Q4 2020 Charles & Colvard Ltd Earnings Call
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Good day, and welcome to the Charles and coal BARDA Q4 fiscal year 2020 earnings call.
All participants will be in listen only mode should you need assistance. Please signal a conference specialist I pressing the star key followed by zero.
After today's presentation, there will be an opportunity to ask questions.
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This earnings call may contain forward looking statements as defined in section 27, eight other 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.
Dates 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 our 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 brief proved 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.
Accompany today's call is a supporting Powerpoint slide deck, which is available in the Investor Relations section of the company's website at IR Dot Charles in Cobar Dot Com slash events.
The company will be hosting acuity session at the conclusion of prepared remarks.
Should you have questions you'd like to submit please E mail IR at Charles and Colvard Dotcom.
Please note this event is being recorded.
I would now like to turn the conference over to the Dod O'connell President and Chief Executive Officer. Please go ahead.
Good afternoon, everyone. Thanks for joining us today I hope you and your families are doing well as you navigate these trying time.
Today, we're going to report Charles de Gaulle barge Twentytwenty in Q4 fiscal year end result.
Before I summarize things for you I like to take a moment to introduce my felt as the new president and CEO of the company.
It's important to note that I've been with Charles and Colvard for the past four and a half years, most recently as Chief operating officer, and senior Vice President of supply chain.
In his role I was responsible for all goods and services from concept to creation, while oversee every aspect of operations in order fulfillment.
I spearheaded the team drove innovation and product design implement a deficiency and transport business transform business processes that led to six quarters of profitability prior to covert 19th and done.
As CEO and leveraging this experience plus the expertise I've gained over 30 years in the jewelry industry, Serbia multiple capacity.
I've owned and operated large scale jewelry company led global supply chain businesses and manage the jewelry television shopping network.
I spent seven years as vice president of operations in procurement, both foreign and domestic with the Ridgeline group a wholly owned subsidiary of Berkshire Hathaway and served on rich lines Executive Steering Committee and acquisition team.
What does this mean.
I mean, I'm confident that I have you experienced in the ability to lead this company to the next level now let me speak to the business highlights.
First of all let me address the impact Cobot 19 had on the fourth quarter without a doubt the pandemic hindered our revenue performance in Q4 and impacted how we finished the year.
Even though we had limited business operations throughout April and May and June we were able to capitalize on the growing E commerce demand by expanding our in stock product offerings with our online General partners.
This shift helped us generate 4.4 million in revenue by the ended the quarter, even though our traditional segment was severely impacted by the global shutdown.
Although this decrease was from last year, our margins remained healthy at 41%.
After taking over as CEO on June 1st My primary goal was to address near term challenges and capitalize on our core strengths.
We had to define business requirements to better position us for our future state.
How do we do this.
We focused on fortifying our foundation in order to weather the immediate effect of Cobot 19, and we acted quickly to stabilize the business in order to strengthen our position heading into our new fiscal year.
We immediately began to rightsize the business across the board from personnel too expensive to contracts the obligation.
We had to contract in order to expand.
These actions helped us generate a positive cash flow from continuing operation of 1.8 million for the quarter, increasing our cash balance.
This enabled us to end the quarter, what a strong $14.6 million of cash.
Up from 11.9 million at March of this year.
Giving us well, we don't believe we believed to be sufficient liquidity. This is to sustain and scale the business accordingly.
As for the downsizing, we defined and executed a go forward resource plan that was more suited for the size of our business.
This reduction enforce included executive and senior level employees, along with some employees who had previously been furloughed.
Next we secured and closed on a 965000 dollar PPP loan to help absorbed the impact covert 19 had on our cash position related to salaries and expenses.
Additionally, we worked with our partners that creek to restructure our supply agreement.
This allows us the level load our existing obligation into the two year option period of our supply agreement.
Given us the flexibility to better balance our raw material against our demand throughout the next five years.
And then we were able to focus on our core strength, making data driven decision to generate revenue on a direct to consumer channels.
Here's what we did.
We shifted our advertising dollars away from top of funnel campaigns to focus on targeting consumers, who are more likely to convert.
We ramped up our virtual consultation services after recognizing its immediate success by allowing us to connect with our customers in a more personal way.
We shifted our social media strategy to become more active and to further engage with the consumer across multiple social channels and platforms.
We believe this is crucial to growing our brand and capturing the additional market share.
I'm confident that our efforts in these areas drove the positive trends we saw in June despite the quarterly decreases we are reporting.
At this time I like to turn call over to quit Pete our CFO for an overview. Our Q4 financials, then I'll return to lay out the strategic initiatives for the coming here and to find the company's plans to manage through our anticipated recovery.
Good afternoon, everyone and thank you for joining us today I'll provide a summary of key financials from our fourth quarter in fiscal year ended June 32020, additional detail can be found in our earnings press release that would be into this afternoon, and our form 10-K, which we expect about them all.
Now, let's get to the numbers. Please note that all percentage comparisons are to the year ago fourth quarter unless otherwise specified.
Well, let's start with revenue, which was primarily impacted by the Kogan 19 environment, including the closure of a corporate headquarters in early April due to the mandated North Carolina stay at home order as Don mentioned, we had some limited E Commerce business and May April and May and then as we were able to reopen operator.
And in June we began to see increasing revenues in our online channels segment.
In total net sales for Q4 2020 totaled $4.4 million.
Or a decrease of 42% primarily due to the closes in the disruptions in the supply chain.
In our online channels segment, which includes thousand Cobar dotcom online marketplaces drop ship retail and other peer play outlets net sales for the quarter totaled $3 million or a decrease of 18%.
Representing 68% of total net sales.
Net sales for my transactional website, Charles and Colvard Dot com decreased 22%.
And the company's traditional segment, which consists of wholesale and retail customers net sales for the quarter were $1.4 million or a decrease of 64% represent 32% of total net sales.
Finished jewelry net sales decreased 20% for the quarter.
We saw declines in our direct to consumer sales as well as with our brick and motor partners, whose retail locations closed in March and had the limited openings in June.
Loose jewel net sales decreased 63% for the quarter, mainly due to a decline in demand from our international distributors during anti quarter related coping 19, and then from our domestic distributors, who continue to feel that the impact.
International sales decreased 86% as we continued to have limited orders from Asian distributors combined with a 48% decrease in cross border sale on our transactional website due to global closures put in effect.
Moving on we delivered solid gross margin performance, primarily driven by improved pricing and dropship marketplace channels.
Our gross margin for Q4, 2020 was 41% compared to 44% in a year ago quarter.
As Don mentioned earlier, we took swift actions to reduce dramatically as we adjusted for the impact of the Cobot 19 Panna Didnt.
For Q4, 2020 total operating expenses decreased 11%.
Sales and marketing expenses decreased approximately $549000.
Primarily related to the significant reduction in the top of funnel digital marketing ad spending.
Gionee expenses increased approximately $190000.
Marinate related to the nonrecurring impact as severance and stock based compensation costs from our CEO transition and severance cost with the reduction in staff.
That reduction due pieced are active workforce by approximately 25%.
These actions increased expenses in the quarter by approximately $580000.
But this will result in lower expense base going forward.
We had reductions in other expense categories, including bonuses board retainer fees travel and entertainment and bad debt allowance.
Next we reported a net loss for Q4 2020 of approximately $1 million.
Or a negative four cents per diluted share compared with net income of approximately $60000.
A once in per diluted share versus a year ago period.
The net loss for Q4 2020 was significantly impacted by that previously mentioned nonrecurring severance and stock based compensation expense.
For the full fiscal year 2020, we reported $29.2 million and net sales a 9% decrease in fiscal year 2019.
They were to know worth the trends for the full year that I'd like to highlight today.
First and online channels segment net sales for the fiscal year, 2020 increased 2% to $16.6 million or 57% of total net sales up from 51% of total net sales in fiscal 2019.
Highlighting a positive shift and E commerce driven business.
Second finished jewelry net sales for the fiscal year in 2020 increased 9% to $16.8 million or 57% on net sales up from 48% to a total net sales in fiscal 2019, highlighting our continued growth and direct to consumer sales.
Now, let's move onto a snapshot of our balance sheet.
Our liquidity our liquidity continues to remain strong as we ended the year with $14.6 million total cash compared with $13 million.
At our last fiscal year ended June 32019.
Okay. That's both from continuing operations as a positive $1.8 million was a quarter.
That's before the proceeds we cede the payroll protection program or PPP.
This favorable performance as a result of aggressively managing costs and cash outlays to match, the current trend and the economic and retail environment.
As Don discussed we closed on the SP a loan in mid June do the PPP under the cares Act with total proceeds and $965000.
With these proceeds our total increase in cash cash equivalents in restricted cash for the quarter with $2.7 million.
In terms of other sources of liquidity. We currently have a 5 million asset based credit facility with White Oak commercial finance.
As of June Thirtyth 2020, we're not excess funds to this credit facility.
Inventory at June 32020 totaled $30.6 million compared to $31.7 million at March 31, 2020, and $33.7 million at June 32019.
Loose jewel inventory was $20.8 million compared to $24.3 million at June Thirtyth 2019.
Finished jewelry inventory was $9.7 million compared to $9.3 million at June Thirtyth 2019.
In summary, we feel confident and our financial strength and our ability to navigate the current environment. So that we are positioned for growth and profitability.
With that I'll turn the call back over did on.
Thanks.
I'd like to speak to the future state of the business and outlined some of our strategic initiatives for fiscal 2021.
Our focus is on growth and increasing shareholder value.
We plan to execute on our strategic vision and expand in multiple ways to become a globally recognized fine jewelry brand with quality products, a beautiful design that appeal to the masses.
How do we do then.
We do this by expanding our digital presence, we plan to be more visible to our customers on social media platforms and on our website through live streaming and live events. This will allow us to showcase our product and real time.
We plan to increase our digital properties through acquisition or by building additional direct to consumer web sites. For example, we're developing moissanite outlet dotcom as part of our disposition strategy to sell our more value oriented products.
Next we plan to increase our customer engagement.
We intend to continue to scale, our virtual consultation services for the holiday season.
We want to capitalize on what is proven to be a viable revenue driver.
And we're planning to develop a digital ambassadors program to incentivize our loyal customers to promote Charles and colvard to their friends and family.
We're also going to regain our focus on our product offerings with that said, we intend to concentrate on and elevate our innovative product brands such as forever, one and our patented signature collection.
We believe we will achieve this by doing a better job of educating our consumers on the premium quality, while showcasing the value add that Charles <unk> Colvard brand encompasses.
We intend to bring forward new products that align with our core values that help diversify our current assortment, thus expanding on our opportunities.
And lastly, we're going to focus on disciplined growth we plan to continue to engage in strategic partnerships within the industry to be able to capitalize on market opportunities, where and when it makes sense.
We intend to define and develop a strategic acquisition growth plan that will create sustainable long term value for our shareholders. We plan to expand on our omni channel reach by securing additional retail partners, giving our customers additional opportunities do experience our products first Dan.
With change comes opportunity and now we believe we're well positioned to see such opportunities that will allow us to serve a broader and more diverse consumer base, while keeping a key item profitability to topline growth. Thus, we believe we will capture a greater market share within the fine jewelry space.
With that I'd like to turn it back over the operator and open the lines for your questions.
We will now begin the question and answer session.
To ask a question you May Press Star then one on your Touchtone phone.
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If at any time. Your question has been addressing you would like to withdraw your question. Please press Star then too.
As time, we will pause momentarily to assemble our roster.
The first question is from Gustavo Gala with Roth Capital Partners. Please go ahead.
Hey, good afternoon, guys congrats on solid quarter.
So just wanted to check and see how order.
It's trending in this new environment, Oh, Gee shopping differently.
Bracketing or prices and just overall Howard demand trends.
Going into the quarter I mean, those solid same store sales number.
Signaled earlier today or just wanted to see you guys. So.
Yeah saga and address that so the A.O. These are holder really strong I mean, we're we're we're keeping steady on that and that's basically primarily the product mix do as well, so we're making conscious decisions at the what progress.
What products were bringing forward to try to keep that where it is and primarily in the bridal business. It's generally a higher ticket item. So we're very pleased with the itll be where we're at currently covering you know between 1000 to $1200 range, which has been very very conservative for us for quite some time.
Yes, I mean, that's on Super healthy I guess, along the same line of questioning.
How is the so I mean, the shift to the high ROI Bobby funnel.
I imagine costs are falling could you talk to.
Help us Oh.
[noise] like can you help us bracket around where costs are sitting now a good cost to acquire customer here.
Sure.
[noise] currently for the.
In Q4, we saw or are we call our average AD spend per customer.
Which time as it was defined in the.
In the as three that we filed a you know previously we had reported in Q3 earnings that were tracking around 400 at that point in time average AD spend per customer.
That and that was a lot of that during the holidays last quarter. We actually saw this amount decreased approximately $135135 sorry.
Because of that shift in that you mentioned that we mentioned in our paid advertising strategy or you know getting away from the top of funnel contained.
Yeah, I'll just add to that if I may.
On top of funnel you know shifts was more on building awareness now were mid to lower funnel, which you know really concentrated focus is on that conversion model.
And that you know is really signet significantly reducing.
Number and then delta right so.
It's in a much much better place.
Great I mean that all sounds great I guess, just there our or the cpms trends like the competition for like more formal.
Keywords and Cpms.
Thanks.
Yeah. So it's a great question.
I would say during Q2 and on holiday period, we were seeing some elevated you know cost associated with that for those key terms.
It started to trickle down after the holiday season of Q2 into Q3, Oh, we're seeing it kind of level off a little bit now certainly you know there is some anticipation that will experience is saying you know moving forward, but the reality is we have to do a better job of shifting and you know my teams right now are kind of putting a plan together too.
Come up with alternative terms and alternative ways to drive traffic.
Through social media and different types of channels that we're going to push through.
Great and my last question would be.
Excuse me then in terms of the DNA for the quarter I think if my math right like roughly 730, something or 40 gig moving forward should we be bracketing like 700 to 900 K level.
We should be.
Modeling or do you think about that.
Going into Q1.
Well, we certainly don't give guidance on those numbers, but I can tell you.
No we're at a comfortable spot on the margin for the end of Q4, we were pleased with kind of kind of the margin holding its steady I will also add to that we're also pleased with the rise in the gold market into gold pricing. So we thought we were going to experience some shift on that but we were able to negotiate with a lot of our strategic vendors during.
In that period of June month.
We're able to kind of reduce some cost associated with that to help mitigate some of that margin pressure and we'll continue to look to do that forward a kind of you know as much as we can.
Great. Thanks for taking my questions.
But that's just to confirm when you and you mentioned the 700000 I'm, assuming you're you're identifying the.
The cost and nonrecurring transitions.
Yeah, the nonrecurring just just a point.
It's.
A lot of that wasn't DNA, but there was there was some in sales and marketing as well.
Okay. Okay. Thank you.
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Right.
Your next question is from Barclays. Okay, with the K capital management. Please go ahead.
Hello, Good afternoon.
Congrats on a new position.
Thanks.
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Yes, just couple of questions here won is as Q1 started into world economies.
Okay. Thank you hear us start opening up a bit.
Just trying to get a better feel for your trends in July and August could you shed some light on that.
Yeah again, I really you know I can't respond to July and August I mean, I can tell you right now what's your I'm hearing in the news related to the ecommerce space.
Certainly kinda was true to our ended the quarter towards the June period, we started seeing those lives. So it was consistent in June with that.
And really.
You know, we were able to mitigate a lot of effects of the business with that.
Lift in the market.
Okay. Then just a follow up question on the Gionee I'm trying to get a good cash run rate apps and hope to stock based comp and that severance related expenses of two previous CEO could you help me model that number.
Going forward basis or at least give me some.
Background on what would have been apps and they'll stores are in Q4 kinda cash DNA.
Well, we can look at it a from a total opex standpoint and sure.
You know, we don't officially published EBITDA, but that's a part of the good starting point for you. When you know from the standpoint of because everything is disclosed in the K to to get to that number.
But you know that was.
And the cash impact.
Naturally definitely come with P. now it was a it was recorded in Q4, but that the cash impact of an entry was being spread over you know the agreement terms that we have with the related to a reduction in force that we had.
Okay. Thank you for that and I'm, just again trying to get a feel for and I don't I could give guidance on this or not but.
Could you be able to I mean, it was impressive to be able to generate free cash flow in the quarter absent of TPP is there any reason or any one time items that would not allow me to generate free cash on that.
You know what they said that core samples this year.
Yeah. So all I can you know I mean, you could just look at the 4.4 million in revenue and and basically just compare where our net losses from their back out the kinds of sovereign side of the equation and kind of look at where we're at now that's the new norm for the business I mean, we right size the business.
So you know that's basically all I can kind of discuss related to that.
Okay and you just given you've got Oh go ahead sorry. Please.
Okay, and you can pretty much producer models from that number.
Understood and my final question is.
And then Youre low capex requirements and access to line of credit and cash on hand.
I get I'm, new to the company, but what is the plan for cash is that that's something that you guys like to keep.
For top kind of type of experience that we just went through or.
I don't know if you ever call should they're smaller acquisitions or not or any other plans how should we look at cash.
Yeah. So so real we are real pleased with a the cash position that we finished out the year and out the quarter now there was a lot of real strategic decisions made to be able to kind of.
Maintain that cash and we certainly will look to deploy that cash with opportunities, but our first priority right. Now is kind of the keep this business nice and stabilize maintain it and kinda pursue some of these strategic initiatives that we have and certainly if you look at my pedigree from prior being with Berkshire, Hathaway's ritual and group.
You don't basically you know organic growth is wonderful, maybe that's great and we're going to get that but but over there. We grew through acquisition and different types of opportunities. So I would see us a you know potentially always looking to explore those opportunities on behalf of our shareholders and ER and.
I can I can't make it any clearer than that so.
Okay, well I appreciate your time and best of luck too. Thanks.
Sure. Thanks Mark.
Your next question is from John Davis, a private Investor. Please go ahead.
Hi, I got two questions number one is on E commerce I'm trying to understand why all while up other third party E commerce numbers into your data because it in a day unless you're getting the full margin stack on it meaning your wholesale margin plus their retail markup shouldn't you separate does is that has a meaningful contribution.
Margin, so see JOL, please break that out going forward or even for the last quarter, because I do think it's a little misleading because what a third party wholesale ourselves on their side I'm, assuming they're buying at wholesale prices. So what does that number looked like it number two as it's my understanding all turned down and offer for a 50% premium to the share price and just understanding how you're going to.
Get back there, especially given the comments that the CIO just made that they are going to make acquisitions or blade. That's how it's been done. It's my understanding that the acquisition offer what actually for a conglomerate that's actually rolling up DTC brands and can leverage a massive shared services model in cross marketing across their brands. Thank you very much.
Yeah. So first of all my first comment is we're always going to kinda reevaluate our shareholders and our investors as far as what they want to report and so forth or want to see and better understand what the business. So always take those things under advisement in consideration will continue to do so.
You know again, we always look at you know folks that are you know, believing in Charles and Colvard and believing what do you know has to offer.
But the reality is you know it has to be a viable consideration and I believe that given the current environment, where this business is where our cash position is what our products are in the services that we put together you know where we're at a really good place moving forward and we'll continue to kind of explore our internal offers.
It is.
Certainly if there's something that's viable and make sense well, we'll we'll go ahead to look at it a little bit further but I appreciate the call.
You think that youre going to get up 50% increase in the stock price for the next 12 months.
Well I'm not a speculator and I don't like to speculate I I'd like to drive the business on the fundamentals of the business and let the pendulum fundamentals kind of speak for themselves and kind of do as they were as they are.
[noise] again, if you have a question. Please press Star then one.
The next question is from Adam prior with Raymond James. Please go ahead.
Hey, Dan.
Graduations.
I'm curious about sales in Asia, and I know that you don't generally great goes out specifically your age I don't think you have in the past.
But when the pandemic first hit.
Recall that.
It was a big contributor to things slowing down.
Can you shed some light on how that's going.
Yeah, Great Great question, So certainly the international side of the equation other businesses as kind of suffered because of global shutdowns and so forth within the you know with into Q4.
Moving forward, we're starting to see some pockets of international coming to life, Our cross border trade business, which is like E. Commerce side is coming to life on ecommerce side, there's still some.
You know difficulty between kind of moving goods in and out between overseas and so forth but.
Certainly that's only one side of the business for a a portion of the business, we'll look to kind of mitigate the effects of that by increasing the other side than the other channels of our business.
And I really can't comment about kind of those shifts that we've made are ready you know in taking goes [noise] into consideration, but we certainly have.
You know a keen eye of the direction, we want to go in pursuit to kind of filling those gaps that we consider that that may occur.
Okay, Hey, one more quick question with all that cash needs fall at your conversations about some celebrity endorsement type contracts or.
Deals.
Can you say that again I'm, sorry could you repeat that.
Yeah with all the cash on hand is there any conversation or strategy about celebrity endorsement a contraction deals.
Yeah. So that's an interesting you know approach we certainly look at that we are continuing to look at that we have a a marketing strategy that what kind of consider those type of things as we start to define the marketing strategy moving forward into the fiscal year, we'll certainly look too.
To kind of explore anything that's going to promote Charles and colvard in both earned and shared media channels further enhancing our social presence within the marketplace.
Okay. Thank you.
This concludes our question and answer session.
I'd like to turn the conference back over to Don Ocado for any closing remarks.
So I'd like to thank everyone for joining us today. We appreciate the continue interest in a Charles and Colvard and your support.
And thank you and good evening.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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