Charles & Colvard, Ltd.
Q2 2013 Earnings Call Transcript

Published: 10 Aug 2013

[Operator:]

Hello and welcome to the Charles & Colvard Limited Second Quarter 2013 Earnings Conference Call. All participants will be in listen-only mode (Operator Instructions) Please note 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 the actual results to differ materially from they discuss here. These risks and uncertainties are available for you in the press release itself, as well as with the company's filings with the Securities and Exchange Commission. You may obtain these documents from the company's website at www.charlesandcolvard.com. They'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 McCullough:]

Thank you. Good morning and thank you for taking time to join us and recapping Charles & Colvard second quarter 2013. The company had a couple of occurrences that I want to address upfront that were unusual for the quarter and affected our revenue and margin performance. While 29% increase in sales on top of a 69% increase for the same quarter in 2012, is an accomplishment, this management team has higher expectations. We believe our 41% increase in sales for the year is more indicative of the results this company has delivered historically. As part of our ongoing and fast-growing relationships with our retail channels, we worked with one of our largest retail customers to reposition our inventory for the upcoming holiday season. The combination of transitioning different products and timing of orders negatively impacted our sales growth and gross margins for the quarter. However we feel this positions us for a stronger second half of 2013. Additionally during the quarter, we made the decision to sell approximately $800,000 in slow moving inventory at a reduced margin to the wholesaler which negatively impacted the company’s overall gross margin percent by roughly 500 basis points in the second quarter of 2013. We believe this is an uncommon event and an important step in fine tuning our inventory and supporting our relationships with key distribution channels, positioning them with the opportunity for stronger sales in the second half of the year. The second quarter saw investment and production ramped up to capture scale to meet the increased demand for moissanite in the second half of the year and to support long-term growth. We continue to make strides during the quarter to execute our business strategies to focus on steadily building a solid foundation now and for the long-term health of our businesses, to attract consumers by providing a superior gems through multiple channels and to deliver a total shareholder return to our investors. We remain confident that we are doing what is right and necessary to achieve these objectives. The investments we made in the second quarter were essential to strategically support and align our growing brands for the holiday season and beyond. Charles & Colvard increased second quarter investment in operations by 35% from second quarter 2012 to support ongoing brand strategies, to better position our product lines in the marketplace, increased marketing initiatives and higher key strategic personnel in support of our direct-to-consumer moissanite.com e-commerce and lulu avenue home party businesses. We are committed to maintaining our investment in our systems, infrastructure inventory marketing and personnel to ensure scalable operations, a robust supply chain, superior products and industry-leading consumer service. As part of our investment in key personnel and a superior management team, we recently announced the appointment of Kyle Macemore, our Senior Vice President and Chief Financial Officer. He will be responsible for overseeing corporate finances and assisting in investor relations to grow and strengthen the company. The executive team and the Board are in agreement that Kyle is an excellent fit to strategically position the company for the next stage of growth. Over the course of his 18 year career, Kyle has held various leadership positions in accounting, finance and investor relations. Prior to joining our management team, he served as Vice President and Chief Financial Officer of Global Signaling Solutions for Tekelec, a telecommunication solutions company that enables service providers to manage and monetize mobile data traffic. Kyle was responsible for businesses with annual revenues of hundreds of millions of dollars and business operations in more than 100 countries. He also served as Chief Financial Officer for the American Storage Division of IBM. Kyle’s experience with international businesses and growing manufacturing companies will aid in our efforts to significantly increase scale to keep up with the demand for our leading Forever Brilliant brand. The appointment of Kyle as CFO coupled with the additions of COO, Steve Larkin and Lulu Avenue President, Michelle Jones demonstrates the company’s commitment to building an experienced and accomplished executive team to manage our next phase of growth. As part of our value proposition for customers, we must continue to introduce, new and exciting and innovative products like our premier brand of Charles & Colvard created moissanite Forever Brilliant gemstones with optical properties that are remarkably lighter and brighter than ever before. Consumers are delighted with the increased brilliance of our Forever Brilliant Moissanite stones which is quickly becoming our fastest growing brand and the platform for significant growth for the company. During the quarter, we made significant investments in our Forever Brilliant capacity and inventory from cash on hand in response to the overwhelmingly positive reaction to the product. As a reflection of our commitment to eliminating backlog and in anticipation of the holiday season and future growth. Today, with the new crystals from Cree Inc. providing and even wider color than before, Charles & Colvard is able to produce an organically superior Forever Brilliant gemstone. The refraction and scintillation provide a brilliance that surpasses anything we've seen before in our moissanite jewels. In a very short period of time, this brand has become a bestselling gem across all Charles & Colvard's channels. Charles & Colvard's continues to innovate and execute aggressively across all our businesses maintaining an intense focus on our competencies, our biggest innovation opportunities and expanding market share. We believe this will have the greatest impact on moving our company to higher levels of revenue and shareholder value as we continue focusing Charles & Colvard's growth strategies on our market opportunities which are following. Launch Forever Brilliant Moissanite gemstone and jewelry collections to increase consumer awareness of Moissanite for developing brand recognition and loyalty. Growing our core wholesale loose jewel and finished jewelry business by continuing to seek opportunities with new and existing partners. Both domestic and international; expanding our Internet presence with moissanite.com functioning as a key vehicle to increase consumer awareness of our moissanite gemstone brands; executing Lulu Avenue, a direct-to-consumer social selling model to provide the opportunity for future revenue growth and for increased overall consumer awareness of moissanite to the prime target audience. I would now like to turn the call over to Steve Larkin, our COO to further discuss the channel developments during the quarter.

[Steve Larkins:]

Thank you, Randy. Earlier this year the executive team received an overwhelming positive response to our Forever Brilliant gemstone at the JCK Las Vegas Show. This is the largest fine jewelry show in the United States. Key industry influences were incredibly interested and enquired into the improved quality of the stone which has led to further conversations with major wholesalers and retailers. This showcases in response from key wholesalers and retailers have increased their commitment and we are investing to capitalize on potential additional distribution channels. The Charles & Colvard wholesale division has continued to be a significant opportunity for revenue growth accounting for 90% of revenues in the second quarter, which show an increase of more than 24% over the same quarter prior year. This growth was achieved through increasing market share by expanding our portfolio of exciting brands products and our established business relationships as well as creating new ones. We are happy to have announced a wholesale opportunity with Amazon.com the world’s largest e-commerce channel with millions of unique visitors and users per day through increased channel distribution and promoting moissanite to a broader audience and consumers. During the quarter the company significantly invested in expanding our wholesale channels and we look forward to announcing future additional channel partnerships. The wholesale division opportunity is significant and should help drive future top-line growth ensuring our consumer value propositions for superior and sustainable and ultimately delivering better earnings growth. We continue to experience an increase in both our domestic and international wholesale businesses during the quarter. During the last quarter, we showed an increase with our existing account base and look forward to growth opportunities with the new accounts we hope to bring online. We continue to focus on growing our wholesale business with the largest and most important retailers and remind confident that Charles & Colvard moissanite is vested to significantly expand its share in the $120 billion global jewelry market and that a multi-channel sales and marketing strategies will play a key role in accelerating Charles & Colvard’s future growth, In addition to the results of our established loose gem wholesale business, wholesale finished jewelry sales increased 151% in the second quarter compared to previous year. Thanks to our unique styling, coupled with the most brilliant gem on the market. We continue to increase our investment at direct-to-consumer retail channels moissanite.com and Lulu Avenue and we believe we are well positioned for the holiday season. Both retail channels initiated strategic marketing opportunities during the quarter to increase consumer awareness through editorial placement, public relations, product placement, partnerships, as well as social media outreach. Recently, we conducted a public relations event in New York City featuring the Forever Brilliant moissanite gemstone challenged against the comparable size and color quality of the diamond. The event was attended by editors, writers, bloggers, digital journalists that had a collective reach in excess of 15 million targeted female fashion consumers. We were not surprised when our moissanite gemstone was overwhelmingly picked as the superior looking gemstone versus the diamond. It’s a very successful event, very impactful. It is taking sometime to prepare Lulu Avenue for launch but we are excited with the shift steps that Michelle and her team are making with the strategies she is employing with the recent signings of new style advisors. We feel it will make a difference as we grow this channel within the marketplace and we believe our investment in Lulu Avenue could increase our market exposure while continuously increasing our revenue streams. We are very pleased with the moissanite.com traffic as well as revenue growth. The website is a key strategic marketing educational branding and commercial tool to promote the Forever Brilliant gem and articulate the moissanite value proposition to consumers. The site is rapidly growing and we are supporting this channel with pending future enhancements to improve user experience, creative increases in marketing spend, product SKU expansion that will well position moissanite.com for the upcoming holiday season. We’ve laid the groundwork for these two channels to provide significant future revenues, profitability and shareholder value and second quarter sales through our consumer direct businesses doubled over the same quarter in prior year. Now I’ll turn it back to Randy.

[Randall McCullough:]

Thank you, Steve. Over the past three years, and specifically this last quarter, we have made significant investments to establish a platform for future growth. It will take time and patience to establish the fundamentals for significant growth in major markets and to allow revenues to reach full potential. And the executive management feels that this quarter was vital in movement toward that goal. We are committed to making those investments and to conveying to our investors our confidence that the future value of the company will be realized over time through strict execution of our business strategies. We are moving forward with urgency, but also with balance, balancing developing market growth, balancing short and long-term objectives and balancing the focus on the top and bottom lines. Management intends to continue to make appropriate investments to capitalize on the global demand and future growth. Over the last three years, I feel we have positioned the company for significant growth and established Charles & Colvard the sole source of Forever Brilliant as the intelligent alternative for consumers. I am proud of the extraordinary efforts of the Charles & Colvard people have made to keep our company growing through a very demand economic period. I am confident that we will deliver the top and bottom-line growth that you expect from Charles & Colvard and that we demand of ourselves. I would now like to turn our call over to our new Chief Financial Officer, Kyle Macemore, Kyle?

[Kyle Macemore:]

Thank you, Randy. Good morning everyone and thank you for joining us today. I am excited to join Charles & Colvard during this phase of growth. I am very impressed with the strategies set forth by Randy and his team and look forward to providing concrete contributions as the Financial Officer of Charles & Colvard. I accepted this position because of the unique product, the value proposition for consumers and the clear opportunities for growth and market leadership, which all of you already recognized investors in the company. I look forward to getting right to work to grow the company and articulate the exceptional value opportunity for our investors. Now, as I just joined the company this week, I would like to ask Steve Dawson, our Controller to discuss the financial performance during the quarter. Steve Dawson. Steve?

[Steve Dawson:]

Thanks, Kyle. I’ll discuss the financial results for the quarter that ended June 30 2013. As announced in today’s press release, net sales for the second quarter of 2013 increased 29% to $6.5 million compared with $5.1 million in net sales during the same period of 2012. Domestic sales for the quarter increased 33% from the same period in 2012 to $5.4 million, and represented 83% of total net sales. International sales for the quarter increased 11% from the same period in 2012 to $1.1 million and represented 17% of total net sales. Our loose gemstone sales during the second quarter were flat from the same period of 2012 to $4.1 million and represented 63% of total net sales. Our finished jewelry sales during the second quarter increased 151% from the same period in 2012 to $2.4 million, and represented 37% of total net sales. The increase in finished jewelry sales during the quarter was primarily due to the approximately 800,000 sales of slow moving finished jewelry inventory during the second quarter of 2013 representing 82% of the increase with finished jewelry sales to our existing and new channels generating 69% of the increase for the quarter. We recorded a net loss of $492,000 or $0.02 per share during the quarter relative to net income of $549,000 or $0.03 per diluted share during the second quarter of 2012. Operating expenses totaled $4 million in the second quarter of 2013 compared with $2.9 million for the same period of 2012, an increase of $1.1 million. Of this increase, sales and marketing expenses increased $949,000 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 $9.3 million of cash and cash equivalents on our balance sheet, which is down from the $12.6 million of cash and cash equivalents at the end of the first quarter of 2013. This decrease was primarily due to the investments we made in new inventory to support the second half of 2013. As a result, our net inventory increased to $36.4 million compared to $33.7 million at March 31, 2013. We used approximately $3.2 million in cash from operations during the second quarter. I’d now like to turn the call back to Randy.

[Randall McCullough:]

Thanks, Steve. 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, could you please open the floor to questions and answers.

[Operator:]

(Operator Instructions) Our first question comes from John Wall of Walsh Capital. Please go ahead.

[John Wall:]

Hey, guys. Thanks for taking the call.

[Randall McCullough:]

Thank you, John.

[John Wall:]

Cost of goods sold was up about 8%, you talked about 500 basis points from the discount and the one-time event. The other 300 BPS increase, is that expected to be the new run rate with the new material purchases? How do we look at that and then if I could tie into that what percentage of ongoing sales is new material versus legacy material? Just trying to get a sense of where margins should be.

[Randall McCullough:]

Okay, John. Let me address the Forever Brilliant percent first, Forever Brilliant is running 20% to 25% of our sales and Forever Brilliant is the new material. There is a small fall-off of maybe 20% to 30% of the stones that we are manufacturing that would fall back into the what we call classic, now the traditional BG. But the vast majority of the new material is going out – making the grade to going out is Forever Brilliant. As far as the new norm, we discussed in our presentation and there was a transition with one of our largest transition in inventory to one of our largest distributors as part of that transition, it adversely affected our margins and I don’t have the number exactly off the cuff. But it’s probably very close to about three points. I do not see that as the new norm.

[John Wall:]

Okay, but if I look at the – if I am looking at inventory, say 20% to 25% of sales of the new material, so, every quarter so to speak, we are looking at $1.5 million in purchases, is that a fair way to look at it?

[Randall McCullough:]

We are doing the math. Yeah, probably close but maybe a little bit less, in essence really off the cuff. But again, let me just remind you that although the material for the new Forever Brilliant stone, our new material from Cree is more expensive. We are also selling the Forever Brilliant stone finished product at about 25% increase as the old classic material. So there is an offset. The more it should go…

[John Wall:]

And then if I…

[Randall McCullough:]

Go ahead, sorry.

[John Wall:]

Finally if I could – looking at the Amazon news, is there any minimum commitments for purchases or is this more you have products listed and you sell what you sell so to speak?

[Steve Larkins:]

Yeah, we shifted initial orders, there were subsequent back-up orders and they are buying goods from us directly as a retailer and we are hoping it’s a big success that we can expand upon that relationship.

[John Wall:]

Okay, so you’d be a retailer through the Amazon network effectively?

[Steve Larkins:]

No, we are not a store front, they are actually the retailer and we are shipping them goods directly. So this is not a store front in their marketplace, this is – they are actually a wholesale account.

[John Wall:]

Okay, great. All right, that’s from me. Thank you guys.

[Randall McCullough:]

Thank you, John.

[Operator:]

Our next question comes from Marc Robins of Catalyst Research. Please go ahead.

[Marc Robins:]

Good morning gentlemen. Thank you for taking the call.

[Randall McCullough:]

Thank you, Marc.

[Marc Robins:]

Just couple of questions. You mentioned something about an order timing issue in the opening preamble and yet I don’t remember sharing anything about that in the more defined discussion. Could you – I missed something or could you help me with that?

[Randall McCullough:]

Marc, without getting into forward-looking statements, I’ll give you a little color on it. One of our largest distributors Tom Pautz, our President of our wholesale division sit with them, reviewed the inventory and we identified what was moving quickly or the best sellers, we identified what was moving slowly and we want to position the second half to maximize our sales. So essentially, he said, let’s pull back the slower moving stones and we’ll replace it with more of these faster moving stones. It’s more of an accommodation, but it also positions to have better sell-through for the second half. In a nutshell, the pullback came in; the orders will go out in the second half. So it is a timing issue and there wasn’t a direct offset in the same quarter.

[Marc Robins:]

Okay, that helps a lot. Okay, and then, is that the same $800,000 or do you want to go into that much detail?

[Randall McCullough:]

Yeah, I can’t get into that much detail, but it was a significant number.

[Marc Robins:]

Okay, fair enough. Let’s talk about the go-forward level of SG&A, now, is that kind of what we should think about as being normal and what we should expect or was there some unusual kind of items in there that that bolstered that number because we are building a real business here?

[Randall McCullough:]

Yeah, I think, well, Marc, I think we are at, what I would call capacity on our SG&A. I am not looking to bring in any more at this point in our growth. I think we’ve actually gotten ahead of ourselves purposely, so that we could drive higher incremental sales. We obviously – we didn’t bring on the level of expertise that we have today to do $25 million, $35 million; obviously we are preparing the company to be a much higher revenue generator. As our sales increase, the SG&A obviously will be a lower percentage of sales. And then there is going to be a couple of executives that have left the company in the past three or four months that their severance taxes will fall off over time.

[Marc Robins:]

Gotcha, okay, thank you. Let’s chat just a second about Amazon and I saw that very encouraging that you had already shipped an order and then have shipped some back-up orders, that’s wonderful to hear. But I need to understand, jeez I’ve only known as 35 years, so I should learn more than things every day, when you ship…

[Randall McCullough:]

You will Robin.

[Marc Robins:]

I think that’s why we have such great here now, and when you ship product to a new retailer like this, and Amazon particularly – do they not pay you until the product is sold, do they pay in advance? How do you really, what is the transaction and how do you account for it?

[Steve Larkins:]

Yeah, this is not a consignment type sale; this was a sale of purchase with normal accepted terms.

[Marc Robins:]

Okay.

[Steve Larkins:]

Payment in full upon receipt of delivery.

[Marc Robins:]

Okay and further on this Amazon, you said that Amazon was actually the store front. So I would see they get the hottest and latest gems from Amazon.com and they might send that out and get to your earrings or what have you, if they were actually doing the marketing, the prop sales and are they doing that?

[Steve Larkins:]

Correct. Yeah, they are in the process of putting the game plan together to execute it. They are pretty good at managing data and managing analytics. So,

[Marc Robins:]

Is they…

[Steve Larkins:]

Yeah, they are not bad at it., $60 million worth of revenue. So we are really pleased to be – on that field with them and we’ll do whatever we can in support of them from a product information content standpoint to help elevate that business.

[Marc Robins:]

Fair enough. I’m going to get back into queue, because I don’t think it’s fair for me to dominate the conversation, but, I’ve got some more follow-up questions for you. Thanks gentlemen, appreciated.

[Steve Larkins:]

Thank you Marc.

[Operator:]

Our next question comes from Mark Wright, a private investor. Please go ahead.

[Unidentified Participant:]

Hi, Randy. I wanted to make it real clear about the inventory increase and the cash decrease did your cash position dropped due to the increased purchases in material from Cree and there was not time to process that material into final Moissanite for product sale in 2Q?

[Randall McCullough:]

Well, you are partially right, let me answer and then hopefully this covers what you are looking for. We bought – from Cree. When they deliver those obviously we pay them for them. There is a small time period of about a week that we go back and forth graving the – there is never, I shouldn’t say never it’s rare that we can use 100% of the material. We isolate any imperfections in it. We mark that, give it back to them, they agree and then we pay them only for the usable material. So, let’s say 80% of every bill is usable and that’s what we pay for. Then we put it through our process here, we slice it up into performs. Preforms are certain shapes and sizes for certain shapes and size stones to be polished. Those preforms are – that’s about a week process and those preforms are sent overseas to various polishers, some have different skill sets for different sizes and shapes of stones and our guys manage that process. That’s about eight week, sometime 10 week turnaround process to get those stones cured up, get them polished and get them back. So now we have finished stones back here and of course when they get back here it takes about a week. Every stone is picked up and looked at and graded and if there is a rejection for a bad cut, it gets processed back through to be fixed and of course it goes into the proper category. Then, if we get orders for loose stones, they go off the door and they are billed. If we get an order for a piece of jewelry then that stone is pooled as component of that jewelry and that’s about a six week turnaround to manufacture the piece of jewelry. So that could be a pretty – from a financial standpoint you could tie up millions of dollars that could be tied up for several months in what we call work in progress.

[Unidentified Participant:]

You are performing what I wanted to hear there, we are getting from Cree in second quarter is going to take eight to ten weeks before moissanite stones on those materials and in 14 weeks before we actually get that into jewelry.

[Randall McCullough:]

And then usually you got to wait 30 to 60 days for your payment from them as you make a sale but that’s correct.

[Unidentified Participant:]

So you guys are ramping up, we have to – from Cree and will be selling that material hopefully I would expect in the third quarter and fourth quarter.

[Randall McCullough:]

We are ramping up. Our inventory is from that perspective since I’ve been here than all time, which is a good thing.

[Unidentified Participant:]

I think you guys were buying 300 to 400k per week in material from Cree from a previous call…

[Randall McCullough:]

That is still our number.

[Unidentified Participant:]

Okay, that’s good to hear. And my follow-up question, the second question on Amazon, who is selling and shipping the Charles W Signature Moissanite products on Amazon.com. I’ve looked in the web pages, I don’t see – my amazon.com, I am seeing golden mine or Reid and Knight, Jewelry Vortex is that Amazon behind moissanite?

[Randall McCullough:]

Those are old goods from previous relationships which has since ended and we are working with Amazon to clean up where necessary.

[Unidentified Participant:]

Okay, it’s real confusing those are Charles W Signature Moissanite name being used.

[Randall McCullough:]

We agree.

[Unidentified Participant:]

Okay, is there anything out there that’s being sold by Amazon.com?

[Randall McCullough:]

It’s right now in process.

[Unidentified Participant:]

Thank you. Thank you for clearing that. I think – I’ll get back in the queue. Thanks guys.

[Operator:]

Our next question comes from Jay Harris of Goldsmith and Harris. Please go ahead.

[Jay Harris:]

Randy, when I look at the June quarter revenues and the fact that they were bolstered by your eliminating your slow moving product line. Could you recap the revenue comparisons from the June quarter of ’12 to ’13 and the first quarter of ’13 to the second quarter of ’13 without any revenues generated from slow moving stones?

[Randall McCullough:]

It was mostly jewelry; it wasn’t slow moving stones necessarily. All the reduced margin was – that $800,000 was jewelry.

[Jay Harris:]

If you chop that out of the picture, what is the revenue?

[Randall McCullough:]

You could do that Jay, that’s a calculation that you could do, but at the same time, here is what I would point out. First we are a small company and growing and there is going to be movement between quarters that if you try to – if you model this company on one quarter you are going to get a vastly different picture from quarter-to-quarter-quarter . You’ve got to look at a running trend to really get a good model, because, what you don’t see in that same set of numbers, what you don’t see is what gross sales were before doing the transition of inventory with one of our larger accounts and that number was in excess of what we turned around and sold off to the liquidator. I am not trying to confuse you I am just trying to say, that our sales production has maintained the level of intensity that we’ve seen with our running 12 or 18 months. We are very pleased with what’s moving out the door. We made the right decision to work with our largest customer and be sure that their inventory was the right inventory going into the all-important Christmas season.

[Jay Harris:]

Well, try to answer this question, why were your revenues down on a consecutive quarterly basis?

[Randall McCullough:]

I don’t know where they down, I think…

[Jay Harris:]

You had a – I am going to use a word firecell which is probably not…

[Randall McCullough:]

I think it was flat, I don’t think it was down, was it?

[Jay Harris:]

No your reported revenues flat, but if you hadn’t disposed of this slow moving jewelry…

[Randall McCullough:]

What we are trying to say to you Jay is had we not taken the inventory back from somebody to clean up their inventory, we wouldn’t had in the first place. And in order to offset that we made sales that you are not seeing or you would have seen a bigger negative. Let me just give you a number. If I sell $2 million of jewelry and I take back $1 million, I got a net $1 million, but I sold $2 million of new jewelry. And then I turn on $1 million to a liquidator, I still sold $2 million of new jewelry, is not that we only sold $5 million or $5.5 million. You assume what I am trying to say you?

[Jay Harris:]

Yes, I do, thank you.

[Operator:]

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

[Rick Fetterman:]

Good morning everyone. Randy, first question is regarding supply. Is there any issue at all with supply from Cree on sufficient quantity and on time and then along the same lines are all the cutting and polishing sites out of this country running relatively smoothly?

[Randall McCullough:]

Probably the best question that’s been asked today Rick. I want to give you the gold star. Cree has stepped up, every time we ask them to, I just can’t. There is nothing I can say adversely about Cree. And they’ve incinerated that if we need them to step-up more, they are prepared to do it. We meet with them every week, once a week their people come here or our people go over there and we spend a couple of hours together and we review our production, we review our production needs going forward, our forecast, the right numbers, do we need to increase, decrease whatever. Now on the other side, the flip side we have increased our staffing on the machines our capacity there is we are maintaining capacity with a single shift. We can get to two or three shifts if we need to. So essentially we could triple what we are currently doing. And not have to add more machines or more, it wouldn’t problem. We know we can handle the flow. And then, third when we came with the company, the company had one polisher that they were using this locker and we talked about it several times. We currently have in aggregate seven polishers in three different countries or four different countries that are up to our standards. We tried several more, but we always test them with some, what we call test material and if they don’t polish a stone that meets our criteria and finish, and everything else, then obviously we don’t go forward with them. But we have seven polishers currently today versus one three years ago that are supplying our demand and have the capacity to ramp up also. And we are constantly looking at not what our needs are today but what our needs, what do we anticipate our needs are going to be six months to a year from now and that’s the level that Bob and his team in the back are constantly maintaining. We always work on longer-term plans and we have those ready to drop in the places. I mean tomorrow we could hit a big deal and have to ramp up and we are ready for it.

[Rick Fetterman:]

Thank you for that. My second question is – in today’s Dallas paper there was a reprint of an article that was in the Raleigh News, I don’t know whether it was today or sometime recently, but it referenced Amazon and a retailer, I’m probably going to mispronounce this – Juju [ph] are you familiar with that at all?

[Randall McCullough:]

No.

[Rick Fetterman:]

They have started with Amazon last year and the results were pretty staggering, I mean, in hundreds of percent increase.

[Randall McCullough:]

Oh, wow, that’s in today’s Dallas paper?

[Rick Fetterman:]

It’s in today’s Dallas paper and it just said it’s from the Raleigh News and Observer, I do not – but they don’t say what day.

[Randall McCullough:]

I will search that. I want to read that. We are excited about Amazon. This is something that we’ve been in discussions for a very long period of time. It’s finally come to fruition. Tom is over there a lot. We are really connected well and we’ll be monitoring what’s moving. There is always little pieces that down there certainly move and the same thing will happen there as you see a much smaller scale. We are very, very proactive. We are all retailers. We came out of the jewelry industry. We know the effect. I had 200 stores. I know the effect that slow moving inventory has even if it’s a small percent, even if it’s only 20% of and 80% is moving that 20% can clog up a pipeline and no different than you already seen your hard, you got to get that 20% out of there. Because over time that 20% becomes 40% and then it becomes 60%. We saw that with this company back in 2006. And this company had an inventory management process, I feel and it’s my personal belief but I feel that a lot of those accounts would never have gone away. And I am going to make darn sure that we don’t let that happen here and we are going to be doing that with Amazon and anyone else we bring on board, we help them manage their inventory. And we are constantly pressuring them let’s move the old stuff out and let’s put in more of the faster selling stuff and by the way let’s try these or four new ones.

[Rick Fetterman:]

Do you feel, will there be results from Amazon that you would be able to share with us say by the end of the year or the call in February of 2014?

[Randall McCullough:]

Yeah, as much as I would like to Rick, we just don’t share results by company. First the companies don’t like to do it and that’s number one reason and the second it’s starts a precedent and then we have to do it for all of them. And it just becomes a nightmare. I don’t know of any company that’s doing that.

[Rick Fetterman:]

Okay, thanks a lot. I’ll jump back in line.

[Randall McCullough:]

Okay, thank you Rick.

[Operator:]

Our next question comes from Mark Wright, a private investor. Please go ahead.

[Unidentified Participant:]

I ask a question about Lulu here, I know that this is still in the investment stage, but it’s being going on for a couple of years now, do you have a timeframe when you expect to see Lulu show a quarterly profit?

[Randall McCullough:]

Mark, I’ll have to say that, Michelle has been on board for about three months. In three months and then of course Anne got involved, Anne Butler, if you remember who was formerly at Blyth and in Mary Kay and Avon before that, but has a long experience record in this industry, in multiple countries, not just here. She got involved about 10 or 12 months ago. With their involvement the direction and what we are doing with Lulu today is totally different from what we tried to do the prior year, totally different. No different than what we did with Moissanite.com. We got in, we learned a lot about the business and recognized quickly that we needed a better platform and better management. We’ve done the exact same thing with Lulu, everything that’s in Lulu today is 100% different from what we started with, from software, from assortment, from people, and I am ecstatic at what we are today, I really am. I sat with a group of ladies yesterday that came in to look at our Lulu operation, because they are thinking about joining. They have a network of several thousand women under them and they went away, they walked out of the building with the same enthusiasm that we have and I am confident that they are going to come on board with us and it’s those small successes that add up and we’ll make a huge success. As far as when that reaches a break-even I can’t say. Don’t have that information yet.

[Unidentified Participant:]

Okay. For my second question, I’ll go back to Amazon.com just to clear this up. So, right now, Amazon.com online is not selling moissanite but they will sometime in the very near future I would expect be doing that would be.

[Steve Larkins:]

Correct. We are working with them on a launch. Again as I mentioned, we sent a – shipped an initial order into them, we’ve got a second order that will more than double the size of the assortment which we are expecting to ship this month and we are eagerly awaiting that launch.

[Unidentified Participant:]

So maybe in a month or so, any timeframe when Amazon will be selling?

[Steve Larkins:]

I can’t comment for Amazon. But obviously there is an urgency on that part as well.

[Unidentified Participant:]

Okay, thank you.

[Operator:]

Our next question comes from Marc Robins Catalyst, Research. Please go ahead.

[Marc Robins:]

Hey, thank you gentlemen. Let me see if I have – okay, I am trying to understand what the Amazon order and their relationship does and forgive – but I am trying to figure out what’s the perception by the industry of Amazon becoming a customer of Charles & Colvard. And what I mean by that is, now the world’s largest retailer is in business with you folks, does that scare the likes of major retailers or does it, or scare them away or scare them into the fold. What’s the effect there?

[Steve Larkins:]

I am going to grab this one Marc, I can tell you, because I’ve had comments – or conversations with several of them. This is the probably the best thing that ever happened to us. It confirms to other large retailers that our awareness has reached a level of expansion beyond what they believed it ever would have and I can tell you that conversations with large retailers is moving rapidly as a result of this and we expect in the second half to be able to come to you with some good news. It’s not done yet but we expect it to be done soon.

[Marc Robins:]

And that’s kind of my, it has been kind of my feeling because you have to go and really see and feel and look and hold them up to your face I guess, and so forth to – I think this is a more of a personal purchase, I think for many and so, maybe they can learn about it was Amazon and certainly people will buy with Amazon. But I would imagine the greater volume would be through the major retailers that have these kinds of departments or the major stores. So anyway, that was kind of the takeaway that I was expecting. Let’s see here, help me understand the New York City PR event, about when was it – we talked about the numbers and we have seen any articles. What would you expect how should we view this going forward?

[Steve Larkins:]

We did it actually last week, it was something that’s in the planning stages for a while. The timing of the event was really due to the – what’s known in the industry as long lead time press, which is essentially the fashion magazine press that needs a lot of time, obviously putting together editing, and then printing in mailing magazines. So they were in the process right now of putting together and co-coordinating all of their content for holiday magazines, November, December, get additions and November, December holiday gift guides. So we want to get in front of them, because obviously we want editorial, we want articles, we want inclusion, maybe front of that, may be front of those audiences. We were really, really pleased with the churn out. There is a lot of follow-up work that’s still going on. During the event, it was tweeting, there was Facebook publishing and things happening and essentially just to summarize we had a pretty significant group of journalists, editors, bloggers show up to this event via invitation. They really didn’t have a lot of knowledge and insight of Charles & Colvard or moissanite or Forever Brilliant and then walked away with a lot of enthusiasm and really with the hope of them becoming advocates. As Randy mentioned in his statement regarding moissanite and Forever Brilliant as an intelligent alternative to an actual diamond. So we were really, really pleased with it. We are doing a lot of follow-up. Our agencies that we’ve employed that has offices in both New York, in Los Angeles and specializes in the fashion industry and press. We will be doing a lot of subsequent follow-up and we are really excited about what we are going to see particularly hitting in the all-important fourth quarter holiday season.

[Randall McCullough:]

Marc, I would just add to that that we made sure they also walked away with a gorgeous pair of Forever Brilliant earrings to put in their ears and have received numerous thank you emails from these ladies and how – they’ve referred to the stone as the new wonder gem and how they are all grabbing that and running with it. I have heard no negative comment from any of them, which is highly unusual, because usually you have a skeptic in a group like that. But these ladies we had merchant eyes from the look at and it was extremely positive event. It was beyond anything I could have ever imagined.

[Marc Robins:]

Okay, and then my last question for this round is, we’ve chatted about Lulu and the changes and so forth and the new people at how the whole business is significantly different than all terms since a year ago. We’ve chatted on these conversations before about how August was to be the launch date, has that been kind of pushed out and launch date is in quotes and pushed out is in quotes, have we kind of extended the timeline for this because of the future changes that Lulu has experienced?

[Randall McCullough:]

No, absolutely not. We are coordinating all of the – the reason for that timeframe in the industry, the fashion industry they have what they call fashion week and it literally moves from city to city to city. And I know that Michelle and her team are doing about an eight week run. Fashion week is actually the target fashion week is the week of September 5, I think it kicks off at New York. It’s one of the biggest events in New York ever. So what we are trying, what we are focusing on doing with Lulu again, the wholesale business working with distributors and whether it’s an Amazon or whoever and the dot com business and the Lulu business, the focus is on driving awareness. Get us in front of more women specifically, because that who our target audience is and get their awareness of Moissanite, specifically now Forever Brilliant because it’s such a better story and as much as we can drive awareness, which will pull revenue. Not about going there and saying, bye, bye, bye, it is about let us show you something that you need to know about. And then in some of the presentations I do, I even say, let me show a gem that De Beers doesn’t want you to know about. So we are having a lot of – but I can tell you, Michelle and her team are geared up. They’ve got a gorgeous new catalog. All the marketing materials been redone, all the training materials been redone, if you haven’t been to the luluavenue.com site in the last four five weeks, you should go look at it and I think you’d be very impressed with the progress that’s been made and it’s not finished yet. They are every day, there is new enhancements that’s being dropped in and there is a lot of work being done on the back side to even take it to the next step. Again, I am excited about what they are doing. It’s – having talking it with Chris about maybe putting an Investor Day together. Late this fall, when we get a chance to get to invite investors, I want you to come in and see in and meet in and see these people working in their environment. I mean, just spend 30 minutes with Michelle is exciting. In fact, come in and I just walk in Michelle’s office for 15 minutes, she gets me obviously quick.

[Marc Robins:]

Thanks very much for that fellas.

[Operator:]

Our next question comes from Mark Wright, a private investor. Please go ahead.

[Unidentified Participant:]

Just I have a question here. Do you have additional green moissanite in the inventory or do you ordered from Cree and is there any traction for coated dim colors that take you grade to others?

[Randall McCullough:]

Yeah, all the colors have, anything we’ve done in color has been a huge success and the green JTV wants the green, Cree has acknowledged that they have the ability to grow the green. We got Cree focus right now on growing the white, so that we can get ahead of the curve on the Forever Brilliant, because that’s our biggest opportunity. So we’ll probably, honestly looking – in work and the schedule that we put in front of Cree and in front of what we’ve allocated with JTV and they will be the ones promoting the green. It’s probably first of the year before we starting growing green. We’ll start experimenting with it in fourth quarter with Cree and we’ll probably grow some and even get it into cutting, but you probably won’t see it in the retail space until first quarter next year. The other color is now, that is a coating that’s going on the bottom of the stone and that’s an ongoing process. JTV runs pink on a regular basis, you can go to the website and see it now and I think they are experimenting with yellow and that’s our big order of yellow go through the bag gorgeous color.

[Unidentified Participant:]

Okay.

[Randall McCullough:]

Okay, then Tom is telling me they are doing a brown now, they are going to be experimenting with. So that’s going to be chocolate, that going to be coming through the bag. But we can do any color. It’s just a matter of doing volume. It’s not say- you can’t make the cost work, just by doing 20 or 100 stones, you literally need to do thousands of stones to make this work.

[Unidentified Participant:]

Right, I think it’s still pretty interesting and significant compared to the rest of your stones, right?

[Randall McCullough:]

Absolutely, and then when we – just to be sure with this clarity because I say green JTV, when we do those runs, there is always three stones five stones, six stones left over and we take those stones and put them in something or either put them loose and let Cree put them on our dot com, it’s just easy to put them out there and typically, our employees buy them up for anybody else. They move quick. Anytime we post colored stones on our website, they are gone in a matter of days.

[Unidentified Participant:]

Okay and second question what are your expectations Randy, well customers they would access moissanite on a national retailer for Christmas this year?

[Randall McCullough:]

Yeah, I can’t do a forward-looking statement. I’d like to answer that one, but I can’t do a forward. But I am not sure to jump over here and get me real quick, but a good question.

[Unidentified Participant:]

Right. thanks.

[Operator:]

Our next and final question comes from Dennis Dobs, a private investor. Please go ahead.

[Unidentified Participant:]

Good morning. Hi, you just mentioned the Forever Brilliant brand name for the jewel and how important to that and in your comments I was just wondering that limits in the future for a brand just at the near colors or can that expand and include colored moissanite or are you going to create different brand?

[Randall McCullough:]

First off, let me just go back to the history of Forever Brilliant. When I came on board, Dennis, one of the things I did was pull out all the names that had been trademarked over the years or had been in the process of being trademarked, maybe they weren’t panelized and one of them was Forever Brilliant and in our industry, there has been a considerable amount of marketing around the word forever. De Beers have spent literally tens of millions of dollars internationally marketing the word Forever mark and they are – as their brand of diamond. So we felt like this was an opportunity to grab a trade name that may have some inherent, – because of what happened in the marketplace and we like the word brilliant because it’s a great tie-in with the most brilliant jewel in the world, that’s a company used for a decade. It had all the components that should have been a winner and it was and is a winner. We didn’t know until we officially launched it what the consumer acceptance would be. Now we launched it as up to four shade slighter. So Forever Brilliant is really tied to white stone. Absolutely, kind of white stone. You couldn’t say, you couldn’t bring colors into Forever Brilliant, but you could do something and I’m just throwing names out there, you could do a Forever Colors or something like that. There is other ways to position colors and we are working on some of that with our marketing people. But the acceptance of Forever Brilliant is beyond anything that we could have predicted. The feedback from consumers, specifically females, because that’s who we target, they love the name. They absolutely love the name. So, the name was lying there. We didn’t come in and dream up this name and I can’t take credit for that. Someone way before me came up with the name, but it’s a phenomenal asset for the company. We took it out, dusted it off, renewed the trademark, it is our trademark and we own it and we are running with it and we are running hard.

[Unidentified Participant:]

But you don’t see it as problematic to need to generate multiple jewel brand names for colored versus the Forever Brilliant?

[Randall McCullough:]

No you would have – look at Procter & Gamble and look at all the different brand names that they have. They have multiple names just in diapers, I got the Pampers and several others. That’s pretty – and you see that a lot with various companies. Signet who owns K Jewelers and Jared’s they have the Leo diamond, they have several other diamonds, that’s just typical in the industry. Forever Brilliant will be an this is the only prediction I will get you, Forever Brilliant will be the lion share of our business. Now we can’t do and I’ll give you a little taste of some of the things that R&D could produce. I am not saying, but we are R&D and we moved from the lower end of the color spectrum classic or older moissanite, that’s still an accepted color that’s out there and been out there for years in the gemstone industry to what is known as a commercial white in the diamond industry. A much more temptable a much more desirable white stone, but we are still not in the collection color, which will be the whitest you can possibly get or what they call colorless. And if we are successful in developing that next step of colorless material, now you’ve got a Forever Brilliant colorless collection which adds a whole another selection. And then you can also go into the make of the stone for years the company has been working on – what we call an ideal cut which would display hearts and arrows and have several models of it. It’s just is very labor-intense and in order to bring it into match market, you’ve got to be able match, produce it and once we are able to do that, we’ll bring it to market. It will be with the Forever Brilliant material and it will be the Forever Brilliant hearts and arrow collection. So there is another collection. So – and it just goes on and on and on. There is things that we can do with it.

[Unidentified Participant:]

That was a good thing. Let me switch gears with a quick question. Amazon just bought the Western Pin Post and I am just wondering can we expect to see even in the bigger picture and not just Amazon, some information getting out there in editorial and stories and such that’s not just advertising, some – it’s something you could drive because maybe traditional advertising campaign is too expensive, guide some more events?

[Steve Larkins:]

That was the intent of the press event that we had in New York and all of our future press. We are really going at this from what I would characterize as guerilla marketing. We are really trying to get out there in PR, in editorial, in product placement, in events, and really to create the awareness down straight directly to the user level. So, I can’t speak for Jeff Bezos and Amazon, purchase of potential inclusion in the Washington Post, but we’d like to be in any swarming type of media that’s appropriate for our brand, our branding and our potential consumer audience.

[Randall McCullough:]

The thing that really impressed me, Dennis, with the PR campaign that we attended, we have an agency that is represents us and I coordinate these efforts and the lady that runs that Cindy came over to me, just before I went up and talk to this group of women. She said, Randy, do you realize this group of women are constantly talking to whether it’s editorials are doing the major women’s magazine or whether it’s blogs or fashion post that they have followers. In aggregate, they are talking to over 15 million women on a daily basis, 15 million women, and if we were successful in getting all of these women, excited enough about Forever Brilliant to go out and talk about it, again, that’s awareness level that you can’t buy that marketing. I mean, because when they talk, women listen, they have followers and we are going to pursue that very, very aggressively. That type of social media.

[Unidentified Participant:]

Okay, well, that sounds good. Thanks.

[Randall McCullough:]

Thank you.

[Operator:]

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

[Randall McCullough:]

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 look forward to talking to again in our upcoming third quarter, date to be announced. And again, I just want to thank everyone for all your support.

[Operator:]

To access the digital replay of this conference, you may dial 1-877-344-7529 or 1-412-317-0088 beginning at approximately 1