U.S. Markets closed

Edited Transcript of CTHR earnings conference call or presentation 5-Sep-19 8:30pm GMT

Q4 2019 Charles & Colvard Ltd Earnings Call

MOORESVILLE Sep 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Charles & Colvard Ltd earnings conference call or presentation Thursday, September 5, 2019 at 8:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Clint J. Pete

Charles & Colvard, Ltd. - CFO & Treasurer

* Suzanne T. Miglucci

Charles & Colvard, Ltd. - CEO, President & Director

================================================================================

Conference Call Participants

================================================================================

* David Michael King

Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst

* Rodney Baber

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good day, and welcome to the Charles & Colvard Q4 and Full FY 2019 Earnings Call. (Operator Instructions)

This earnings call may contain forward-looking statements as defined in Section 27A of the Securities Act of 1933 as amended, including statements regarding, among other things, the company's business strategy and growth strategy. Expressions which identify forward-looking statements speak only as of the date of the statement is made. These forward-looking statements are based largely on our company's expectations and are subject to a number of risks and uncertainties, some of which cannot be predicted or quantified and are beyond our control.

Future developments and actual results could differ materially from those set forth in, contemplated by, or underlying the forward-looking statements. In light of these risks and uncertainties, there can be no assurance that the forward-looking information will prove to be accurate. This earnings call does not constitute an offer to purchase any securities, nor a solicitation of a proxy, consent, authorization or agent designation with respect to a meeting of the company's shareholders.

Accompanying today's call is a supporting PowerPoint slide deck, which is available in the Investor Relations section of the company's website at ir.charlesandcolvard.com/events.

The company will be hosting a Q&A session at the conclusion of the prepared remarks. (Operator Instructions)

Please note, this event is being recorded.

I would like to now turn the conference over to Suzanne Miglucci, President and Chief Executive Officer. Please go ahead.

--------------------------------------------------------------------------------

Suzanne T. Miglucci, Charles & Colvard, Ltd. - CEO, President & Director [2]

--------------------------------------------------------------------------------

Good afternoon, and thank you for joining us as we summarize Charles & Colvard's results for the fourth quarter ended June 30 and our full fiscal year 2019.

Before I begin, as you may know, the Research Triangle area in North Carolina is experiencing some inclement weather today due to Hurricane Dorian. In the event we're dropped from the call, we do have contingency services in place, and we should be able to rejoin in short order. We thank you in advance for your patience.

Let's begin. In the fourth quarter 2019, we generated strong revenue growth, excellent gross margins, continued robust performance from our international sector and our fourth consecutive quarter of profitability. It was a pivotal year for Charles & Colvard as we solidified our direct-to-consumer model and secured the capital that will help us catapult our business forward. Clint Pete, our CFO, will begin today's call with an overview of our financials. Then I'll return to discuss key highlights from the quarter and year to share with you our vision for fiscal year 2020. Clint?

--------------------------------------------------------------------------------

Clint J. Pete, Charles & Colvard, Ltd. - CFO & Treasurer [3]

--------------------------------------------------------------------------------

Thank you, Suzanne. Good afternoon, everyone, and thank you for joining us. My comments today will focus on highlighting the key financial results in Q4 2019 and the fiscal year ended June 30, 2019. Additional detail can be found in our Form 10-K for the fiscal year ended June 30, 2019, which we expect to file tomorrow.

The fiscal year 2019 was our first full fiscal year since we shifted to a June 30 fiscal year-end from a December 31 fiscal year-end. Therefore, for our call today, when we compare the financial results from the fiscal year ended June 30, 2019, to the prior year period, we are comparing to June 30, 2018, which is the unaudited recasted results for the 12-month period.

Beginning on Slide 5. We reported net income for Q4 2019 of approximately $160,000 or $0.01 per diluted share compared with a net loss of approximately $700,000 or $0.03 loss per diluted share in the year ago quarter. This is our fourth consecutive quarter of profitability. For the full fiscal year 2019, we reported net income of approximately $2.3 million or $0.10 per diluted share compared with a net loss of approximately $800,000 or $0.04 loss per diluted share in the prior year.

Drilling down to the drivers of our positive net income. Slide 6 summarizes net sales for Q4 2019, which increased 19% to $7.6 million compared to the year ago quarter. In our Online Channels segment, which consists of e-commerce outlets, including charlesandcolvard.com, third-party online marketplaces, drop-ship and other pure play, exclusively e-commerce outlets, net sales for the quarter increased 9% versus the year ago quarter, representing 48% of total net sales. Our transactional website, charlesandcolvard.com, increased 30% in net sales versus the year ago quarter.

In the company's Traditional segment, which consists of wholesale and retail customers, net sales for the quarter increased 30% to $4 million versus the year ago quarter, representing 52% of total net sales primarily due to increased demand from our international distributor network and our brick-and-mortar channel.

Finished jewelry net sales increased 28% for the quarter resulting from our strategy to drive finished jewelry sales across multiple geographies and channels, such as our direct-to-consumer initiatives, which include our charlesandcolvard.com website and our brick-and-mortar channel. Loose jewels net sales increased 11% for the quarter, which contributed to the 118% increase in international sales versus the year ago quarter mainly for our Forever One product. Sales through our cross-border trade platform were strong, with 128% increase from the year ago quarter contributing to our growing overall international sales.

Looking at the full fiscal year ended June 30, 2019, Slide 7 summarizes net sales, which increased 16% to $32.2 million compared to the prior year period. In the company's Online Channels segment, net sales for the fiscal year 2019 increased 25% to $16.3 million or 51% of net sales for the fiscal year compared with $13.1 million or 47% of total net sales in the year ago period.

In the company's Traditional segment, net sales for the fiscal year 2019 increased 7% to $15.9 million or 49% of total net sales compared with $14.9 million or 53% of total net sales in the year ago period.

On a product line basis, finished jewelry net sales increased 19% to $15.5 million for the fiscal year 2019. The company's net sales of loose jewels increased 13% to $16.8 million for the fiscal year 2019.

On Slide 8, our gross margin performance remained strong and stable. The fourth quarter gross margin was 44% compared to 35% in the year ago quarter. For the fiscal year ended June 30, 2019, our gross margin was 46% compared to 40% in the year ago period. This improved margin was driven by continued healthy Online Channels sales, including strong sales of our Forever One product on our transactional website charlesandcolvard.com. Forever One net sales of finished jewelry and loose gemstones represented 85% of total net sales for both Q4 and the fiscal year 2019.

On Slide 9, we show operating expenses as a percentage of net sales at the top of each bar. The dollar level of our operating expenses for each quarter is presented inside each bar. There is a breakdown of our quarter-over-quarter operating expenses. For Q4 2019, operating expense as a percentage of net sales was 42% compared to 51% in the year ago quarter. Operating expenses were essentially flat compared to the year ago quarter as we controlled our expenses, while increasing our marketing investments to drive top line growth. G&A expenses decreased approximately $100,000 primarily due to lower legal and accounting fees. Sales and marketing expenses increased approximately $100,000 due to increased digital marketing ad spending to fuel our growth.

Here is a breakdown of our year-over-year operating expenses. For the fiscal year ended June 30, 2019, operating expense as a percentage of net sales was 39% compared to 45% in the year ago period. Operating expenses were essentially flat compared to the year ago period. G&A expenses decreased approximately $200,000 primarily due to lower legal and other professional service fees. Sales and marketing expenses increased approximately $350,000 primarily due to increased digital, marketing ad spending to fuel the increase in our top line. We believe the trend of our expense as a percentage of net sales continues to reflect the discipline that we've built into our business by controlling costs, while continuing to grow our top line.

Slide 10 presents a snapshot of our balance sheet. At June 30, 2019, we had $13 million of cash, cash equivalents and restricted cash compared to $3.4 million of cash and cash equivalents at June 30, 2018. We recently executed an underwritten follow-on public offering of our common stock. We issued approximately 6.9 million shares of our common stock and raised $11 million in total gross proceeds. After offering costs and underwriter commissions, we received net cash of $10 million for general corporate and working capital purposes, with a specific focus on marketing and brand awareness initiatives. We continue to have no long-term debt and have not accessed funds through our credit facilities.

On Slide 11, inventory at June 30, 2019, totaled $33.7 million compared to $31.8 million at June 30, 2018. Loose jewels inventory was $24.3 million compared to $24 million at June 30, 2018. Finished inventory increased to $9.3 million compared to $7.8 million at June 30, 2018. The overall increase in finished jewelry inventory reflects 3 positive strategic factors: One, we invested in our consignment inventory related to the continued success and expanding sales through our brick-and-mortar channel; two, we have planned higher in-stock inventory to drive increased net sales for our transactional website, charlesandcolvard.com; and three, we are building inventories of our Moissanite by Charles & Colvard product line to support our drop-ship and marketplace outlets.

At June 30, 2019, 79% of our inventory is classified as new inventory, leaving only 21% of our inventory classified as legacy inventory. Legacy inventory is down 37% from December 31, 2017.

In summary, we generated strong positive results in our business during the recent quarter and fiscal year. We continue to be proactive in our outreach to the investment community, conducting numerous investor briefings, including roadshow meetings related to our recent follow-on public offering. A key benefit of the financing was the addition of more than 25 new institutional investors and a number of new family, office and high net worth individual investors who participated in this financing. This improves trading volumes and liquidity of our stock for all stakeholders.

In addition, ROTH Capital Partners initiated research on Charles & Colvard. We plan to attend additional investor conferences in the coming months, and we'll continue to actively meet with members of the investment community to increase awareness and interest in the company. I would now like to turn the call back over to Suzanne.

--------------------------------------------------------------------------------

Suzanne T. Miglucci, Charles & Colvard, Ltd. - CEO, President & Director [4]

--------------------------------------------------------------------------------

Thank you, Clint. I'll start with a summary of notable highlights for the quarter and year on Slide 13. Revenue growth of 19% for the fourth quarter was a result of several blended factors, among them, our high-performing Mother's Day campaign and our bridal sale, which took place over Memorial Day. Bolstered by our digital marketing efforts, these campaigns contributed to Online Channels sales, especially on our charlesandcolvard.com website, where we saw a 30% increase in sales over the prior year quarter.

This site leads our Online Channels segment, representing over half of this segment's revenue. We continue to be pleased with the performance of the growth of this site, and we'll continue to focus resources and digital investments to further its growth as this is the most direct connection with meaningful engagement that we have with our customers. Another key contributor to our Q4 performance was our Traditional segment, and in particular, the performance of our domestic retailers and international distributors. Traditional channels had a strong show in this quarter and represented 52% of total sales. An expanding footprint with key retail partners in the U.S. contributed significantly. In fact, we've reached a point of maturity with certain retail partners, and we've migrated some of our retail programs from a consignment model to a blended asset and consignment model. In a consignment model, we receive payment after the customer buys a product. But in an asset model, the retailer takes ownership of select products upfront at the time we ship them, making for more favorable cash flow for the company.

We are pleased to have reached this level of relationship with these important retail customers. Also contributing to international growth was cross-border trade, where foreign nationals transact on our domestic website, and we ship our goods to their global locations. We had a 128% increase in cross-border trade revenue over the prior year quarter. We finished Q4 with international revenue representing 17% of our total sales, a 118% increase over the prior year, and we finished the quarter with strong growth in finished jewelry, a continued indicator of our direct-to-consumer foothold.

We closed fiscal year 2019 with several key milestones: We delivered attractive gross margins across the year, finishing at 46% versus 40% in the prior 12-month period. Margins have improved due to the significant growth of our Online Channels segment, which grew by 25% over the prior year period. Our direct-to-consumer channels generally deliver higher margins compared to selling through third-party distribution channels, especially when goods are purchased directly from charlesandcolvard.com. Direct-to-consumer engagement is also responsible for the trend in our finished jewelry growth, which is up 90% -- 19% over the prior year. International sales were 13% of our total revenue for fiscal year 2019, a 106% increase in sales over the prior 12-month period.

Our trajectory has shown 4 consecutive quarters of double-digit international growth over the course of the year, and we anticipate continued strong performance from this sector. Forever One, our flagship gemstone, continues to gain in popularity and recognition, most recently winning JCK's Jewelers' Choice Awards in the lab-grown gemstone jewelry category for a Signature Collection Halo Hearts and Rings -- Hearts & Arrows Ring. Product innovation has been at the center of our direct-to-consumer transition and will continue to be a focus as we head into fiscal year 2020.

We delivered 4 consecutive quarters of profitability, ending the year with net income of $2.3 million or $0.10 per diluted share versus a net loss of $0.8 million in the prior 12-month period. We have managed our inventory levels very tightly to meet our increasing sales demand while also reducing legacy inventory to 21% of total inventory at June 30, 2019.

And finally, with the improved valuation that's come from our financial performance and operating momentum, we leverage the opportunity to raise funds in a public offering to invest in key marketing initiatives that we believe will help catapult the company forward.

I'll turn to Slide 14 to discuss the strategy behind this capital raise and how we plan to invest these proceeds to grow the business and create shareholder value. Since Charles & Colvard's relaunch in October 2016, we focused heavily on our direct-to-consumer engagement. We firmly believe that a 1-to-1 dialogue with our customer is the best way to tell our brand story and learn directly from our customer what their buying preferences are. To facilitate this conversation, we deployed significant digital marketing tactics, from paid digital advertising to social media engagements and influencer marketing programs. In the course of these activities, we paid particularly close attention to our analytics. We measured everything from clicks to likes, product reviews, advertising channel performance, campaign efficacy, organic traffic and so much more. Here is what we've learned: Today, the average cost to convert a new customer is approximately $220 in advertising spend. With an average order value of $1,000, not only is this a sound digital marketing investment, it also drives traffic and revenue through the channels that command the highest gross margins. We've also learned that roughly 28% of our customers are repeat buyers, a number that we feel is low due to our focus on net new customer acquisitions.

Turning to Slide 15. This volume of digital data also helped us map our marketing funnel, guiding our thinking on the types of activities that incent someone to first engage with our brand, what we call top-of-funnel activities, to the level and types of engagement someone desires while they are learning about the brand, and all the way down to the very last click that converts a consumer into a Charles & Colvard customer. We learned that for every dollar of advertising spend, we can see 2x to 8x return on ad spend, depending on the maturity of the prospect, and how far into the marketing pipeline they are. This customer journey and the efficiency of our ad spend are key to effective digital marketing investments and a key investment vehicle for our offering proceeds.

Over the past 2 years, Charles & Colvard has been applying its ad spend in the mid to lower funnel -- of the marketing funnel, where you see campaigns such as personalized e-mail. At a time when we were capital constrained, this made sense. We were seeing a blended 4x to 5x return on ad spend, while readily converting customers that were predisposed to the Charles & Colvard brand or were searching for the term moissanite. But this is a shortsighted strategy as we were only reaching customers familiar with our brand and value proposition. And we subsequently grew the company in the 13% to 16% annual growth range through these tactics in order to garner the attention of consumers not familiar with our brand, but interested in the ethical appeal of lab-created gemstones or a value price bridal option that competes handily with diamond, we need to invest more resources and attention to the top of the funnel seeking out the new, but soon to be converted Charles & Colvard customer. That work is done at the top of the marketing funnel through awareness strategies, such as mobile social ads, influencer marketing programs and strategic paid media placements. As we head into fiscal year 2020, and imminently into the holiday season, the time is critical to now drive awareness and proliferate our brand. We believe through continued measurement of our customer journey and the same care we've been applying to our digital marketing spend to date, we can accelerate our growth. This process does have a natural lead time, so we anticipate that the increased marketing investments we began making in July will begin showing impact in the holiday quarter. We'll be prudent as we invest these funds over the next several years, not just in the next few quarters.

Let's talk about a few other focus areas for the year ahead on Slide 16. We plan to continue our push into international markets. In fiscal year 2019, we expanded Charles & Colvard into new international markets through marketplaces and distributors. This image denotes our current footprint across the globe. We think of marketplaces as an agile way to test new geographies. Let the marketplace bring the consumer to the table. We will introduce our product, measure whether we have a target customer base in the region, and if so, further develop our presence. Last year, we went live in Western Europe on Amazon in Italy, France, Spain and Germany. And in Australia, on Amazon, eBay and Catch. We also went live on Amazon Japan in March 2019. With the support of our new funding, we believe that we'll now have the ability to build a digital presence in these new regions, driving awareness of our brand and driving consumers to these regional marketplaces. We also anticipate that these investments will have the positive effect of driving international consumers to charlesandcolvard.com by a way of cross-border trade, which is indicated here by the dotted lines.

In addition to online international sales, we've also been relying on the work of select international distributors to help us with our local presence. This has been a profitable endeavor for us as indicated by an 81% increase in international distributors in Q4 over the same period last year. We plan to continue this work with local resources that understand how to bring brand presence into their local markets.

Slide 17 outlines our focus on continued product innovation. As mentioned earlier, our Signature collection is gaining significant traction. Introduced in Q1 of fiscal year 2019, this product line started as a handful of specialty items. Today, it's a JCK award-winning line of jewelry that represented 7% of net sales in Q1 and 11% of our total sales this year. We're thrilled with its performance and it suggests to us that what the customer wants is our brand. Every piece of Charles & Colvard signature jewelry features our floret, the company logo. This validates that our brand is resonating with our consumer.

We're also seeing meaningful adoption of our Moissanite by Charles & Colvard value line of gemstones. We introduced this product in May 2018 as a response to competitive moissanite coming to market. This product, which carries the Charles & Colvard name and is subject to our standards, grading guidelines, and laser engravings, is being met with enthusiasm across our drop-ship marketplace and distributor channels, delivering 7% of total net sales this past quarter. We'll continue to expand this gemstone across our sales channels as we phase out our legacy products.

We plan to continually evolve our product mix as the demand -- or the market demand. In fact, in just a few weeks, we plan to run a test pilot with new colored gemstones, lab-created blue and pink sapphires and lab-created ruby in our drop-ship program. Our drop-ship partners have been requesting colored gemstones in response to market trends and searches on their websites. These synthetic lab-created stones are made from Corundum, an ethically-sourced product that has been in the market for some time. We're turning to leading suppliers of these gems for our supply and marrying them with moissanite gems to create beautiful blended gemstone options. For those of you viewing the slide deck, you can see an example in the lower right-hand corner.

Evolving our gemstone and jewelry mix to meet the demand of our consumer has been at the center of our transformation. As we learn more, from our top-of-funnel marketing activities, you can expect further changes in our product mix as our millennial and Gen Z audiences taste and preferences mature.

On Slide 18, I've highlighted our focus on corporate social responsibility. While our moissanite product has always been made not mined, the company wasn't historically focused on the positive environmental impact we can have, but we feel it's time to make that a core tenant of our business practices going forward. Thankfully, our wonderful moissanite gemstones is born from lab-created practices so we're not moving tons of earth to mine a single carat gemstone. But there's much more to focus on than just our gems. We believe that more than enough metals have been mined from the earth. So we are moving to a recycled metals approach. Over the past year, more than 95% of the metals we sourced were recycled and going forward, we are working towards utilizing only recycled precious metals in our production lines. We also plan to measure and improve the overall environmental footprint of our business operations. We want to positively impact the communities where we work and live, so we'll be supporting these communities through philanthropic programs that advocate positive social change. And lastly, we plan to create a higher level of transparency regarding these practices so our stakeholders will be able to track these efforts and hold us accountable.

In summary, and outlined on Slide 19, our focus for fiscal year 2020 will be on the following 5 strategic initiatives: Expansion of brand awareness. We are laser focused on expanding the reach of our brand and digital marketing will be the leader -- will be leading this charge on a global scale. International sales reach. It's very early days for Charles & Colvard internationally. We'll be working on our omni-channel presence so there's plenty of places for the consumer to learn about and transact with our brand. Product evolution. We'll continue to listen intently to our customer audience, and deliver products that meet consumer demands. Enhanced customer experience. The consumers' experience with our brand can make or break their viability as a lifelong customer, so we need to ensure that every interaction is engaging, rewarding and beyond their expectations. We'll be focused on several aspects of the customer journey, including digital and customer service experiences. And lastly, corporate social responsibility. As mentioned earlier, we plan to work toward 100% recycled metals, improve our environmental footprint, support our local and business communities through philanthropic programs, and create transparency of these activities for our stakeholders.

Over this past year, we've seen the compelling results from our omni-channel distribution strategy, the promise of measured digital marketing efforts, and the impact of market-driven products. We look forward to taking these learnings and our investment capital and applying both to a year of expanding brand awareness and top line growth.

This concludes our prepared remarks. We'd now like to open the call to take your questions. Operator, would you please poll for questions from our listening audience?

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions)

--------------------------------------------------------------------------------

Suzanne T. Miglucci, Charles & Colvard, Ltd. - CEO, President & Director [2]

--------------------------------------------------------------------------------

So while we're waiting for you to fill the queue, we do have an e-mailed question that we thought we'd begin with. We were asked why we decided to issue equity rather than take on debt given our clean balance sheet. Clint, I'll ask you to address this question, please.

--------------------------------------------------------------------------------

Clint J. Pete, Charles & Colvard, Ltd. - CFO & Treasurer [3]

--------------------------------------------------------------------------------

Sure. Thanks, Suzanne. And good question because we've been asked this question several times since our capital raise. In fact, we actually went down the path of taking on debt as was our first choice for capital growth. But what we learned is that the cost of capital related to the debt wasn't favorable to us due to the aggressive time line on the payback of the debt. And also in addition to that is various potential terms, such as warrants and capital restrictions that small companies such as us face. So in bottom line, after a very thorough evaluation, the Board and the executive management team actually elected to go with a capital -- with the equity raise and that also helped us with continue to be debt-free. And one more other thought. In addition, executing an equity raise also allows us to expand the numbers of shareholders, and particularly institutional investors, which we did get quite a few participate in the offering and which we believe will benefit all shareholders, as I mentioned earlier in the call, through increase trading volume and liquidity over the medium and long term.

--------------------------------------------------------------------------------

Suzanne T. Miglucci, Charles & Colvard, Ltd. - CEO, President & Director [4]

--------------------------------------------------------------------------------

Thank you, Clint. Operator, do we have anyone in the queue?

--------------------------------------------------------------------------------

Operator [5]

--------------------------------------------------------------------------------

Yes. It looks like we have Dave King from Roth Capital.

--------------------------------------------------------------------------------

David Michael King, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [6]

--------------------------------------------------------------------------------

I guess, first off on the traditional growth you had this quarter. Looks like you guys had a fairly nice lift there. Just curious how much of the benefit was due to a transition from consignment to asset-light? Or maybe a better way of looking at it, what was the sell-through or rate of sell-through through your brick-and-mortar channels versus that, I think, 30% growth you saw?

--------------------------------------------------------------------------------

Suzanne T. Miglucci, Charles & Colvard, Ltd. - CEO, President & Director [7]

--------------------------------------------------------------------------------

Let me take that one, Clint, or you got it?

--------------------------------------------------------------------------------

Clint J. Pete, Charles & Colvard, Ltd. - CFO & Treasurer [8]

--------------------------------------------------------------------------------

Sure. Thanks, Dave. We saw from that standpoint on the Traditional side, the upside, we are seeing excellent results related to our brick-and-mortar channels. We don't disclose -- although we don't disclose subchannel type of metrics, except for charlesandcolvard.com, we did see some very strong sales continue through Helzberg as we do the expansion. As far as -- we did not see -- we saw very little related to that asset from the conversion -- from the consignment model this quarter. And it's going to be quarter-by-quarter basis when they do that flip. But we were actually successful in getting to our partners to actually -- retail partners to do this.

--------------------------------------------------------------------------------

Suzanne T. Miglucci, Charles & Colvard, Ltd. - CEO, President & Director [9]

--------------------------------------------------------------------------------

And let me jump in. As Clint mentioned, the work that we're doing with Helzberg, and we actually have another question in the queue and it probably all plays into the same question here, so I'll address that, so any update on Charles & Colvard's partnership with Helzberg. We are seeing a continued and very nice relationship with Helzberg Diamonds. As I think most of you that have been on these calls before know we started in their online channels. And then in October of 2016, we began in stores. It was 25 stores, then it 50 and 100 and then nearly all of their doors which is about a fleet of 200. But I'm proud to say that we have gone from 1 foot of case line to 2, and now we're pretty much 3 feet of case line in most all stores, and there are some that are taking on a fourth foot of case line. And what this means is that we continue to grow the footprint in a number of styles that we have in this store, which then continues to address a broader audience preference with this sort of variety of goods. So as Clint mentioned, while we don't necessarily share numbers from individual accounts, this one is a very nice account for us that's performing well. It's a good synergistic mutual relationship where we are bringing accretive business to Helzberg, and in turn, they are giving us more and more exposure. We kind of think of it as our showroom. Charles & Colvard doesn't have a physical showroom of our own. But almost any American can get in their car and within 2 hours' time, see Charles & Colvard product in a Helzberg Diamonds store. So we are thrilled with that one.

--------------------------------------------------------------------------------

David Michael King, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [10]

--------------------------------------------------------------------------------

Okay. That's great to hear. Shifting gears a bit. On the marketing front, to what extent did you start to lay into marketing subsequent to quarter-end and into July and August? And then I guess more importantly, what sort of ROIs are you seeing there? Have you started to accelerate it at the top of funnel yet? And how the ROI has been there versus what you've seen previously?

--------------------------------------------------------------------------------

Suzanne T. Miglucci, Charles & Colvard, Ltd. - CEO, President & Director [11]

--------------------------------------------------------------------------------

It's a great question, Dave. So we're only now beginning -- and of course, we've got -- we did a deal or do the capital raise in June, sort of second part of it, and a little bit into July. So we really didn't start additional spending until the July time frame. And so we're slowly sort of burning it in, and we are careful investors here. So we want to make sure that the dollars that we are putting in are giving us that return. We are continuing to see a 2x to 8x return on ad spend, so that's not changing much, Dave. What changes now as we get into holiday and we start to lean in and work more top-of-funnel is that we're spending more in the 2x range than we are in the 8x range because the 8x range is the people that already know us or are predisposed to the brand, and the conversion rate is more in the 2x return ad spend or the people that don't know us yet. And as we ramp for holiday, that's really where we want to put our efforts. We're excellent marketers when it comes to converting people that know the brand. But we simply need more of those eyeballs in the pipeline and that's what we are going to be focusing on. The things for folks to understand is that, that takes a little bit of time. So it can take 8 to 16 weeks for somebody that sees us for the first time to convert. So the effort is going into the sort of the quarter that we're in and that we're looking for the holiday quarter to start to really reap those rewards. Hopefully, that answers your question.

--------------------------------------------------------------------------------

David Michael King, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [12]

--------------------------------------------------------------------------------

Okay. That helps. And then I've got one more if I can just sneak it in. For Clint, in terms of the -- I think it was like $3.1 million or so of OpEx during the quarter, how much of that was outside either related to the capital raise or other items, if anything?

--------------------------------------------------------------------------------

Clint J. Pete, Charles & Colvard, Ltd. - CFO & Treasurer [13]

--------------------------------------------------------------------------------

I'll tell you probably that items that were not capitalized to the balance sheet, Dave, I'd say that estimated between $100,000 and $150,000 that we do spend related to that, maybe a little lighter than that. Probably under $100,000.

--------------------------------------------------------------------------------

David Michael King, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [14]

--------------------------------------------------------------------------------

Okay. So just in terms of trying to think about what a good run rate of expenses going forward then is a little bit under the $3 million a quarter or something? The right way to think about it?

--------------------------------------------------------------------------------

Clint J. Pete, Charles & Colvard, Ltd. - CFO & Treasurer [15]

--------------------------------------------------------------------------------

Can you say that again, Dave?

--------------------------------------------------------------------------------

David Michael King, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [16]

--------------------------------------------------------------------------------

Sorry. So in terms of run rate of quarterly expenses on a go-forward basis then is the right way to think about it, sort of, a little under $3 million then quarterly in terms of core expense OpEx?

--------------------------------------------------------------------------------

Clint J. Pete, Charles & Colvard, Ltd. - CFO & Treasurer [17]

--------------------------------------------------------------------------------

What we ended up, like I said, we were pretty flat the last year or a quarter. But as we continue, you should see the increase in marketing spend as we put some more fuel on the fire related to driving that top line and top of funnel. So from the standpoint, you've got to factor that in related to start looking at quarter-over-quarter trends related to our OpEx.

--------------------------------------------------------------------------------

Suzanne T. Miglucci, Charles & Colvard, Ltd. - CEO, President & Director [18]

--------------------------------------------------------------------------------

Thanks for the questions, Dave. I appreciate you calling in. Operator, do we have someone else in the queue?

--------------------------------------------------------------------------------

Operator [19]

--------------------------------------------------------------------------------

Yes. The next question comes from Mark Scanlan, private investor.

--------------------------------------------------------------------------------

Unidentified Participant, [20]

--------------------------------------------------------------------------------

Suzanne, congratulations on a very good year and a great quarter. Very interested in hearing more about traditional expansion. I definitely have a lot of respect for what you're doing digitally, but it seems like Helzberg is doing extremely well. Are there any conversations going forward, with larger entities like perhaps the Sterling Signet Corporation?

--------------------------------------------------------------------------------

Suzanne T. Miglucci, Charles & Colvard, Ltd. - CEO, President & Director [21]

--------------------------------------------------------------------------------

So we talk with everyone that will take our phone calls. And then when they don't we try calling them back again. So by all means, we are actively pursuing the traditional sector. In the U.S., going directly to these retailers makes sense and we're building and working on those relationships. Internationally, we've spent a little more time and effort going to our distributors and asking them to do the job of bringing the brand forward because they speak those local languages and they know those outlets pretty well. But by all means, we're not throwing the traditional baby out with the bathwater because it has been a very healthy and growing business for us. Certainly, not growing as rapidly as we are in Online Channels. We started from 0 and so it's kind of -- it's a net new and shiny object for us and a great way for us to get some growth. But there is absolutely work for us to do on the retail side of the business, and retail is a vast place. And so I think that you can expect over the coming year to hear more about these efforts. It's a blended effort, and as you'll see right now, 50% of the business roughly is traditional, 50% of the business is online. It's a great balance. And what we're thrilled about is the fact that we built this omni-channel strategy where we're not relying on a few elephants, if you will, that bring us our revenue. We are now very nicely balanced across these multiple channels. But a nice big additional retailer would be a nice boon to us. So certainly something that we're focused on. Operator, anyone else in the queue?

--------------------------------------------------------------------------------

Operator [22]

--------------------------------------------------------------------------------

That is it for the queue.

--------------------------------------------------------------------------------

Suzanne T. Miglucci, Charles & Colvard, Ltd. - CEO, President & Director [23]

--------------------------------------------------------------------------------

All right. I think we had one more write-in question here, give us a second here.

What is the most exciting growth opportunity in Online Channels?

That's a good question. Thank you for writing in on that one. And we love the write-in questions. So please don't ever hesitate to send in your questions to ir@charlesandcolvard.com. I think the most exciting opportunity in Online Channels and you're going to be maybe surprised at my answer, it's not landing a new marketplace or a new outlet to sell-through, it's the relationship we are building with our consumer. The most exciting thing is talking to her directly and having that dialogue. And then through the dialogue having her embrace the brand and then creating her own content and user-generated content where she is bringing the brand forward and becomes an ambassador. And the more brand ambassadors we have driving this brand to market, the less we have to talk about it ourselves and the more the consumer can lead the charge for us. So I would say that's one of the most exciting things in life. Top-of-funnel marketing activities are important to us because that gives us a chance to be in front of more consumers and then to initiate that dialogue. So thanks for the write-in question. Operator, I think we have one more in the queue.

--------------------------------------------------------------------------------

Operator [24]

--------------------------------------------------------------------------------

Yes. Rodney Barber, who is a private investor, has just dialed in.

--------------------------------------------------------------------------------

Unidentified Participant, [25]

--------------------------------------------------------------------------------

Congratulations for you and the team on the progress that you've been making because there's a lot of good in this report and the margin improvements, expense has been under control, all those kinds of things. For those that have been around for a while, we've been watching that and you've delivered on this, so congratulations on that. The things that's on my mind is you've got the company through a transition and in a pretty good position to grow. And so how you're going to get the revenue growth up is going to bring attention to this, and one other thing that's been on my mind is when will the millennials kick in and really wake up to the value of this product. And so I wanted to ask you for kind of a state-of-the-union update on the millennials because I heard that with lab-created diamonds coming down a lot, that is they are almost getting competitive with moissanite, and there may be more interest in lab-created diamonds than I was thinking would evolve. So what is the status of that? Because if the moissanite market ever really takes hold, will have -- it will have that J-curve thing we've been looking for. So I'd love to hear what your recent thoughts are on that?

--------------------------------------------------------------------------------

Suzanne T. Miglucci, Charles & Colvard, Ltd. - CEO, President & Director [26]

--------------------------------------------------------------------------------

Yes. Sure, Rodney, that's a great question and probably something a lot of the other folks on the call would be interested in. So the growth is going to come in the expansion of brand, and that's where the proceeds are really going to play a role. So how are we going to do more top-of-funnel marketing to bring awareness to it? And that's where the millennial sits, right. She is at that social media intersection where we're going to meet up with her and we're going to present the brand. More than 50% of our Online Channels' revenue comes from this millennial and emerging Gen Z consumer. So she is here. And absolutely the dollars and the margins that we are making in Online Channels is coming from the millennial. So while other retailers may be having challenges, I'm not sure where that data is coming from, for us, it is where we live. The millennial is absolutely the consumer that is making things happen here. So I think that on the lab-created diamond side, what was happening here, Rodney, is we're seeing a lift from the buzz and the interest that's happening in the market in lab-created diamond. But let me share some recent numbers with you. So we know that a 2-carat moissanite gemstone, at our highest possible quality, is going to cost that consumer about $1,500. A comparable lab-created diamond is going to be about $21,000. So there's still a lot of space between our product and lab-created diamond. So what we love is that there's a lot of buzz and money where people like De Beers talking about lab-created products. And then when she does her homework and figures out the difference in price, yet she still gets an ethically-sourced stone, I think that's when the interest comes back here. We do know that De Beers is putting some downward pressure on the overall market, but they're doing it in kind of a segmented way. They are bringing forward some price points that do maybe compete with us. But I would say they really don't because they're working in below 1-carat space. Most of the jobs that we have -- most of the products that we sell into our consumer are 1-carat and very much 2-carat and above. So the value proposition of moissanite is that you can buy a really big look and get a terrific stone that sparkles more than anything else, and you can get it at a greatly reduced price from what the lab-created producers are bringing to market at 1-carat and above. So there's still a lot of room there, Rodney, and I'm not too worried about downward pressure, right?

--------------------------------------------------------------------------------

Unidentified Analyst, [27]

--------------------------------------------------------------------------------

Make sure I'm clear on this. You said a 1-carat moissanite is $1,500. And then you said a lab-created was $21,000. And I would thought -- I thought the lab-created valuation would be more like $2,000 or $3,000. So much ahead of moissanite. But you can buy a diamond for 1-carat for $21,000. So I want to -- clear that up for me?

--------------------------------------------------------------------------------

Suzanne T. Miglucci, Charles & Colvard, Ltd. - CEO, President & Director [28]

--------------------------------------------------------------------------------

Okay. It has to do with the quality of the stone. So of Forever One, our premium product, really has no flaws in it. So we're comparing ourselves to a lab-created diamond that equally doesn't have flaws. So when we have that perfection of stone, D-E-F, which means basically colorless and what's called a VVS quality, which is basically flawless gemstone $1,500 for a 2-carat moissanite from Charles & Colvard and Forever One and $21,000 or so from a lab-created diamond purveyor. So that's -- again, that's a quality play. And you can find moissanite that's a lower quality and you can certainly find lab-created diamond that's a lower quality, but that's very much how the consumer knows how to grade a gemstone. It's the same way that we have graded mined diamonds for years. So when we use that scale, and we are up here with the premium product and we're at the top of the scale, we are competing handily with the right price point and the right product.

--------------------------------------------------------------------------------

Rodney Baber, [29]

--------------------------------------------------------------------------------

One final thing, real quick. The average ad spend was $220 per customer, okay? I'm not an expert on digital online, all the marketing and the cost side, but that sounded high to me that -- is that where you expected that to be? Will that go down over time as you scale that kind of thing? Or is that what it takes to get a new customer in using the digital social media approach?

--------------------------------------------------------------------------------

Suzanne T. Miglucci, Charles & Colvard, Ltd. - CEO, President & Director [30]

--------------------------------------------------------------------------------

Yes. So...

--------------------------------------------------------------------------------

Rodney Baber, [31]

--------------------------------------------------------------------------------

Is that thing high?

--------------------------------------------------------------------------------

Suzanne T. Miglucci, Charles & Colvard, Ltd. - CEO, President & Director [32]

--------------------------------------------------------------------------------

Yes. You did good. $220 was the number that we had quoted. We feel pretty good about that number. From a comparison standpoint with some of our peers, I think that we are very competitive, if not at a better number than others, I would have you turn to some market research that would maybe validate this for yourself. But I would expect, that you ask the question, I would expect that number might go up in the short term. And when Dave King asked his question about where we're spending money, the answer was we're going to spend more money at the top of funnel where the $2 return on ad spend happens. The more we do that, the more the price is going to go up because she's going to be clicking on ads or she's going to be engaging with us, and we're spending more money to get her because we're spending by the click or by the drink, if you will. So I do anticipate that to go up a little bit over time and then it will probably then blend out. What happens though, and for those of you that understand digital ad spend, what happens is it's a little bit expensive then to bring in those new folks, but they may raise the traffic and they may raise our organic traffic into the site. And so we blend it out, and I do anticipate we're still going to blend out at a 2x to 8x return on ad spend, it's all going to come out in the wash. So we feel pretty good about that investment. And again, keep in mind, our average order value is $1,000. So we think it's good math to be spending $220 to get a $1,000 deal. I will do that all day long, Rodney.

Operator, do we have anyone else in the queue?

--------------------------------------------------------------------------------

Operator [33]

--------------------------------------------------------------------------------

You do not. That was the last question.

--------------------------------------------------------------------------------

Suzanne T. Miglucci, Charles & Colvard, Ltd. - CEO, President & Director [34]

--------------------------------------------------------------------------------

Okay. Well, let me just say some final remarks here. I want to thank you all for joining us on the call today. I'd like to take a moment to extend my sincere thanks to the amazing team here at Charles & Colvard. I appreciate everything that these folks have done to deliver this profitable year to our shareholders, and I'm looking forward to an exciting new year focused on growth. To everyone on today's call, we appreciate your interest and investment in Charles & Colvard and look forward to being in touch to update you on our continued progress. Thank you, and have a good evening.

--------------------------------------------------------------------------------

Operator [35]

--------------------------------------------------------------------------------

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