period in 2012 to $2.2 million, and represented 33% of total net sales. The increase in loose gemstone sales as well as domestic and international sales during the quarter was primarily due to robust sales we are experiencing from our existing customer base, especially of our whiter Forever Brilliant gemstones as they grow their moissanite businesses. We also shipped a number of previous Forever Brilliant orders that contributed to revenue in the current quarter. The increase in finished jewelry sales, and also contributing to the increase in domestic sales, during the quarter was primarily attributable to our ongoing expansion into the finished jewelry business, including finished jewelry increases to Jewelry Television quarter-over-quarter, and the growth of our direct-to-consumer businesses, moissanite.com and Lulu Avenue, which collectively increased their finished jewelry net sales 220% to $428,000 over the same period in the prior year. Our first quarter comparable sales increased 63% when compared with the same period in the previous year. We define comparable sales as active customers with which we generated revenue during both periods on which we are reporting, and we use this as a metric to measure sales growth within our existing customer base. We recorded net income of $306,000 or $0.02 per diluted share during the quarter, representing a $682,000 improvement relative to a net loss of $376,000 or $0.02 per share during the first quarter of 2012. First quarter 2012 net loss included an income tax benefit of $320,000 generated by the reversal of a liability for an uncertain tax position resulting from a voluntary disclosure agreement the company entered into with the taxing authority. Operating expenses totaled $3.1 million in the first quarter of 2013 compared with $2.9 million for the same period of 2012, an increase of $234,000 or 8%. Of this increase, sales and marketing expenses increased $744,000 or 50% when compared with the same period in 2012. This was primarily due to our ongoing investments in marketing and branding initiatives to better position Charles & Colvard's product lines in the marketplace, as well as marketing investments in key strategic personnel additions in support of our direct-to-consumer Moissanite.com, e-commerce and Lulu Avenue home party businesses. We ended the quarter with a higher level of cash and liquid long-term investments on our balance sheet relative to the end of 2012. Cash and liquid long-term investments totaled $13.1 million at March 31, 2013, up from $12.4 million at December 31, 2012. We generated approximately $869,000 in cash from operations during the first quarter. Total inventory, including long-term and consignment inventory, approximated $33.7 million at the end of the first quarter, up slightly from $32.8 million at the end of 2012. This increase is primarily the result of new, raw material silicon carbide purchased from Cree during the quarter pursuant to our amended exclusive supply agreement, purchases of jewelry castings, findings and other jewelry components and production of moissanite gemstones, offset in part by sales during the quarter. I'd now like to turn the call back to Randy.

[Randall N. McCullough:]

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

[Operator:]

[Operator Instructions] And the first question comes from Mark Weindling from JHS Capital.

[Mark Weindling:]

I was wondering if you might be able to give us a little bit more flavor on Lulu Avenue and its growth? Are you anticipating, particularly anything of substance this calendar year, or is this going to be more of a longer-term situation? And then my second question has to do with, should we be expecting an announcement hopefully sometime this year concerning some big-box stores and their acceptance of moissanite?

[Randall N. McCullough:]

Okay. Well, let me take those separately. The growth in Lulu, and I guess I have to say how I look at it, I look at what has actually happened historically in that space and probably Stella & Dot is the one most significant. If you look at their first real year, their first launch, they generated about $1 million. Year 2, they generated about $5 million, you can check these numbers. And year 3, they generated about $15 million. And then they're off to the races and they hit $75 million, over $150 million, the 2 respective years. And that's kind of how that industry seems to work. I'm not an expert in the social-selling, direct selling industry. But in speaking with the experts, the growth pattern, Neal Goldman said it best to me, "Last year, it's more like a hockey stick. It moves kind of sideways. And then when it hits," and the user clicks on and around 2 to 3 years in, "then it's accelerated like you've never experienced." And you have to be prepared for it. You have to know that all your systems are in place to go from taking 15, 25 orders a day to taking 250 to 2,500 day. And the worst thing you can do is not be able to handle that kind of significant growth. So we have been very, very focused on all of the internal operating components to make sure that we are positioned and that we do not disappoint any of the women who are making this part of their lifeblood. On the other piece, the big boxes, what we -- we have to be careful in what we say in that arena because Tom's conversation, Tom Pautz, President of our wholesale division, with the big boxes -- and he's in conversation with several. Those conversations are held in confidence and the buyers of those companies get irritated, have expressed to us that they get irritated when we discuss it. So we're being a little more quiet about our conversation. But I can tell you, we are in conversations with several big boxes. The steps that you're going to see, and it's like a stepping stone, is we will come live on their e-commerce sites first. And with productivity there, we would move to a test in their stores. And with success there, then it could expand to most or all doors. That's a testing process that seems to be in place and consistent with all of them. That's really all I feel comfortable in telling you right now, Mark. I'd like to tell you more and I think you'll see -- I'm hopeful that you'll see 1, maybe 2 announcements before the end of this quarter.

[Operator:]

And the next question comes from Keith Gil also with JHS Capital.

[Keith Francis Gil:]

My question is the dramatic growth in the loose stones, I guess, is attributed to the newness of the new stones or brilliance. Is that 77% growth and 67% of total revs sustainable going forward?

[Randall N. McCullough:]

Don't know the answer to that. I - the indications are that the sell-through has escalated significantly. What we're experiencing -- and again, we're in the early phases of how big this phenomenon with Forever Brilliant can be. The majority of the Forever Brilliant sales are incremental. Our VG product is still selling well and we're not anticipating falloff there yet and we're seeing significant increases on the Forever Brilliant side. So time will tell, but we haven't seen any backing off, so far, in the second quarter.

[Operator:]

And our next question comes from Scott Butler [ph] with Catalyst Research [ph].

[Unknown Analyst:]

I just had a question on the revenue line -- well, I had a couple of questions. In terms of the revenue line, help me understand the kind of lack of linearity. You had, what, 60%, 70% growth for the year last year, I think it was about 20% in the fourth quarter and then now it's picked back up again. And I'm wondering if you could articulate at least what you guys feel that -- for the lack of linearity? And did Forever Brilliant, the fact that you had these new gemstones out, have any impact on it and maybe the new crystals from Cree? And then I have a follow-up.

[Randall N. McCullough:]

Yes. Let me address it, and then if Tim will say something to it. When you look at last year, we were up 40%. I don't know where you got your number from. We were up 40% last year. And the fourth quarter was our lowest percent of increase. But the fourth quarter was up against $1 million incremental -- the prior year, that should have been in the third quarter or would have been in the third quarter, had we not had a shipping, 1 day shipping delay. And we disclosed that in 2011. So if you factor that in, you have a pretty consistent growth track in 2012 because what happened was the third quarter was up like 70%, if I remember correctly, and the fourth quarter was like 20%. But if you smooth the 2 of those out with a $1 million shift, it was really a 40% increase consistently. So the company was tracking in the neighborhood of a 40% consistent growth rate, and now the first quarter, we're in the 50% range. So we're seeing some uptick, and I contribute that to our ability to deliver more of the Forever Brilliant products.

[Unknown Analyst:]

Okay, that's great. That makes perfect sense. And you talked about continued investments a couple of times. And I'm wondering, as we look at the OpEx levels kind of relative to sales presently, is that -- if we're developing a model, is that what we would expect going forward? I'm wondering if you could kind of put some brackets around what continuing investment means and help us understand that better?

[Randall N. McCullough:]

Sure. Absolutely. And it's not just on the revenue deriving side, and I'll give you an example. Our continued investment -- and we've been exploring and experimenting with laser technology to cut some of our material, our material is expensive. And when we take a slice of material and we cut it down and then polish it into a stone, typically, we lose more than 70% of the mass, more than 70% of it gets cut away and falls in non-usable product. And to the extent that we can move away from saws, which is a 10-year-old technology today, and get into laser, which has a smaller kerf loss and also leaves a much cleaner cut and gives us the ability to do some angle cutting instead of straight lines, which you have to do with saws, could significantly increase our profit or decrease our costs or decrease our loss in material. So that is a significant investment because that technology doesn't exist in the jewelry industry. It exists for ruby, sapphires, emeralds and diamonds, but all of that is at about 1,500 degrees or less and we have to generate about 2,500 degrees in order to successfully cut moissanite. It has a very high tolerance to temperature. We've been working with several, even out of Israel, manufacturers to achieve that. We have some prototypes that are being used in India in some of our cutting and polishing of smaller stones with great success, and we're really close to being able to bring that technology into our building here. So we're looking at all fronts. It's not just about investing in ways to drive the revenue, but in ways to be smarter and more accurate in what we do internally so that we become more efficient and more profitable.

[Unknown Analyst:]

Okay. And so that would be kind of a capital expenditure. Maybe as a follow-up, if I may, in terms of CapEx and kind of contemplating this additional laser cutting equipment, what is your expectation for the year?

[Timothy L. Krist:]

This is Tim here. Previously, we haven't disclosed our CapEx budgets publicly, but we -- obviously as the business grows, we do have a budget of CapEx that is -- will increase to support the business. A lot of that will be IT infrastructure-related investments, to Randy's point earlier, that we need the systems and the support for the field, and so forth, in place before we ramp up to a point that we see some momentum on that. We also have some investments that we're planning on lasers, and so forth, to increase yields that will be somewhat, I guess the word would be expensive, but with the payback that will be very rapid. Beyond that, to -- I guess, to address your question in another way, our total operating expenses quarter-over-quarter went up 8%, which is pretty much flat when you think about it. It's not that big of an increase considering the increase in revenue. So I think in terms of the increase in operating expenses or the investment in the operating expenses to support our new direct-to-consumer businesses, what I anticipate with respect to that is a lot of the upfront expenses, like personnel, has been made. Going forward, it's going to be more revenue-related, such as marketing and advertising, that will help. It will grow in relation to revenue. So I think that we have most of the more fixed-cost components in place at this point in time.

[Operator:]

And our next question comes from Mark Rite [ph], a private investor.

[Unknown Attendee:]

I've got a couple of questions here on long-term inventory, I'll toss those at you and let you address those. I see that long-term inventory went up by about $1 million from December of 2012. I understand you're buying SiC from Cree now, but I wouldn't think that will go into long-term inventory. So that's question one, if you can explain that for me. And number two, related to that, can all that long-term inventory be sold without whitening?

[Timothy L. Krist:]

Well, with respect to the long-term question, Mark, we don't actually specifically identify our inventory when we classify between short term and long term. It's really a formula based upon the next 12-month expected utilization. And what's happening a little bit with that formula is we are purchasing more material that we're selling in the same period. For example, the new Cree material we're cutting it and selling it more quickly than the older material in some cases. We are also purchasing jewelry components and labor cost to manufacture jewelry that turns pretty quickly as well. So those are not factored into our short-term or long-term inventory. It only becomes a timing issue at the end of any given quarter when we have in-house that has not gone out the door yet, for example, for a JTV order, something like that. So it's -- so the $1 million increase is really more of a function of a formula than anything else. To answer your second question, we still feel very strongly that the old material, for lack of a better word, the previous material is 100% salable. In fact, Randy had mentioned earlier that we still have strong demand for our VG goods. Some people actually they purchase both Forever Brilliant and VG, so we still see a good sell-through on that.

[Randall N. McCullough:]

And Mark, the -- another way to look at that, 80% of our sales in the first quarter came from what I call the classic material. The VG material has been around forever. 20% came from Forever Brilliant. So we still have a big market for it. We are - we've actually got several design teams at different manufacturers working. We have very good visibility to the inventory today, but all shapes, sizes and -- meaning the millimeter sizes, and we're able to provide that inventory to these designers so that they can design products specifically to use up small marquees or trapezoids or things that's been sitting in the inventory for a period of time. And so, that's just good inventory management. We feel pretty strong -- strongly that we're going to be able to monetize all of this inventory in a relatively reasonable period of time. Yes. And yes, we could make it whiter if we wanted to, if we needed to.

[Operator:]

And the next question comes from John Curti of Singular Research.

[John H. Curti:]

A question on your G&A expenses, which were down considerably year-over-year. I'm new to the story, so I don't know if last year's $1.35 million had some nonrecurring items in it or not. But I was wondering, what drove the significant year-over-year decrease there? And does that $850,000 to, say, $1 million range represent a pretty good run rate on a go-forward basis maybe for the rest of the year on a quarterly basis?

[Timothy L. Krist:]

Well, what we started doing in the first quarter of '13 was we actually had an allocation change and how we're reallocating certain IT-related expenses. So that is part of it. And the other part of that decrease is essentially fixed cost has not grown as the company has grown. So we've actually decreased our G&A expenses a bit. But a good chunk of that is allocation within the company to other departments, all which now fall in the sales and marketing line.

[John H. Curti:]

And then with respect to the expenses that were incurred for Lulu Avenue with the direct marketing side, about $750,000 in the quarter, I think, represented the increase year-over-year. Given the recent new hires and the continued rollout and development of the business, should we see that year-over-year expense continue to increase at least, say, over the next several quarters or at least for the remaining quarters of this year? In other words, $750,000 first quarter maybe goes up $750,000 to $1 million in the second quarter, $1 million-plus the third, et cetera. Can you give us an indication of what kind of expenses are getting incurred within that category to drive that expense level up?

[Timothy L. Krist:]

Yes. I would expect that -- first of all, on a consolidated basis, the sales and marketing line includes not only our direct-to-consumer subsidiaries but also includes the wholesale division sales and marketing spend as well. So as we move throughout the year, I would anticipate that line will go up because of initiatives within the subsidiaries to support revenue through marketing and advertising campaigns, as well as some additional marketing and advertising campaigns that are wholesale level in support of Forever Brilliant and so forth to just help support our revenue growth. So yes, I expect that to increase. However, sales and marketing also include personnel in the subsidiaries that, as I said previously, I don't anticipate a significant increase in personnel. Those investments have been made, that would be ongoing expense. And hopefully, as that line increases on a consolidated basis, we'll see the corresponding revenue increase as well.

[Operator:]

And the next question comes from Arnold Brief from Goldsmith & Harris.

[Arnold Brief:]

I was wondering how many distributors does Lulu Avenue have at the end of the first quarter? And what do you anticipate they will have by year end? And then maybe if you could talk a little bit about what the relationship Michelle went in and what the responsibilities will be bode [ph] to each other?

[Randall N. McCullough:]

Yes. Arnold, we don't -- and we have them and we don't feel comfortable disclosing at this stage the number of style advisors that we have, and that's really because we don't want our competitors to know. It allows them to target, and we just don't want to do that. And that's pretty typical in the industry, especially with startup companies. But we feel confident that we have a large enough queue to sufficiently test our system. And our launch, our real launch is planned for August, and we have a lot of PR in place between now and then. And I'm looking forward to Michelle being on board next week. And she and Ann have been working together to position Lulu Avenue for as much success as one could possibly think is attainable. I'm extremely impressed with the branding that they've been able to put together and the new styling that's coming in from the 2 Frances people. You should go to every -- all the investors should take the time and go to luluavenue.com, and just spend a little while and look at the product, the look and feel, all of the material that is used to recruit or put the job opportunity in front of the women out there. It's all there. You can breeze through all of it. And it will really give you a better understanding of what that business is all about. And it just comes down to execution, and execution is what we hired an expert to do. And we think we've got the right one. We interviewed a lot of people with a lot of big companies, and Michelle came to the top of the list. And I'm looking forward to her being on board.

[Arnold Brief:]

Can you give us some idea of how the -- your sales were up a lot and VG product is 80% of your sales and you've been buying a new product from Cree. VG, as a percent of your inventory, should be dropping pretty dramatically. Could you give us some numbers this year versus last year?

[Randall N. McCullough:]

I guess you'd compare the polished stones, because you got about a $5 million or $6 million of work in progress.

[Timothy L. Krist:]

Yes. That number is not in our fingertips. We may be able to...

[Randall N. McCullough:]

Yes, I can give you a flavor. When I came with the company, there were -- that was about a $28-million inventory of polished VG. And today, it's less than $18 million. I do track [ph] that. So...

[Operator:]

And the next question comes from Archie Goliath [ph] a UTrade [ph] Securities.

[Unknown Analyst:]

In your growth plan -- first of all, congratulations on a great quarter. In your growth plan you've done a lot of -- or certainly some organic growth and just breaking into other areas. Do you anticipate growth by adding distribution channels? And if so, would that be in the form of acquisition or you intend to grow that internally?

[Randall N. McCullough:]

We would be remiss if we didn't look at potential acquisitions, but they're not plentiful because we have a pretty finite channel of distribution in moissanite. But we do see huge upside, especially on the wholesale, to grow organically with our current base. But at the same time, when you look at what's out there that could really benefit from having moissanite in their showcases, it's a vast arena of retailers, and we're approaching all of them. Trust me, we're in conversations. And I'm very, very hopeful that we're going to have a few significant ones at least in their website. And these guys' websites do billions. I mean, it's amazing the amount of volume they do. So we're looking forward to being able to share and use, hopefully soon, of 1 or 2 of those bigger boxes.

[Operator:]

And the next question comes from Marc Robins of Catalyst Research.

[Marcus Robins:]

My question about cost expectations have been pretty well covered, so I've just got one little quick thing. I guess I haven't heard you really directly say this, and I want to make sure that I'm right, but is the new Forever Brilliant gems, do we get a better gross margin on those, particularly what cut stones versus -- or individual stones versus the jewelry? Does gross margin improve for both and is it greater for one or the other?

[Randall N. McCullough:]

It's -- it might be. If it is, it's so slight. And I'll tell you why. Even though we're getting 20% or so more for the Forever Brilliant stone, I'm talking on a wholesale basis where we -- when we sell it, not on a retail basis on our .com, even though we're getting 20% to 25% more than the classic moissanite from the past, the material is more expensive. It's considerably more, but we're improving our yield, which brings the cost per stone back in line. So we've been able to maintain a very close, if not slightly better, gross margin. And it's going to be controlled more in the future by us increasing the yield, and it is by trying to raise the price or anything like that, that could adversely affect our marketplace.

[Marcus Robins:]

Now this is kind of a crude question, but I'm going to ask it anyway. I know that when I used to follow the lumber industries, an improvement in kerf could mean as much as 3% to 7% in productive results, how much they were able to cut out of a log. Do you have a guesstimate as to what you might be able to save or improve in productive result from the laser and some of these new techniques that you're using?

[Randall N. McCullough:]

On the small stones where we're using it and we've been in -- I mean, we're producing with the company that's using the laser and cutting the material for us, we're generating 80,000 roughly stones, actually 100,000 boules stones, 100,000 stones a month. So it's not like we're cutting 10 stones. We know this works. And the productivity there and the way that you're looking at it, the yield is up -- is 10% better than it was historically.

[Marcus Robins:]

That's great. Okay. And forgive me, I'm going to ask one other really just kind of quick one. Is there any reason why the launch of Lulu Avenue has been chosen for August? Is that partly due to the timing to give coming -- everything coming together or partly so that you can catch the holiday season? Just kind of give me a little color, if you please.

[Randall N. McCullough:]

Yes. When we looked at it, we said, okay, we need to brand it better. I mean, I'm just going through as we...

[Marcus Robins:]

That's fine. That's what I wanted to kind of understand.

[Randall N. McCullough:]

Okay. As we were bringing it up through the test phases and we were having multiple parties and getting feedback, and the group did a fabulous job in being open and honest with the feedback, as we moved up through that, we recognize the need to partner with a major designer who could bring us, not only wonderful designs that would be unique to us to Lulu, but also a great PR. And we're fortunate to hook up with the JudeFrances folks -- and Frances, who's really the key designer there, just loves moissanite. If you could hear her talk about it, you get even more excited. But she has really put her touch into the branding. The look and feel of all the packaging and everything else, that was a key element. We feel good about that. That is in place. However, the quantity needed to support the orders that would be anticipated, all of those have -- those orders have been placed. It started to come in, but it's not in, in mass. Typically, you -- once you design some -- we did our deal with JudeFrances in October and then we put together the new packaging probably by the end of the year. Typically -- and all of that comes out of Asia. I mean, the paper, packaging and all of those things. And typically, it takes 4 to 6 months to get those orders filled. They come overseas on a boat in the large containers. So we started getting merchandise, we've started getting the new packaging and all the things to support it. We made some significant changes in the management team. And obviously, we had the benefit of having Anne Butler join our board and be willing to and has spent significant time internally to help us put together the right team and focus us in the right direction. So we've gone through that process. We've identified the person, hired them. She starts Monday. We wanted to give her time to put the processes in place that will support the growth. The thing you don't want to do is have a party and all these people show up and you run out of food. And I'm saying this as -- just as a comparison, and you run out of food or run out of something, we want to make sure that we've got all the branding materials, the packaging, all the merchandise to support pretty much any outside anticipated growth that could happen. And we looked at the timeline of all those components coming together, including Zoyto doing our fulfillment and how we're interconnecting our systems to their systems. There still a few connections that have to be trued up. So all of that will fall in place over the next 60 days or so. And then we want to run a series of tests. We're having parties. Every week, we're having parties. It's not that we're not in business, we're having parties and it's helping us identify areas of opportunity, as well as areas that we need to go in and address. And so in anticipation of all of that and coordinating PR, we've hit on some significant PR opportunities over the next 90 days. You're going to -- not that you read the women's magazine, but you're going to see us in -- Lulu Avenue in editorials over the next 3 months in several major magazines. And you're going to -- if you watch the daytime talk shows that women typically watch, you're going to see us with a product there, actually giving product to everyone in the audience on some of the key shows. I was hoping I could identify who they were, but they asked us not to because they wanted it to be a surprise to the audience.

[Operator:]

And the next question comes from Jeb Terry from Aberdeen Investment Management.

[Jeb Terry:]

I just have a couple of items and I appreciate the candor and the time you spent on this call answering questions. But regarding Forever Brilliant and the terrific growth you had there. I know there were -- you had an issue with supply before, and that predicated the agreement with Cree and then that may have caused some back ordered revenue to occur in Q1. Is that back order situation remedied and then going forward is there visibility into upcoming quarters either through JTV or your wholesalers that will allow that growth to persist?

[Randall N. McCullough:]

The answer is Bob's shaking his head, yes. Bob Curry, my VP of Manufacturing and Merchandising. Bob's shaking his head, yes, and that means that the vast majority have cleared up. There may be still a few pieces of overseas jewelry fabrication that's still behind schedule, and that's not untypical when you're designing a new model. But as far as Forever Brilliant stones go, we have been able to catch up on most everything that I'm aware of that's in a back order status. There may be a stone or 2 here and there. And at the same time, in looking forward and in wrapping our arms around forecast for what our needs are. We actually sat with the Cree folks last week, Bob and I did, and we -- they were bringing, not that it would mean anything, here, but they were bringing about 20 boules a week of new material and we have increased that to 30 boules a week in order to get in front of the orders, the anticipated orders. And I'll have to say that, boy, everything we've asked Cree to do, they just stepped up and made it happen. And that's not why just running the machine is harder, that means they have to assembly and bring up another 5 or 10 machines to growers, we call them, to meet that demand for us.

[Jeb Terry:]

So would that be an increase versus the anticipated production that was in your published agreement?

[Randall N. McCullough:]

That would be a moving it forward.

[Jeb Terry:]

Okay. It's all in your forward.

[Randall N. McCullough:]

Yes, we didn't-- we're not increasing, we're moving forward the timing of those orders. So maybe some third quarter dollars moving to second quarter and some third -- fourth quarter dollars moving to third quarter. We'll just -- we'll keep our finger on that pulse and see how it goes. And I don't want to put additional orders out there until I see where we're at going into the end of the third quarter. But it will not surprise me if we didn't have to increase it. About 80% of what we're getting in material is cutting and finishing out as Forever Brilliant quality. The other 20% is falling into the classic quality, mostly because of a small micro price. The color on the VG that's coming out of this material is still phenomenal.

[Jeb Terry:]

And then the second question deals with this direct-to-consumer. And I'm really impressed by, obviously, your year-over-year growth, and I'm very impressed by Mr. Larkin's background. He's had a front row seat in the development of e-commerce. And I was just wondering if what can you say about the kind of what we can anticipate in terms of the [indiscernible] e-commerce, JTV? If I lump those together and segment out Lulu, what might we anticipate and some of the things that might change there? Or what visibility you might have relative to your JTV and your e-commerce now that you have Mr. Larkin on board?

[Randall N. McCullough:]

Okay. Well, JTV is in the wholesale side of the company, and I've said it before to you guys that when Tom and I met with them and they presented us with the Vendor of the Year award, that they stated -- they're committed to growing their business significantly. What that percent is, I can't say. But it's -- they're looking at doing a much bigger number in 2013 than they did in 2012. And on the e-commerce side and we are -- and if he was on the phone, he would tell you too, Larkin, that he helped us position our e-commerce under the team that Craig Lane heads up and he helped us find Craig and put him on board. And I can tell you, Craig is -- if you're going to go to battle, he's the guy you want leading the troops. And I think you'll see that the initiatives that they've got in place and what they've been able to do thus far is nothing short of just amazing. And every week, it just continues to grow and get better, as do efficiencies. Our spend, what we're spending, to get the business that we need to generate the sales, are significantly less than they were in the fourth quarter, because we got smarter and more effective and more efficient. But at the same time, we're constantly pushing and challenging each other to expand our e-commerce reach to other avenues and other venues. And that -- and those are some areas that Steve has some experience that could very well exceed all the areas that we've looked at thus far. I know Steve's excited about it. I know that he and Craig are always talking, have been for the last 1.5 years on a regular basis. So I can't think that he's been holding anything in his back pocket waiting to come on board. I think that his partnership with Craig and his long-term friendship. These guys have known each other for years. And it has worked in our favor to have Steve. They're pushing any way he can to help our e-commerce efforts.

[Operator:]

And the next question comes from Rodney Baber from Aaron Capital.

[Rodney Baber:]

Well, I know that. That's kind of where my question is. You've been chipping away at and one of the things I wanted to ask you. But I've been impressed with the people you've been able to bring on, going back to Ann Butler and, now, with Michelle and Steve. And you been giving some clarity to those guys as you've been answering questions today. But I mean, they're so important to the success of the company in the future. If Michelle were here, I would ask her, why did she come over. And I would want her to explain what is her experience that has -- that's most comparable to what she'll be doing at Charles & Colvard. Was it her time at Avon? Was it the time at Medifast? I was going to ask her to size this opportunity. I mean, you're talking about Stella & Dot, is that the best comp? That's a $300 million company. Or is it a number of other companies that are out there that have had very successful ramps? And so, I would ask you, if you could give us a little more clarity on both Michelle and Steve. Steve, I remember, had a ramp at Golfsmith, if I remember, on the online side of $50 million to $150 million. And for him to come over and join in, come out the board and going in an operating position is quite a statement about what he thinks the potential of the company is. So if you could give us a little additional clarity on that. And then, I'm going to ask you just a vision question. If you fast forward with this company a couple, 3 years, when it's built out a lot more, what's this company going to look like? And I know that you don't have a crystal ball, but is this going to be a company with Lulu Avenue leading the charge? Is it going to be a moissanite.com situation? Is it JTV or the internet [ph]? Can you give us just a little bit of your thoughts on that?

[Randall N. McCullough:]

Okay. Let me first share a conversation -- obviously, I had extensive conversation with both Steve and Michelle before we put our deals together. And I'll take Michelle first since you brought her up first. I can just tell you what Michelle said to me and -- because I asked a lot of those similar questions. Michelle really built the Canadian business that operated under her in Canada, and did one heck of a job. She is, what I would deem -- and she may be on the call, I hope she don't take this in the wrong way, but I called her -- and she is what I was looking for, and that is a sales maniac. She is not the person that is going to sit there and work on the infrastructure in terms of systems enhancements and things like that. But we've hired the right people to do that. She's not going to sit in front of a computer screen all day. She is going to be out there driving the sales force, attending sales meetings, attending sales parties and figuring ways to make it bigger and better, because that's what she thrives on and that's what we need. And then she's not somebody who's going to sit and watch it happen or even sit around and wonder what happened, she's a make it happen person. And when I asked her, with all of your success at Avon, why did you go to Medifast? Well, it was a bigger opportunity financially for her family and herself, and it was an opportunity to build -- to take something that wasn't mature and build it. And she did. She took a very immature business there and in less than 2 years built it up significantly. And when she looked at this as -- and for her, it's really a startup. That's her biggest excitement, is coming into something that she can look back on a few years down the road and say I built that, and that's a big deal for her. And then having the upside on stock options and restricted stock. I mean, she gets it. She sees the benefit. If she comes in here and she creates enormous success, she's going to make a lot of money. And believe me, everybody is motivated with money. You've been there, you know. And she has all the right ingredients for exactly what we've been missing in order to take this thing to the next level. Then I'll jump over to Steve. Steve, every board meeting I see it in Steve as he feels almost let down to have to leave here and go back home. Steve loves the jewelry industry. He's always been in the jewelry industry. He took the Golfsmith assignment because the CFO at Zale went over into Golfsmith and recruited him over there. And she's today, I think, she's the CEO there, great lady. And he went in and he did what he needed to do. And those of you that follow Golfsmith know that they were acquired a few months ago. And Steve did well. Steve has had a really great run in his career, not unlike Michelle, a string of successes one after another. I know that when he went in Zale and took hold of their e-commerce, we were competing against him and they just zoomed from probably low $20 millions to close to $100 million in a short time period. And the guy -- and it's not just all the functionalities of the e-commerce. Steve -- when you look at Steve's background, he's had a lot of success in the jewelry industry, whether it was at Macy's or ShopNBC or Fingerhut. He's had a lot of success in marketing products. He gets it. And he's been very helpful with us as a board member and throwing some really strong and clever ideas out there for me. And when the opportunity came up that he was considering moving into something else rather than go sit on the beach, he -- we talked. We actually talked over a game of golf and came to a deal. So I'm excited about having Steve on board. I do think Steve will fill a void, but probably a little different than you're thinking. But a very positive one that will help drive, not just the e-commerce, but all of our various business models.

[Rodney Baber:]

Do you have those staff in place now that you need to really take this thing and roll it? Do you have anybody else? I think that...

[Randall N. McCullough:]

I think we're sitting -- our processes have improved, our systems have vastly improved. Are we 100%? No. But you know what, you'll ask me that question 3 years from now and I'll still tell you no. We're never good enough. There's always room for improvement. But we're real today. We're a real company with a real solid foundation. And you know, because you were here long before me, that, that was not the case before we started rebuilding this thing. But when I look out, what does this company look like 3, 4 years from now? I think Charles & Colvard will be a very influential piece in the -- our business in the jewelry industry space. I think we're bringing a unique opportunity to retailers to make incremental sales and incremental margin. I think they took them a while to realize that. I know it took them a while to realize that with like the Pandora product. It took them a while to even accept and gravitate silver -- to silver, putting silver in their stores. And the ones that are running moissanite today are having huge, huge success, just like JTV. And others are hearing about it. And that's the best way for them to hear it, is from their peers because then they reach out to us. I can tell you, our performance at the upcoming JCK show in Las Vegas, the end of May, first week of June. Our appointment book is full. We're having to take extra people to the show just to be able to deal -- to handle with all the appointments that we have. We had to double the size of our booth to be able to have space, to handle the appointments. And we would have quadrupled the size if we could have gotten space. So I think we're in a unique position. But I think we -- it's just the tip of the iceberg. I really do, Rodney. I think when this thing takes off, it's going to be really exciting and fun, and we're looking forward to it. And the investments we're making in personnel, whether it's Steve Larkin, whether it's Michelle, it's -- all of those investments are being made because myself and the board are looking at to where we want to be, not where we are. We would never bring these people in to do $22 million a year. That's not the case. We're looking at where we need to be. And I told you, time and time again, I won't walk around and hold my head until we're north of $100 million. We got to be $100 million-plus company.

[Operator:]

And the next question comes from Jason Revland from Blueprint Capital.

[Jason Revland:]

I was on the Lulu website and I noticed there's JudeFrances inventory on there. I guess my question relates to, is there a plan to offer JudeFrances design jewelry that also has moissanite? And is that sort of a part of the August timeframe to have that fully and formally offered within that channel?

[Randall N. McCullough:]

Yes. There is a moissanite section on there. So what happens in the party business, you got to have what they call the entry-level product because women come there. And the vast majority of those parties, the average price point is in the $50 to $100 range. And we're reintroducing some new moissanite, it's not -- product that's not yet in that would hit those entry-level price points. But then, what we bring to that selling space that hasn't been there before, and is an opportunity for the style advisors, is to move those sales up to $200, $300, $400 even $500 price points, and the average style advisor is making 25% to 30% of the sale. So if they're out there selling some other brand of jewelry in that space, and we call it fashion jewelry, Fine Jewelry, and they see their friends hosting parties that are coming in at $1,000 at $1,200 and their parties are running $500, you can do the math. I mean, that's a big deal for them, and that becomes a real attraction to come over to the Lulu Avenue party model. And again, that's -- we're not doing the moissanite in place of what's been out there traditionally, we're taking what's been out there traditionally, making it a little better, unique, because it's JudeFrances styling, and then we add into that a whole -- another layer of upsell that's mounted with moissanite. That nobody else has got, it's unique. And it really becomes a major point of differentiation. But on the website, there is definitely a Lulu Avenue moissanite product. I think there's about 20 pieces or so in there currently, and we have another 15 to 20 that should be in here shortly.

[Jason Revland:]

So there will be JudeFrances design pieces that are yet to -- that incorporate moissanite in that design?

[Randall N. McCullough:]

That's correct. And just so you know, the Jude -- yes, I'm looking at it on the site now. Is that on the opening page?

[Timothy L. Krist:]

That's a shop, and then...

[Randall N. McCullough:]

Go into shop and then go to moissanite. Yes, there's moissanite. When you drop down under shop, just hit moissanite, and it takes you to a whole section of moissanite jewelry, and it's all designed by JudeFrances. Lulu Avenue is moving towards a model that we'll be able to go out and market as all of the product on Lulu Avenue will be designed by JudeFrances. Will it be that way forever? I don't know. Let's just see how sales run with it. But right now, it's a huge, huge PR opportunity for us, leveraging the JudeFrances notoriety of it, because of that connection with Oprah Winfrey and others.

[Jason Revland:]

I think's that's important to know because I think you initially forecasted that, that would take place around this time. So it's good to see the execution as far as having that available in that channel. So my follow-up question is, I haven't heard you talk about Ann Raulston today. Is she still with the company?

[Randall N. McCullough:]

No, she's not.

[Jason Revland:]

Okay, so the new management changes are all part of kind of a new world order within the Lulu channel, and that's sort of going to be rebranded and relaunched come August?

[Randall N. McCullough:]

Yes. But the branding is already out there. You're looking at it when you look on the -- we moved away from the older purple look to the -- I mean, these are the hot colors that are in. I'm not a designer, by any means, but that's Frances' forte. She's been a designer for a lot of years.

[Jason Revland:]

So what do you need to do over the next 3 or 4 months, and what is the -- what will be done during that ramping phase until August?

[Randall N. McCullough:]

Everything is in place in terms of what we need. It's just -- when I say it's in place, it's either on order, the systems are already been -- they're being connected. There's a time schedule for all of that, and all of that moves forward. In the meantime, we're having parties, training. Michelle starts Monday. She's having a major trunk show here the following Monday. And actually, Frances is flying in for it. So I mean, she's hitting the ground running. And again, it's not just because we want to have that trunk show to generate sales, which we do want to do, but we also want to have it so that we can learn more from the consumers that are there shopping, what do they think of the branding, what do they think of the product, just all of those things, so that we can take it and then replicate that and move it out to all the style advisors that are currently owned and the new ones that are coming in.

[Operator:]

And we have a follow-up question from John Curti with Singular Research.

[John H. Curti:]

I was wondering if you could talk a little bit about the JTV operation in terms of how much placement you envision this year versus last year in terms of hours?

[Randall N. McCullough:]

Yes, they've committed to increase the hours, but we don't have a firm in-writing commitment. So I don't feel comfortable saying that they're going to increase by 30%, 40%, 50%. It's -- but they demonstrated and -- that -- it's their #1-selling product and they want to get more out of it, and we're working with them to achieve that. I know that this month, we have increased or they increased the hours and that Charles Winston will be on air. I don't know the exact number, but I know it's a pretty significant increase. And next month has increased hours, I believe, also.

[John H. Curti:]

So you're seeing -- continuing to see a steady ramp there?

[Randall N. McCullough:]

Yes. Yes, absolutely. We only had 1 day. In all of our time working with JTV, we only had 1 day, 1 show that missed this goal. And that one was on the exact day that the bombing happened in Boston. And we kind of discount that one. As you know, you lost the audience. And I mean, it wasn't a terrible day, it came very close to hitting that one. He's actually considering what he was up against, he knocked the ball out of the park. But he -- every time they do a show, they just continue to hit the ball out of the park. They're very well organized in how they run their operations. I'm very impressed. I'm hoping they'll go public, so I can buy some stock.

[John H. Curti:]

And then a separate question. As you ramp up Lulu Avenue and that becomes a bigger percentage of the total revenue stream, what's the potential magnitude of impact on gross margins?

[Timothy L. Krist:]

Well, gross margins under the Lulu Avenue model will be higher because of the way that the style advisors are paid with commissions. So overall, the company consolidated if Lulu Avenue grows, as a percent of revenue our margins and all other things being equal, shouldn't increase. But then, you'll see a larger sales and marketing line for commissions coming out.

[Randall N. McCullough:]

Yes. So you have to -- obviously, the margin is built into the product to support paying the style advisors 25% to 30%, and that's below the margin line. So the -- I mean, I can tell you my back of the envelope, the net margin, meaning net after paying the style advisors' knowledge is very close to what we get in our other 2 subsidiaries.

[Operator:]

And we have another follow-up from Arnold Brief from Goldsmith and Harris.

[Arnold Brief:]

You've been, I think, generally trying to develop better product, Forever Brilliant, a new product from Cree. And yet you're still selling the old moissanite, which is not the same quality. Do you feel that there's any problem with hurting the image of what you're trying to do, trying to upgrade at the same time selling the lower stones?

[Randall N. McCullough:]

No. Yes, I don't, Arnold. When -- In my 42 years in the jewelry industry, and let's just go back to the prior 39 in retail, running retail operations of some 200 stores, we carried 3 qualities. There's -- you could make numerous qualities, unlimited qualities almost out of diamonds or other gemstones. But most jewelry retailers and we carry 3 qualities, and it's different price points, different offerings for our consumers. And you usually have an entry-level, lower-price point. We have a middle kind of classic, which is -- it's usually a bigger piece of the business. And then you have your premier brand. And premier brand in diamonds may be a whiter color and a much cleaner stone, no different than it is with moissanite. So there is a demand for both.

[Arnold Brief:]

I understand good, better, best. But in this case, they're all selling under the moissanite name, which is not as familiar to people as diamonds are. And it just -- how are you going to get them to differentiate between good, better and best when it all says moissanite on it?

[Randall N. McCullough:]

Well, because -- but it all says diamond on it. Diamond is a gemological term that's controlled by the American Gem Society, and the same is with moissanite. Moissanite -- we didn't name it. Moissanite was actually named in the '20s, 1920s, and it was actually recommended by the gemologist at Tiffany's to name it after Henri Moissan. The moissanite identification of the material has been in the books since the '20s. And in -- obviously, in a natural state, it just wasn't plentiful enough to be harvested and put into jewelry. So once Cree developed the technology to grow it, then we brought it to market and just identified it as what it is. It could be ruby, it could be sapphire, it's moissanite, just like tanzanite. Now what we've done is Charles & Colvard became the brand. Charles & Colvard moissanite has been a one quality brand of moissanite over the years. And then what we did, we said, "Okay, now we have a premium moissanite, a better color, and we're bringing that out under the Charles & Colvard Forever Brilliant brand." And you'll probably see us moving towards branding the normal -- we refer to it as VG, because that's our internal classification, but you'll probably see us branding that. I don't know what the name's going to be yet, maybe it will be classic, I don't know. But you'll probably see us branding that. But the Forever Brilliant, we don't even talk about moissanite, we brand it as Forever Brilliant. You can buy Forever Brilliant, which is a premium brand of moissanite. You can buy Hearts on Fire, which is a premium brand of diamonds. You follow what I'm saying?

[Arnold Brief:]

I understand. I'm just -- I guess, the retailer did do a good job of making the consumer understand that there is -- all moissanite doesn't have to be the same quality, that there's different price points and different quality in them.

[Randall N. McCullough:]

Well, more than just the retail, I look at our consumer feedback on our Internet site and we've literally sold hundreds and hundreds of stones in Forever Brilliant and in polished, the VG. And the consumer has no problem understanding it, none whatsoever. And are very receptive. Actually, they like the branding Forever Brilliant. They like the name and the branding Forever Brilliant much better than just showing it to a friend and saying it's moissanite.

[Operator:]

[Operator Instructions] We have another question from Mark Rite, a private investor.

[Randall N. McCullough:]

Okay. And we're going to take maybe one more question after Mark, it says one there, and then we're going to conclude it because we've gone a pretty long time here today.

[Unknown Attendee:]

A couple of retail questions for you that I get from looking on the Internet. If I go to walmart.com and do a search on moissanite, I get 2 hits, 2 pieces of jewelry, and they're from Wayfair.com. If I go to Wayfair.com and do a search on moissanite, I get 114 hits, 112 of them are out of stock. It's been that case for a while, so why my question is, is this a test? And my second question is, if I go to homeshoppingnetwork.com I see an article for Charles Winston, he's going to start selling on hsn.com or HSN, July 2, is that going to be selling moissanite?

[Randall N. McCullough:]

Did you look at the date on that?

[Unknown Attendee:]

July 2 is when he's supposed to start.

[Randall N. McCullough:]

July 2 of what year?

[Unknown Attendee:]

Oh, I assumed this year.

[Timothy L. Krist:]

That's wrong. He had a deal with HSN when he left ShopNBC like 3 years ago. And it's -- the wonderful thing about the Internet, once you post something, it never comes back. I've had several people bring that up. I think it's dated like either 2010 or 2011.

[Unknown Attendee:]

Okay, so there's nothing going on there?

[Randall N. McCullough:]

Yes, there's nothing there.

[Unknown Attendee:]

All right. For the Wal-Mart -- Wayfair site, is that a test?

[Randall N. McCullough:]

That's nothing to do with us. That's probably someone out there that's bought some jewelry from Stellar or somebody. And I don't understand exactly how it is, maybe Craig, you can explain how people post.

[Craig Laing:]

It's a good question. How it works is Walmart is a essentially a marketplace. And what you can do is you can send a feed of your inventory if you're hooked up with them and you can offer your goods for a web share on walmart.com. You'll start to see us in some other marketplaces in the coming quarters here. We've just, yesterday, confirmed our relationship with ChannelAdvisor to do so. Walmart.com is not one of the ones we're going to test directly from us. There are a couple of reasons behind that, that I won't get into, but they're not -- Walmart runs the relationship a little bit differently than everybody else on the planet and it's not -- the economics just don't quite work out the right way for us.

[Randall N. McCullough:]

Yes. And I'm not even sure we want to be there just yet. I got to think that one through. But I know that Craig's been working on some pretty significant relationships that can mean a lot for us.

[Operator:]

And this concludes our question-and-answer session. I'd like to turn the conference back over to Mr. McCullough for any closing remarks.

[Randall N. McCullough:]

Thank you. Once again, I'd like to thank everyone for taking the time to participate in our call today. I hope that everyone shares our enthusiasm for 2013, and we look forward to talking to you again at our upcoming shareholders meeting at 10 a.m., Thursday, May 23, at the Sheraton Imperial Hotel in the Research Triangle Park in Durham, North Carolina. Hope to see you there.

[Operator:]

Thank you. To access the replay of this conference, you may dial 1 [phone] or 1 [phone] at 2 p.m. Eastern time today. If you're prompted to enter a conference number, which will be 10023605. Please record your name and company when joining. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.