On June 25, 2014, we and our wholly owned subsidiaries, Charles & Colvard Direct, LLC and Moissanite.com, LLC (now charlesandcolvard.com, LLC), collectively referred to as the Borrowers, obtained the Credit Facility from Wells Fargo, which is a $10,000,000 asset-based revolving credit facility.Fargo. The Credit Facility willmay be used for general corporate and working capital purposes, including transaction fees and expenses incurred in connection therewith and the issuance of letters of credit up to a $1,000,000 sublimit. The Credit Facility will mature on June 25, 2017.
The Credit Facility includes a $5,000,000 sublimit for advances that are supported by a 90% guaranty provided by the U.S. Export-Import Bank. Advances under the Credit Facility are limited to a borrowing base, which is computed by applying specified advance rates to the value of the Borrowers’ eligible accounts and inventory, less reserves. Advances against inventory are further subject to an initial $3,000,000 maximum. We must maintain a minimum of $1,000,000 in excess availability at all times. There are no other financial covenants.
Each advance accrues interest at a rate equal to Wells Fargo’s 3-month LIBOR rate plus 2.50%, calculated on an actual/360 basis and payable monthly in arrears. Principal outstanding during an event of default accrues interest at a rate of 3% in excess of the above rate. Any advance may be prepaid in whole or in part at any time. In addition, the maximum line amount may be reduced by us in whole or part at any time, subject to a fee equal to 2% of any reduction in the first year after closing, 1% of any reduction in the second year after closing, and 0% thereafter. There are no mandatory prepayments or line reductions.
The Credit Facility is evidenced by a credit and security agreement dated as of June 25, 2014, andas amended, as of September 16, 2014 and December 12, 2014, or the Credit Agreement, and customary ancillary documents. The Credit Agreement contains customary covenants, representations and cash dominion provisions, including a financial reporting covenant and limitations on dividends, distributions, debt, contingent obligations, liens, loans, investments, mergers, acquisitions, divestitures, subsidiaries, affiliate transactions, and changes in control.
Events of default under the Credit Facility include, without limitation, (1) any impairment of the Export-Import Bank guaranty, unless the guaranteed advances are repaid within two business days, (2) an event of default under any other indebtedness of the Borrowers in excess of $200,000, and (3) a material adverse change in the ability of the Borrowers to perform their obligations under the Credit Agreement or in the Borrowers’ assets, liabilities, businesses or prospects, or other circumstances that Wells Fargo believes may impair the prospect of repayment. If an event of default occurs, Wells Fargo is entitled to take enforcement action, including acceleration of amounts due under the Credit Agreement and foreclosure upon collateral.
The Credit Agreement contains other customary terms, including indemnity, expense reimbursement, yield protection, and confidentiality provisions. Wells Fargo is permitted to assign the Credit Facility.
We believe that our existing cash and cash equivalents and other working capital, together with future cash expected to be provided by operating activities, will be sufficient to meet our working capital and capital expenditure needs over the next 12 months. Our future capital requirements and the adequacy of available funds will depend on many factors, including our rate of sales growth; the expansion of our sales and marketing activities; the timing and extent of raw materials and labor purchases in connection with loose jewel production to support our moissanite jeweljewels business and precious metals and labor purchases in connection with jewelry production to support our finished jewelry business; the timing of capital expenditures; and risk factors described in more detail in “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K. We obtained the Credit Facility to mitigate these risks to our cash and liquidity position. Also, we may make investments in, or acquisitions of, complementary businesses, which could also require us to seek additional equity or debt financing.
We do not use off-balance sheet arrangements with unconsolidated entities or related parties, nor do we use other forms of off-balance sheet arrangements. Accordingly, our liquidity and capital resources are not subject to off-balance sheet risks from unconsolidated entities. As of December 31, 2015,2016, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K.
We have entered into an operating lease for approximately 36,350 square feet of mixed-use space, which we currently occupy, from an unaffiliated third-party for our offices and manufacturing facility in the normal course of business. This type of arrangement is often referred to as a form of off-balance sheet financing.
Charles & Colvard, Ltd.
We have audited the accompanying consolidated balance sheets of Charles & Colvard, Ltd. as of December 31, 20152016 and 20142015 and the related consolidated statements of operations, shareholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Charles & Colvard, Ltd. at December 31, 20152016 and 2014,2015, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
CHARLES & COLVARD, LTD.
See Notes to Consolidated Financial Statements.
CHARLES & COLVARD, LTD.
See Notes to Consolidated Financial Statements.
CHARLES & COLVARD, LTD.
See Notes to Consolidated Financial Statements.
CHARLES & COLVARD, LTD.
CHARLES & COLVARD, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 1. | DESCRIPTION OF BUSINESS |
Charles & Colvard, Ltd. (the “Company”), a North Carolina corporation founded in 1995, manufactures, markets, and distributes Charles & Colvard Created Moissanite® (hereinafter referred to as moissanite or moissanite jewels) and finished jewelry featuring moissanite for sale in the worldwide jewelry market. Moissanite, also known by its chemical name silicon carbide (SiC), is a rare mineral first discovered in a meteormeteorite crater. Because naturally occurring SiC crystals are too small for commercial use, larger crystals must be grown in a laboratory. Leveraging its advantage of being the original and leading worldwide source of created moissanite, jewels, the Company’s strategy is to establish itself with reputable, high-quality, and sophisticated brands and to position moissanite as an ethically-sourced, affordable, and luxurious alternative to other gemstones such as diamond. The Company believes this is possible due to moissanite’s exceptional brilliance, fire, durability, and rarity like no other jewel available on the market. The Company sells loose moissanite jewels and finished jewelry at wholesale to distributors, manufacturers, retailers, TV shopping networks, and retailersdesigners and at retail to end consumers through its wholly owned operating subsidiaries, charlesandcolvard.com, LLC (formerly Moissanite.com, LLCLLC) and Charles & Colvard Direct, LLC (until March 2016), and through third-party marketplaces. As of September 30, 2016, the Company changed the name of its wholly owned subsidiary Moissanite.com, LLC to charlesandcolvard.com, LLC.
In February 2016, the Company made the strategic decision to explore a potential divestiture of its direct-to-consumer home party business previously operated through its Charles & Colvard Direct, LLC (dba Lulu Avenue®) subsidiary. After careful analysis of the Company’s core competencies, go-to-market strategies, and intent to advance toward profitability, the management team and Board of Directors determined a divestiture of this distribution channel to be in the best interest of the Company and its shareholders. On March 4, 2016, the Company and Charles & Colvard Direct, LLC entered into an asset purchase agreement with Yanbal USA, Inc. (“Yanbal”), or Yanbal, under which Yanbal purchased certain assets related to the Company’s direct-to-consumer home party business for $500,000 and assumed certain liabilities related to such assets. A more detailed description of this transaction is included in Note 14, “Subsequent Events.”12, “Discontinued Operations”.
ForAs a result of the yearsdivestiture of the Company’s direct-to-consumer home party business operated through its Charles & Colvard Direct, LLC (dba Lulu Avenue®) subsidiary, during the three months ended DecemberMarch 31, 2015 and 2014,2016, the Company managedbegan managing its business primarily through its threetwo continuing distribution channels that it used to sell its product lines, loose jewels and finished jewelry, which included Charles and Colvard Direct, LLC.channels. Accordingly, for the years ended December 31, 20152016 and 2014,2015, the Company’s reportable segments remainedare its wholesale distribution channel transacted through the Company’s parent entity, and its twothe Company’s direct-to-consumer distribution channelschannel transacted through the wholly owned operating subsidiaries, Moissanite.com, LLCsubsidiary, charlesandcolvard.com, LLC. The Company is now presenting the operating results of Charles and Charles & Colvard Direct, LLC.LLC as a discontinued operation.
| 2. | BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES |
Basis of Presentation and Principles of Consolidation - The accompanying consolidated financial statements as of and for the years ended December 31, 20152016 and 20142015 include the accounts of the Company and its wholly owned subsidiaries charlesandcolvard.com, LLC (formerly Moissanite.com, LLC,LLC), formed in 2011; Charles & Colvard Direct, LLC, formed in 2011; and Charles & Colvard (HK) Ltd., the Company’s Hong Kong subsidiary that became a dormant entity in the second quarter of 2009 and the operations of which ceased in 2008. All intercompany accounts have been eliminated.
Discontinued Operations - The results of operations for businesses that have been disposed of or classified as held-for-sale are segregated from the results of the Company’s continuing operations and classified as discontinued operations for each period presented in the Company’s consolidated income statement. Similarly, the assets and liabilities of such businesses are reclassified from continuing operations and presented as discontinued operations for each period presented on the Company’s consolidated balance sheet.
Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. The most significant estimates impacting the Company’s consolidated financial statements relate to valuation and classification of inventories, accounts receivable reserves, depreciable lives of property and equipment, deferred tax assets, uncertain tax positions, stock compensation expense,cooperative advertising, and revenue recognition, and cooperative advertising.recognition. Actual results could differ materially from those estimates.
Reclassifications - Certain amounts in the prior year’s consolidated financial statements have been reclassified to conform to the current year presentation, primarily amounts described in Note 3, “Segment Information and Geographic Data” and Note 12, “Discontinued Operations” related to changes in the Company’s reportable segments.
Cash and Cash Equivalents - All highly liquid investments with an original maturity of three months or less from the date of purchase are considered to be cash equivalents.
Concentration of Credit Risk - Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and trade accounts receivable. The Company maintains cash and cash equivalents. At times, cash balances may exceed the Federal Deposit Insurance Corporation (“FDIC”) insurable limits. The Company has never experienced any losses related to these balances. Non-interest-bearing amounts on deposit in excess of FDIC insurable limits at December 31, 20152016 approximated $4.92$7.04 million.
Trade receivables potentially subject the Company to credit risk. The Company’s standard wholesale customer payment terms on trade receivables are generally between 30 and 90 days, though it may offer extended terms with specific customers and on significant orders from time to time. The Company believes its competitors and other vendors in the wholesale jewelry industry have also expanded their use of extended payment terms and, in aggregate, the Company believes that by expandingthrough its use of extended payment terms, it has provided a competitive response in its market and that its net sales have been favorably impacted. The Company is unable to estimate the impact of this program on its net sales, but if it ceased providing extended payment terms in select instances, the Company believes it would not be competitive for some wholesale customers in the marketplace and that its net sales and profits would likely decrease. The Company extends credit to its customers based upon a number of factors, including an evaluation of the customer’s financial condition and credit history that is verified through trade association reference services, the customer’s payment history with the Company, the customer’s reputation in the trade, and/or an evaluation of the Company’s opportunity to introduce its moissanite jewels or finished jewelry featuring moissanite to new or expanded markets. Collateral is not generally required from customers. The need for an allowance for doubtful accounts is determined based upon factors surrounding the credit risk of specific customers, historical trends, and other information. During the year ended December 31, 2016, the Company wrote off $815,000 in accounts receivable related to one international customer that was past due on its payment arrangement as it determined that the benefits of continued collections efforts did not outweigh the cost of legal proceedings. The Company does not believe its commercial terms were a factor with this customer’s non-payment. The Company’s allowance for doubtful accounts previously included an allowance for this accounts receivable, and therefore, this write-off did not have an impact on net loss for the year ended December 31, 2016. The Company has not experienced any other significant accounts receivable write-offs related to revenue arrangements with extended payment terms. However, the Company’s allowance for doubtful accounts includes approximately $815,000 related to one customer that has become past due on its payment arrangement.
See Note 12,13, “Major Customers and Concentration of Credit Risk,”Risk”, for further discussion of credit risk within trade accounts receivable.
Accounts Receivable Reserves - Estimates are used to determine the amount of two reserves against trade accounts receivable. The first reserve is an allowance for sales returns. At the time revenue is recognized, the Company estimates future returns using a historical return rate that is reviewed quarterly with consideration of any contractual return privileges granted to customers, and it reduces sales and trade accounts receivable by this estimated amount. The allowance for sales returns was $731,000$415,000 and $910,000$731,000 at December 31, 20152016 and 2014,2015, respectively.
The following is a reconciliation of the allowance for sales returns:
| | | Year Ended December 31, | | | Year Ended December 31, | |
| | | 2015 | | | 2014 | | | 2016 | | | 2015 | |
| Balance, beginning of period | | $ | 910,000 | | | $ | 1,186,000 | | | $ | 731,000 | | | $ | 910,000 | |
| Additions charged to operations | | | 3,651,741 | | | | 1,942,191 | | | | 3,574,297 | | | | 3,651,741 | |
| Sales returns | | | (3,830,741 | ) | | | (2,218,191 | ) | | | (3,890,297 | ) | | | (3,830,741 | ) |
| Balance, end of period | | $ | 731,000 | | | $ | 910,000 | | | $ | 415,000 | | | $ | 731,000 | |
The second reserve is an allowance for doubtful accounts for estimated losses resulting from the failure of the Company’s customers to make required payments. This allowance reduces trade accounts receivable to an amount expected to be collected. Based on historical percentages of uncollectible accounts by aging category, changes in payment history, and facts and circumstances regarding specific accounts that become known to management when evaluating the adequacy of the allowance for doubtful accounts, the Company determines a percentage based on the age of the receivable that it deems uncollectible. The allowance is then calculated by applying the appropriate percentage to each of the Company’s accounts receivable aging categories, with consideration given to individual customer account activity subsequent to the current period, including cash receipts, in determining the appropriate allowance for doubtful accounts in the current period. Any increases or decreases to this allowance are charged or credited, respectively, as a bad debt expense to general and administrative expenses. The Company generally uses an internal collection effort, which may include its sales personnel as it deems appropriate. After all internal collection efforts have been exhausted, the Company generally writes off the account receivable.
Any accounts with significant balances are reviewed separately to determine an appropriate allowance based on the facts and circumstances of the specific account. During the quarter ended September 30, 2016, the Company wrote off $815,000 in accounts receivable related to one international customer that was past due on its payment arrangement, as the Company determined that the benefits of continued collections efforts did not outweigh the costs of legal proceedings. The Company’s allowance for doubtful accounts previously included an allowance for this accounts receivable, and therefore, this write-off did not have an impact on net loss for the year ended December 31, 2016. During its review for 2014, the Company analyzed several of its slower-paying customers and determined that one customer required an additional reserve, which constitutes the majority of the reserve as of December 31, 2015 and 2014 while the Company continues its collection efforts. During its review for 2015,2016, the Company determined no additional reserves were necessary for specific accounts. Based on these criteria, management determined that allowances for doubtful accounts receivable of $1.14 million$226,000 and $1.07$1.14 million at December 31, 20152016 and 2014,2015, respectively, were required.
The following is a reconciliation of the allowance for doubtful accounts:
| | | Year Ended December 31, | | | Year Ended December 31, | |
| | | 2015 | | | 2014 | | | 2016 | | | 2015 | |
| Balance, beginning of period | | $ | 1,074,000 | | | $ | 522,000 | | | $ | 1,137,000 | | | $ | 1,074,000 | |
| Additions charged to operations | | | 89,462 | | | | 734,243 | | |
| (Reductions) additions charged to operations | | | | (73,300 | ) | | | 89,462 | |
| Write-offs, net of recoveries | | | (26,462 | ) | | | (182,243 | ) | | | (837,700 | ) | | | (26,462 | ) |
| Balance, end of period | | $ | 1,137,000 | | | $ | 1,074,000 | | | $ | 226,000 | | | $ | 1,137,000 | |
Although the Company believes that its reserves are adequate, if the financial condition of its customers deteriorates, resulting in an impairment of their ability to make payments, or if it underestimates the allowances required, additional allowances may be necessary, which would result in increased expense in the period in which such determination is made.
Inventories - Inventories are stated at the lower of cost or market on an average cost basis. Inventory costs include direct material and labor, inbound freight, purchasing and receiving costs, inspection costs, and warehousing costs. Any inventory on hand at the measurement date in excess of the Company’s current requirements based on historical and anticipated levels of sales is classified as long-term on the Company’s consolidated balance sheets. The Company’s classification of its inventory as either short or long-term inventory requires it to estimate the portion of on-hand inventory that can be realized over the next 12 months and does not include precious metal, labor, and other inventory purchases expected to be both purchased and realized in cost of sales over the next 12 months.
The Company’s work-in-process inventories include raw SiC crystals on which processing costs, such as labor and sawing, have been incurred; and components, such as metal castings and finished good moissanite jewels, that have been issued to jobs in the manufacture of finished jewelry. The Company’s moissanite jewel manufacturing process involves the production of intermediary shapes, called “preforms,” that vary depending upon the size and shape of the finished jewel. To maximize manufacturing efficiencies, preforms may be made in advance of current finished inventory needs but remain in work-in-process inventories. As of December 31, 2015 and 2014, work-in-process inventories issued to active production jobs approximated $3.02 million and $2.05 million, respectively.
All inventories are carefully reviewed for quality standards before they are entered into finished goods. As conditions warrant, the Company’s grading standards change. The Company reviews the inventory on an ongoing basis to ensure its inventory meets current quality standards.
The Company’s jewels do not degrade in quality over time and inventory generally consists of the shapes and sizes most commonly used in the jewelry industry. In addition, the majority of jewel inventory is not mounted in finished jewelry settings and is therefore not subject to fashion trends nor is obsolescence a significant factor. The Company has very small market penetration in the worldwide jewelry market, and the Company had the exclusive right in the U.S. through August 2015 and has the exclusive right in many other countries through mid-2016 to produce and sell created SiC for use in jewelry applications. During the year ended December 31, 2015, management identified an opportunity to sell approximately $2.28 million of slow-moving loose jewel inventory of less desirable quality. As a result of this sale and feedback from customers on the value of some of these goods, the Company determined a lower of cost or market reserve of $352,000 was required on some of the remaining inventory of these lower quality goods. In view of the foregoing factors, management has concluded that no excess or obsolete loose jewel inventory reserve requirements existed as of December 31, 2015 and 2014 on goods other than the lower quality goods noted previously.
The Company manufactures finished jewelry featuring moissanite. Relative to loose moissanite jewels, finished jewelry is more fashion oriented and subject to styling trends that could render certain designs obsolete. The majority of the Company’s finished jewelry featuring moissanite is held in inventory for resale and consists of such basic designs as stud earrings, solitaire and three-stone rings, pendants, and bracelets that tend not to be subject to significant obsolescence risk due to their classic styling. In addition, the Company manufactures small individual quantities of designer-inspired moissanite fashion jewelry as part of its sample line that are used in the selling process to its wholesale customers.
Prior to March 2016, the Company purchased fashion finished jewelry comprising base metals and non-precious gemstones for sale through Lulu Avenue®, the former direct-to-consumer home party division of its wholly owned operating subsidiary, Charles & Colvard Direct, LLC. This finished jewelry was fashion oriented and subject to styling trends that may change with each catalog season, of which there are several each year. Typically in the jewelry industry, slow-moving or discontinued lines are sold as closeouts or liquidated in alternative sales channels. The Company reviewed the finished jewelry inventory on an ongoing basis for any lower of cost or market and obsolescence issues. The Company identified certain fashion finished jewelry inventory that could not be sold due to damage or branding issues and established an obsolescence reserve of $164,000 and $250,000 as of December 31, 2015 and 2014, respectively, for the carrying costs in excess of any estimated scrap values. As of December 31, 2015 and 2014, the Company identified certain finished jewelry featuring moissanite that was obsolete due to damage and other factors that indicate the finished jewelry is unsaleable, and established an obsolescence reserve of $225,000 and $31,000, respectively, for the carrying costs in excess of any estimated scrap values.
Jewelry inventories consist primarily of finished goods, a portion of which the Company acquired as part of a January 2009 settlement agreement with a former manufacturer customer to reduce the outstanding receivable to the Company. Due to the lack of a plan to market this inventory at that time, a jewelry inventory reserve was established to reduce the majority of the acquired jewelry inventory value to scrap value, or the amount the Company would expect to obtain by melting the gold in the jewelry and returning to loose-jewel finished goods inventory those jewels that meet grading standards. Because the finished jewelry the Company began manufacturing in 2010 after it entered that business was made pursuant to an operational plan to market and sell the inventory, it is not subject to this reserve. This reserve was $4,000 and $101,000 as of December 31, 2015 and 2014, respectively.
The Company also maintains inventory reserves for shrinkage, recuts, and repairs. Shrinkage refers to loose jewels and finished jewelry on review with customers and vendors that may not be returned to the Company. The recuts reserve is for the projected material loss resulting from the re-cutting of damaged jewels into smaller loose jewels to remove the damage. The repairs reserve is for finished jewelry in need of repair before it can be returned to finished goods inventory and be available for sale. These reserves totaled $625,000 and $552,000 as of December 31, 2015 and 2014, respectively.
The need for adjustments to inventory reserves is evaluated on a period-by-period basis.
Property and Equipment - Property and equipment are stated at cost and are depreciated over their estimated useful lives using the straight-line method as follows:
| Machinery and equipment | 5 to 12 years |
| Computer hardware | 3 to 5 years |
| Computer software | 3 years |
| Furniture and fixtures | 5 to 10 years |
| Leasehold improvements | Shorter of the estimated useful life or the lease term |
Intangible Assets - The Company capitalizes costs associated with obtaining or defending patents issued or pending for inventions and license rights related to the manufacture of moissanite jewels. Such costs are amortized over the life of the patent, generally 17 years. The Company also capitalizes licenses it obtains for the use of certain advertising images and external costs incurred for trademarks. Such costs are amortized over the period of the license or estimated useful life of the trademark, respectively.
Impairment of Long-Lived Assets - The Company evaluates the recoverability of its long-lived assets by reviewing them for possible impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of assets to be held and used is measured by comparing the carrying amount of the asset to future net undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment is measured as the amount by which the carrying amount exceeds the fair value and is recognized as an operating expense in the period in which the determination is made. Assets to be disposed are reported at the lower of the carrying amount or fair value less costs to sell. As of December 31, 2015,2016, the Company did not identify any indicators of long-lived asset impairment.
In addition to the recoverability assessment, the Company routinely reviews the remaining estimated useful lives of its long-lived assets. Any reduction in the useful-life assumption will result in increased depreciation and amortization expense in the period when such determination is made, as well as in subsequent periods. During the year ended December 31, 2013, the useful lives of leasehold improvements associated with the Company’s then-current lease were adjusted to the length of the lease term through July 2014. The additional depreciation recognized for the year ended December 31, 2014 as a result of the shortened lives was approximately $74,000.
Revenue Recognition - Revenue is recognized when title transfers at the time of shipment from the Company’s facility or a third-party fulfillment company’s facility, excluding consignment shipments as discussed below; evidence of an arrangement exists; pricing is fixed or determinable; and collectability is reasonably assured. At the time revenue is recognized, an allowance for estimated returns is established. Any change in the allowance for returns is charged against net sales. TheFor the Company’s wholesale customers, the return policy allows for the return of loose jewels and finished jewelry for credit generally within 30 days of shipment and must be returned for a valid reason, such as quality problems or an error in shipment, withshipment. For the exception of ourCompany’s direct-to-consumer sales channels, in which a customercustomers can return their purchases for any reason.reason in accordance with the Company’s warranty policy as noted on the charlesandcolvard.com website. The Company has established an allowance for returns based on the Company’s historical return rate, which takes into account any contractual return privileges granted to the Company’s customers. Periodically, the Company ships loose jewel and finished jewelry goods to wholesale customers on consignment terms. Under these consignment terms, the customer assumes the risk of loss and has an absolute right of return for a specified period. In these instances, the Company only recognizes revenue when the contractual right of return is exhausted. Periodically, the Company ships finished goods inventory to wholesale customers on consignment terms. Under these terms, the customer assumes the risk of loss and has an absolute right of return for a specified period that typically ranges from six months to one year. The Company’s wholesale customers are generally required to make payments on consignment shipments within 60 days upon the customer informing the Company that it will keep the inventory. Accordingly, the Company does not recognize revenue on these consignment transactions until the earlier of (1) the customer informing the Company that it will keep the inventory, or (2) the expiration of the right of return period.period, or (3) the customer informing the Company that the inventory has been sold.
Cost of Goods Sold - Cost of goods sold is primarily composed of inventory sold during the period; inventory written off during the period due to ongoing quality reviews or through customer returns; salaries and payroll-related expenses for personnel involved in preparing and shipping product to customers; an allocation of shared expenses such as rent, utilities, communication expenses, and depreciation related to preparing and shipping product to customers; and outbound freight charges.
Advertising Costs - Advertising production costs are expensed as incurred. Media placement costs are expensed the first time the advertising appears.
The Company also offers a cooperative advertising program to certain of its wholesale customers that reimburses, via a credit towards future purchases, a portion of their marketing costs based on the customers’ net purchases from the Company and is subject to the customer providing documentation of all advertising performed that includes the Company’s products. For the years ended December 31, 20152016 and 2014,2015, these approximate amounts were an expense of $126,000 for 2016 and a credit of ($4,000) and $321,000, respectively,for 2015, and are included as a component of sales and marketing expenses. The credit for the year ended December 31, 2015 is a result of the decision of ourthe Company’s domestic distributors to not utilize the advertising credits wethe Company had accrued during 2014 within the allowable period that wewere reversed during the three months ended March 31, 2015.
Advertising expenses, inclusive of the cooperative advertising program, for the years ended December 31, 20152016 and 20142015 were approximately $2.59 million and $1.76 million, respectively. Included in total advertising expense are approximately $56,000 and $1.84 million, respectively.$187,000 for the years ended December 31, 2016 and 2015, respectively, related to discontinued operations.
Sales and Marketing - Sales and marketing costs are expensed as incurred. These costs include all expenses of promoting and selling the Company’s products and include such items as the salaries, payroll-related expenses, and travel of sales and marketing personnel; advertising; trade shows; market research; sales commissions; and an allocation of overhead expenses attributable to these activities. Except for an allocation to general and administrative expenses, these costs also include the operating expenses of the Company’s two wholly owned operating subsidiaries Moissanite.com,charlesandcolvard.com, LLC and, up to the time of divestiture on March 4, 2016, Charles & Colvard Direct, LLC. See Note 12, “Discontinued Operations”.
General and Administrative - General and administrative costs are expensed as incurred. These costs include the salaries and payroll-related expenses of executive, finance, information technology, and administrative personnel; legal, investor relations, and professional fees; general office and administrative expenses; Board of Directors fees; rent; bad debts; and insurance.
Research and Development - Research and development costs are expensed as incurred. These costs primarily comprise salary allocations and consultant fees associated with the study of product enhancement and manufacturing process efficiencies.
Stock-Based Compensation - The Company recognizes compensation expense for stock-based awards based on estimated fair values on the date of grant. The Company uses the Black-Scholes-Merton option pricing model to determine the fair value of stock options. The fair value of other stock-based compensation awards is determined by the market price of the Company’s common stock on the date of grant. The expense associated with stock-based compensation is recognized on a straight-line basis over the requisite service period of each award.
Fair value of stock options using the Black-Scholes-Merton option pricing model is estimated on the date of grant utilizing certain assumptions for dividend yield, expected volatility, risk-free interest rate, and expected lives of the awards, as follows:
| · | Dividend yield - Although the Company issued dividends in prior years, a dividend yield of zero is used due to the uncertainty of future dividend payments. |
| · | Expected volatility - Volatility is a measure of the amount by which a financial variable such as share price has fluctuated (historical volatility) or is expected to fluctuate (expected volatility) during a period. The Company estimates expected volatility giving primary consideration to the historical volatility of its common stock. |
| · | Risk-free interest rate - The risk-free interest rate is based on the published yield available on U.S. Treasury issues with an equivalent term remaining equal to the expected life of the stock option. |
| · | Expected lives - The expected lives of the stock options issued in 20152016 and 20142015 represent the estimated period of time until exercise or forfeiture and are based on the simplified method of using the mid-point between the vesting term and the original contractual term. Stock options issued prior to 2014 were expensed using expected lives that represented the time until exercise or forfeiture using historical information. |
The assumptions used in calculating the fair value of share-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and the Company uses different assumptions, the Company’s stock-based compensation expense could be materially different in the future. In addition, the Company is required to estimate the expected forfeiture rates of stock-based awards and only recognize expense for those shares expected to vest. In estimating the Company’s forfeiture rates, the Company analyzed its historical forfeiture rates, the remaining lives of unvested stock-based awards, and the amount of vested awards as a percentage of total awards outstanding. If the Company’s actual forfeiture rates are materially different from its estimates, or if the Company re-evaluates the forfeiture rates in the future, the stock-based compensation expense could be significantly different from what the Company has recorded in the current period.
Income Taxes - Deferred income taxes are recognized for the income tax consequences of “temporary” differences by applying enacted statutory income tax rates applicable to future years to differences between the financial statement carrying amounts and the income tax bases of existing assets and liabilities. Valuation allowances are established when necessary to reduce deferred income tax assets to the amount that is more likely than not to be realized.
Net Loss per Common Share - Basic net loss from continuing and discontinued operations per common share is computed by dividing net loss by the weighted average number of common shares outstanding during the periods. Diluted net loss from continuing and discontinued operations per common share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the periods. Common equivalent shares consist of stock options that are computed using the treasury stock method.
The following table reconciles the differences between the basic and diluted net loss per share presentations:
| | | Year Ended December 31, | | | Year Ended December 31, | |
| | | 2015 | | | 2014 | | | 2016 | | | 2015 | |
| Numerator: | | | | | | | | | | | | |
| Net loss from continuing operations | | | $ | (3,952,035 | ) | | $ | (5,087,272 | ) |
| Net loss from discontinued operations | | | | (573,726 | ) | | | (4,485,787 | ) |
| Net loss | | $ | (9,573,059 | ) | | $ | (13,097,023 | ) | | $ | (4,525,761 | ) | | $ | (9,573,059 | ) |
| | | | | | | | | | | | | | | | | |
| Denominator: | | | | | | | | | | | | | | | | |
| Weighted average common shares outstanding: | | | | | | | | | | | | | | | | |
| Basic | | | 20,407,764 | | | | 20,295,618 | | | | 20,926,120 | | | | 20,407,764 | |
| Stock options | | | - | | | | - | | | | - | | | | - | |
| Diluted | | | 20,407,764 | | | | 20,295,618 | | | | 20,926,120 | | | | 20,407,764 | |
| | | | | | | | | | | | | | | | | |
| Net loss per common share: | | | | | | | | | | | | | | | | |
| Basic | | $ | (0.47 | ) | | $ | (0.65 | ) | |
| Diluted | | $ | (0.47 | ) | | $ | (0.65 | ) | |
| Basic-continuing operations | | | $ | (0.19 | ) | | $ | (0.25 | ) |
| Basic-discontinued operations | | | | (0.03 | ) | | | (0.22 | ) |
| Basic-total | | | $ | (0.22 | ) | | $ | (0.47 | ) |
| | | | | | | | | | |
| Diluted-continuing operations | | | $ | (0.19 | ) | | $ | (0.25 | ) |
| Diluted-discontinued operations | | | | (0.03 | ) | | | (0.22 | ) |
| Diluted-total | | | $ | (0.22 | ) | | $ | (0.47 | ) |
For the years ended December 31, 20152016 and 2014,2015, stock options to purchase approximately 2.212.13 million and 1.672.44 million shares, respectively, were excluded from the computation of diluted net loss per common share because the exercise price of the stock options was greater than the average market price of the common shares or the effect of inclusion of such amounts would be anti-dilutive to net loss per common share. For the yearyears ended December 31, 2016 and 2015, 359,000 and 425,000, respectively, of restricted shares that have been issued but not yet vested have been excluded from the computation of diluted net loss per common share.
Recently Adopted/Issued Accounting Pronouncements -In May 2014, the Financial Accounting Standards Board (the “FASB”) issued a new accounting standard that supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of the new standard is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. The new standard defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. The standard is effective for annual periods beginning after December 15, 2017, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting the standard recognized at the date of adoption (which includes additional footnote disclosures). The Company is currently evaluatinghas begun reviewing its significant contracts and continues to assess the impact of the pending adoption of the standard on its consolidated financial statements and has not yet determined the method by which the Company will adopt the standard in 2018.this accounting standard.
In August 2014, the FASB issued new accounting guidance intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. Under U.S. GAAP, financial statements are prepared under the presumption that the reporting organization will continue to operate as a going concern, except in limited circumstances. The going concern basis of accounting is critical to financial reporting because it establishes the fundamental basis for measuring and classifying assets and liabilities. Currently,Prior to this accounting guidance, U.S. GAAP lackslacked guidance about management’s responsibility to evaluate whether there is substantial doubt about the organization’s ability to continue as a going concern or to provide related footnote disclosures. This new accounting guidance provides guidance to an organization’s management, with principles and definitions that are intended to reduce diversity in the timing and content of disclosures that are commonly provided by organizations today in the financial statement footnotes. This new accounting guidance is effective for annual periods ending after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016. Early application is permitted for annual or interim reporting periods for which the financial statements have not previously been issued. The Company does not expectadopted this new accounting guidance to have ain 2016, noting no material impact on its consolidated financial statements.
In July 2015, the FASB issued new accounting guidance that will require an entity to measure inventory valued under the average cost method from the lower of cost or market to the lower of cost or net realizable value, with net realizable value defined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. No other changes were made to the current guidance on inventory measurement. This guidance is effective on a prospective basis for public entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early application is permitted as of the beginning of an interim or annual reporting period. TheOn January 1, 2017, the Company doesbegan applying the inventory measurement provisions of the new ASU and such provisions are not anticipate early adoption at this time and is currently evaluatingexpected to have a material impact on the impact of this guidance on itsCompany’s consolidated financial statements.
In November 2015, the FASB issued new accounting guidance that requires that deferred tax assets and liabilities be classified as noncurrent in a classified statement of financial position. The guidance is effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Earlier application is permitted for all entities as of the beginning of an interim or annual report period. The amendments in this guidance may be applied either prospectively to all deferred tax assets and liabilities or retrospectively to all periods presented. The Company adopted this standard as of December 31, 2015 with prospective application. As a result, the Company reclassified its deferred tax assets classified as current to noncurrent and its deferred tax liabilities classified as current to noncurrent in its December 31, 2015 consolidated balance sheet. Prior balance sheets presented were retrospectively adjusted.
In February 2016, the FASB issued new guidance that establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either financing or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently evaluating the impact of its pendingexpects that upon adoption of thethis new standard, ROU assets and liabilities will be recognized in the balance sheet in amounts that will be material.
In March 2016, the FASB issued updated guidance that changes how companies account for certain aspects of share-based payment awards to employees, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as the classification of related matters in the statement of cash flows. The update is effective for the Company in the first quarter of 2017. The Company does not expect the adoption of this accounting standard to have a material impact on its consolidatedthe Company’s financial statements.
All other new and recently issued, but not yet effective, accounting pronouncements have been deemed to be not relevant to the Company and therefore are not expected to have any impact once adopted.
| 3. | SEGMENT INFORMATION AND GEOGRAPHIC DATA |
The Company reports segment information based on the “management” approach. The management approach designates the internal reporting used by management for making operating decisions and assessing performance as the source of the Company’s operating and reportable segments.
As of September 30, 2016, the Company changed the name of its wholly owned subsidiary Moissanite.com, LLC to charlesandcolvard.com, LLC.
During 2014 andIn 2015, the Company managed its business primarily through the three distribution channels that it used to sell its product lines, loose jewels and finished jewelry.jewelry, which included Charles and Colvard Direct, LLC. Accordingly, the Company determined its three operating and reportable segments to be wholesale distribution transacted through the parent entity, and the two direct-to-consumer distribution channels transacted through the Company’s wholly owned operating subsidiaries, Moissanite.com,charlesandcolvard.com, LLC and Charles & Colvard Direct, LLC. The accounting policies of these three segments are the same as those described in Note 2, “Basis of Presentation and Significant Accounting Policies.” On March 4, 2016, the Company divested its direct-to-consumer home party business previously operated through its Charles & Colvard Direct, LLC (dba Lulu Avenue®) subsidiary. Consequently, for future periodsAs a result, during the three months ended March 31, 2016, the Company will re-evaluate how it managesbegan managing its business and disclosesprimarily through its two continuing distribution channels. Accordingly, the Company is presenting segment results for the two continuing operating and reportable segments.segments within this footnote and the segment results for Charles & Colvard Direct, LLC within Note 12, “Discontinued Operations”. The accounting policies of these segments are the same as those described in Note 2, “Basis of Presentation and Significant Accounting Policies”.
The Company evaluates the financial performance of its segments based on net sales; product line gross profit, or the excess of product line sales over product line cost of goods sold; and operating income (loss). Product line cost of goods sold is defined as product cost of goods sold in each of the Company’s wholesale distribution and two direct-to-consumer distribution operating segmentssegment excluding non-capitalized expenses from the Company’s manufacturing and production control departments, comprising personnel costs, depreciation, rent, utilities, and corporate overhead allocations; freight out; inventory valuation allowance adjustments; and other inventory adjustments, comprising costs of quality issues, damaged goods, and inventory write-offs.
The Company allocates certain general and administrative expenses from its parent entity to its two direct-to-consumer distribution segmentssegment primarily based on net sales and number of employees to arrive at segment operating loss. Unallocated expenses, which also include interest and taxes, remain in the parent entity’s wholesale distribution segment.
Summary financial information by reportable segment is as follows:
| | | Year Ended December 31, 2015 | | | Year Ended December 31, 2016 | |
| | | Wholesale | | | Moissanite.com | | | Charles & Colvard Direct | | | Total | | | Wholesale | | | charlesandcolvard .com | | | Total | |
| Net sales | | | | | | | | | | | | | | | | | | | | | |
| Loose jewels | | $ | 14,581,554 | | | $ | 531,695 | | | $ | (45 | ) | | $ | 15,113,204 | | | $ | 20,929,322 | | | $ | 522,406 | | | $ | 21,451,728 | |
| Finished jewelry | | | 5,683,478 | | | | 4,896,565 | | | | 5,073,870 | | | | 15,653,913 | | | | 3,601,768 | | | | 4,114,632 | | | | 7,716,400 | |
| Total | | $ | 20,265,032 | | | $ | 5,428,260 | | | $ | 5,073,825 | | | $ | 30,767,117 | | | $ | 24,531,090 | | | $ | 4,637,038 | | | $ | 29,168,128 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Product line cost of goods sold | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Loose jewels | | $ | 9,375,195 | | | $ | 83,964 | | | $ | 65 | | | $ | 9,459,224 | | | $ | 13,851,463 | | | $ | 65,286 | | | $ | 13,916,749 | |
| Finished jewelry | | | 3,867,080 | | | | 2,429,684 | | | | 1,242,623 | | | | 7,539,387 | | | | 2,497,788 | | | | 1,651,000 | | | | 4,148,788 | |
| Total | | $ | 13,242,275 | | | $ | 2,513,648 | | | $ | 1,242,688 | | | $ | 16,998,611 | | | $ | 16,349,251 | | | $ | 1,716,286 | | | $ | 18,065,537 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Product line gross profit | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Loose jewels | | $ | 5,206,359 | | | $ | 447,731 | | | $ | (110 | ) | | $ | 5,653,980 | | | $ | 7,077,859 | | | $ | 457,120 | | | $ | 7,534,979 | |
| Finished jewelry | | | 1,816,398 | | | | 2,466,881 | | | | 3,831,247 | | | | 8,114,526 | | | | 1,103,980 | | | | 2,463,632 | | | | 3,567,612 | |
| Total | | $ | 7,022,757 | | | $ | 2,914,612 | | | $ | 3,831,137 | | | $ | 13,768,506 | | | $ | 8,181,839 | | | $ | 2,920,752 | | | $ | 11,102,591 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Operating loss | | $ | (3,736,111 | ) | | $ | (1,328,117 | ) | | $ | (4,485,787 | ) | | $ | (9,550,015 | ) | | $ | (1,603,947 | ) | | $ | (2,332,871 | ) | | $ | (3,936,818 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Depreciation and amortization | | $ | 652,326 | | | $ | 106,461 | | | $ | 104,566 | | | $ | 863,353 | | | $ | 479,517 | | | $ | 77,876 | | | $ | 557,393 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total assets | | $ | 43,881,011 | | | $ | 174,899 | | | $ | 84,928 | | | $ | 44,140,838 | | | $ | 40,167,149 | | | $ | 338,627 | | | $ | 40,505,776 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Capital expenditures | | $ | 291,372 | | | $ | 116,080 | | | $ | 20,676 | | | $ | 428,128 | | | $ | 158,702 | | | $ | 263,059 | | | $ | 421,761 | |
| | | Year Ended December 31, 2014 | |
| | | Wholesale | | | Moissanite.com | | | Charles & Colvard Direct | | | Total | |
| Net sales | | | | | | | | | | | | |
| Loose jewels | | $ | 12,324,045 | | | $ | 600,505 | | | $ | 1,820 | | | $ | 12,926,370 | |
| Finished jewelry | | | 8,452,800 | | | | 2,812,158 | | | | 1,449,321 | | | | 12,714,279 | |
| Total | | $ | 20,776,845 | | | $ | 3,412,663 | | | $ | 1,451,141 | | | $ | 25,640,649 | |
| | | | | | | | | | | | | | | | | |
| Product line cost of goods sold | | | | | | | | | | | | | | | | |
| Loose jewels | | $ | 7,458,355 | | | $ | 100,851 | | | $ | 7,623 | | | $ | 7,566,829 | |
| Finished jewelry | | | 6,584,937 | | | | 1,371,056 | | | | 472,189 | | | | 8,428,182 | |
| Total | | $ | 14,043,292 | | | $ | 1,471,907 | | | $ | 479,812 | | | $ | 15,995,011 | |
| | | | | | | | | | | | | | | | | |
| Product line gross profit | | | | | | | | | | | | | | | | |
| Loose jewels | | $ | 4,865,690 | | | $ | 499,654 | | | $ | (5,803 | ) | | $ | 5,359,541 | |
| Finished jewelry | | | 1,867,863 | | | | 1,441,102 | | | | 977,132 | | | | 4,286,097 | |
| Total | | $ | 6,733,553 | | | $ | 1,940,756 | | | $ | 971,329 | | | $ | 9,645,638 | |
| | | | | | | | | | | | | | | | | |
| Operating loss | | $ | (4,802,435 | ) | | $ | (1,265,035 | ) | | $ | (2,976,754 | ) | | $ | (9,044,224 | ) |
| | | | | | | | | | | | | | | | | |
| Depreciation and amortization | | $ | 887,287 | | | $ | 174,562 | | | $ | 46,106 | | | $ | 1,107,955 | |
| | | | | | | | | | | | | | | | | |
| Total assets | | $ | 51,183,888 | | | $ | 128,049 | | | $ | 114,460 | | | $ | 51,426,397 | |
| | | | | | | | | | | | | | | | | |
| Capital expenditures | | $ | 1,093,055 | | | $ | 1,386 | | | $ | 1,262 | | | $ | 1,095,703 | |
| | | Year Ended December 31, 2015 | |
| | | Wholesale | | | charlesandcolvard .com | | | Total | |
| Net sales | | | | | | | | | |
| Loose jewels | | $ | 14,581,554 | | | $ | 531,695 | | | $ | 15,113,249 | |
| Finished jewelry | | | 5,683,478 | | | | 4,896,565 | | | | 10,580,043 | |
| Total | | $ | 20,265,032 | | | $ | 5,428,260 | | | $ | 25,693,292 | |
| | | | | | | | | | | | | |
| Product line cost of goods sold | | | | | | | | | | | | |
| Loose jewels | | $ | 9,375,195 | | | $ | 83,964 | | | $ | 9,459,159 | |
| Finished jewelry | | | 3,867,080 | | | | 2,429,684 | | | | 6,296,764 | |
| Total | | $ | 13,242,275 | | | $ | 2,513,648 | | | $ | 15,755,923 | |
| | | | | | | | | | | | | |
| Product line gross profit | | | | | | | | | | | | |
| Loose jewels | | $ | 5,206,359 | | | $ | 447,731 | | | $ | 5,654,090 | |
| Finished jewelry | | | 1,816,398 | | | | 2,466,881 | | | | 4,283,279 | |
| Total | | $ | 7,022,757 | | | $ | 2,914,612 | | | $ | 9,937,369 | |
| | | | | | | | | | | | | |
| Operating loss | | $ | (3,736,111 | ) | | $ | (1,328,117 | ) | | $ | (5,064,228 | ) |
| | | | | | | | | | | | | |
| Depreciation and amortization | | $ | 652,326 | | | $ | 106,461 | | | $ | 758,787 | |
| | | | | | | | | | | | | |
| Total assets | | $ | 43,882,939 | | | $ | 174,899 | | | $ | 44,057,838 | |
| | | | | | | | | | | | | |
| Capital expenditures | | $ | 291,372 | | | $ | 116,080 | | | $ | 407,452 | |
A reconciliation of the Company’s product line cost of goods sold to cost of goods sold as reported in the consolidated financial statements is as follows:
| | | Year Ended December 31, | | | Year Ended December 31, | |
| | | 2015 | | | 2014 | | | 2016 | | | 2015 | |
| Product line cost of goods sold | | $ | 16,998,611 | | | $ | 15,995,011 | | | $ | 18,065,537 | | | $ | 15,755,923 | |
| Non-capitalized manufacturing and production control expenses | | | 1,388,567 | | | | 949,385 | | | | 1,427,924 | | | | 1,388,268 | |
| Freight out | | | 698,840 | | | | 284,944 | | | | 376,726 | | | | 600,751 | |
| Inventory valuation allowances | | | 436,000 | | | | 295,000 | | | | 200,000 | | | | 436,000 | |
| Other inventory adjustments | | | 1,030,689 | | | | 488,995 | | | | 331,252 | | | | 762,565 | |
| Cost of goods sold | | $ | 20,552,707 | | | $ | 18,013,335 | | | $ | 20,401,439 | | | $ | 18,943,507 | |
The Company’s net inventories by product line maintained in the parent entity’s wholesale distribution segment are as follows:
| | | December 31, | | | December 31, | |
| | | 2015 | | | 2014 | | | 2016 | | | 2015 | |
| Loose jewels | | | | | | | | | | | | |
| Raw materials | | $ | 6,741,712 | | | $ | 4,658,692 | | | $ | 2,586,045 | | | $ | 6,741,712 | |
| Work-in-process | | | 5,516,799 | | | | 5,752,103 | | | | 10,589,424 | | | | 5,516,799 | |
| Finished goods | | | 15,877,436 | | | | 21,495,873 | | | | 9,455,393 | | | | 15,877,436 | |
| Finished goods on consignment | | | 55,388 | | | | 46,284 | | | | 5,473 | | | | 55,388 | |
| Total | | $ | 28,191,335 | | | $ | 31,952,952 | | | $ | 22,636,335 | | | $ | 28,191,335 | |
| | | | | | | | | | | | | | | | | |
| Finished jewelry | | | | | | | | | | | | | | | | |
| Raw materials | | $ | 190,427 | | | $ | 258,707 | | | $ | 520,572 | | | $ | 190,427 | |
| Work-in-process | | | 514,946 | | | | 540,576 | | | | 458,702 | | | | 514,946 | |
| Finished goods | | | 3,193,569 | | | | 5,557,417 | | | | 4,081,275 | | | | 3,193,569 | |
| Finished goods on consignment | | | 200,613 | | | | 578,200 | | | | 416,305 | | | | 200,613 | |
| Total | | $ | 4,099,555 | | | $ | 6,934,900 | | | $ | 5,476,854 | | | $ | 4,099,555 | |
Supplies inventories of approximately $38,000$17,000 and $51,000$38,000 at December 31, 20152016 and 2014,2015, respectively, included in finished goods inventories in the consolidated financial statements are omitted from inventories by product line because they are used in both product lines and are not maintained separately. The Company’s twocontinuing operating subsidiaries comprising the two direct-to-consumer distribution segments carrysubsidiary carries no net inventories, and inventory is transferred without intercompany markup from the parent entity’s wholesale distribution segment as product line cost of goods sold when sold to the end consumer.
The Company recognizes sales by geographic area based on the country in which the customer is based. A portion of the Company’s international wholesale distribution segment sales represents products sold internationally that may be re-imported to U.S. retailers. Sales to international end consumers made by the Company’s two direct-to-consumer distribution segmentssegment, charlesandcolvard.com LLC, are included in U.S. sales because products are shipped and invoiced to a U.S.-based intermediary party that assumes all international shipping and credit risks. The following presents certain data by geographic area:
| | | Year Ended December 31, | | | Year Ended December 31, | |
| | | 2015 | | | 2014 | | | 2016 | | | 2015 | |
| Net sales | | | | | | | | | | | | |
| United States | | $ | 27,297,901 | | | $ | 22,101,974 | | | $ | 26,164,660 | | | $ | 22,224,076 | |
| International | | | 3,469,216 | | | | 3,538,675 | | | | 3,003,468 | | | | 3,469,216 | |
| Total | | $ | 30,767,117 | | | $ | 25,640,649 | | | $ | 29,168,128 | | | $ | 25,693,292 | |
| | | December 31, | | | December 31, | |
| | | 2015 | | | 2014 | | | 2016 | | | 2015 | |
| Property and equipment, net | | | | | | | | | | | | |
| United States | | $ | 1,615,683 | | | $ | 1,859,355 | | | $ | 1,391,116 | | | $ | 1,615,683 | |
| International | | | - | | | | - | | | | - | | | | - | |
| Total | | $ | 1,615,683 | | | $ | 1,859,355 | | | $ | 1,391,116 | | | $ | 1,615,683 | |
| | | December 31, | |
| | | 2016 | | | 2015 | |
| Intangible assets, net | | | | | | |
| United States | | $ | 8,808 | | | $ | 15,362 | |
| International | | | - | | | | 55,724 | |
| Total | | $ | 8,808 | | | $ | 71,086 | |
| | | December 31, | |
| | | 2015 | | | 2014 | |
| Intangible assets, net | | | | | | |
| United States | | $ | 15,362 | | | $ | 39,050 | |
| International | | | 55,724 | | | | 177,897 | |
| Total | | $ | 71,086 | | | $ | 216,947 | |
| 4. | FAIR VALUE MEASUREMENTS |
Under U.S. GAAP, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. U.S. GAAP also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are obtained from independent sources and can be validated by a third party, whereas unobservable inputs reflect assumptions regarding what a third party would use in pricing an asset or liability. The fair value hierarchy consists of three levels based on the reliability of inputs, as follows:
| · | Level 1 - quoted prices in active markets for identical assets and liabilities |
| · | Level 2 - inputs other than Level 1 quoted prices that are directly or indirectly observable |
| · | Level 3 - unobservable inputs that are not corroborated by market data |
The Company evaluates assets and liabilities subject to fair value measurements on a recurring and non-recurring basis to determine the appropriate level to classify them for each reporting period. This determination requires significant judgments to be made by management of the Company. The financial instruments identified as subject to fair value measurements on a recurring basis are cash and cash equivalents, trade accounts receivable, and trade accounts payable. All financial instruments are reflected in the consolidated balance sheets at carrying value, which approximates fair value due to the short-term nature of these financial instruments.
Assets that are measured at fair value on a non-recurring basis include property and equipment, leasehold improvements, and intangible assets, comprising patents, license rights, and trademarks. These items are recognized at fair value when they are considered to be impaired. As of December 31, 2015,2016, no assets were identified for impairment. Level 3 inputs are primarily based on the estimated future cash flows of the asset determined by market inquiries to establish fair market value of used machinery or future revenue expected to be generated with the assistance of patents license rights, and trademarks.
The Company’s total inventories, net of reserves, consisted of the following as of December 31, 20152016 and 2014:2015:
| | | December 31, | | | December 31, | |
| | | 2015 | | | 2014 | | | 2016 | | | 2015 | |
| Raw materials | | $ | 6,932,139 | | | $ | 4,917,399 | | | $ | 3,106,617 | | | $ | 6,932,139 | |
| Work-in-process | | | 6,031,745 | | | | 6,292,679 | | | | 11,048,126 | | | | 6,031,745 | |
| Finished goods | | | 20,441,535 | | | | 27,985,067 | | | | 15,074,896 | | | | 20,441,535 | |
| Finished goods on consignment | | | 293,001 | | | | 677,484 | | | | 467,778 | | | | 293,001 | |
| Less inventory reserves | | | (1,370,000 | ) | | | (934,000 | ) | | | (1,567,000 | ) | | | (1,370,000 | ) |
| Total | | $ | 32,328,420 | | | $ | 38,938,629 | | | $ | 28,130,417 | | | $ | 32,328,420 | |
| | | | | | | | | | | | | | | | | |
| Short-term portion | | $ | 10,739,798 | | | $ | 13,320,639 | | | $ | 9,770,206 | | | $ | 10,739,798 | |
| Long-term portion | | | 21,588,622 | | | | 25,617,990 | | | | 18,360,211 | | | | 21,588,622 | |
| Total | | $ | 32,328,420 | | | $ | 38,938,629 | | | $ | 28,130,417 | | | $ | 32,328,420 | |
Inventories are stated at the lower of cost or market on an average cost basis. Inventory costs include direct material and labor, inbound freight, purchasing and receiving costs, inspection costs, and warehousing costs. Any inventory on hand at the measurement date in excess of the Company’s current requirements based on historical and anticipated levels of sales is classified as long-term on the Company’s consolidated balance sheets. The Company’s classification of its inventory as either short- or long-term inventory requires it to estimate the portion of on-hand inventory that can be realized over the next 12 months and does not include precious metal, labor, and other inventory purchases expected to be both purchased and realized in cost of goods sold over the next 12 months.
The Company’s work-in-process inventories include raw SiC crystals on which processing costs, such as labor and sawing, have been incurred and components, such as metal castings and finished good moissanite jewels, that have been issued to jobs in the manufacture of finished jewelry. The Company’s moissanite jewel manufacturing process involves the production of intermediary shapes, called “preforms,” that vary depending upon the size and shape of the finished jewel. To maximize manufacturing efficiencies, preforms may be made in advance of current finished inventory needs but remain in work-in-process inventories. As of December 31, 2016 and December 31, 2015, work-in-process inventories issued to active production jobs approximated $7.18 million and $3.02 million, respectively.
The Company’s jewels do not degrade in quality over time and inventory generally consists of the shapes and sizes most commonly used in the jewelry industry. In addition, the majority of jewel inventory is not mounted in finished jewelry settings and is therefore not subject to fashion trends nor is obsolescence a significant factor. Presently, the Company has very small market penetration in the worldwide jewelry market, and the Company had the exclusive right in the U.S. through August 2015 and had the exclusive right in many other countries into the third quarter of 2016 to produce and sell created SiC for use in jewelry applications. During the years ended December 31, 2016 and 2015, management identified an opportunity to sell approximately $6.77 million and $2.28 million, respectively, of legacy loose jewel inventory of less desirable quality. As a result of these sales and feedback from customers on the value of some of these goods, the Company determined a lower of cost or market reserve of $517,000 and $352,000 as of December 31, 2016 and December 31, 2015, respectively, was required on some of the remaining inventory of these lower quality goods.
The Company manufactures finished jewelry featuring moissanite. Relative to loose moissanite jewels, finished jewelry is more fashion oriented and subject to styling trends that could render certain designs obsolete. The majority of the Company’s finished jewelry featuring moissanite is held in inventory for resale and consists of such basic designs as stud earrings, solitaire and three-stone rings, pendants, and bracelets that tend not to be subject to significant obsolescence risk due to their classic styling. In addition, the Company manufactures small individual quantities of designer-inspired moissanite fashion jewelry as part of its sample line that are used in the selling process to its wholesale customers.
Prior to March 2016, the Company purchased fashion finished jewelry comprising base metals and non-precious gemstones for sale through Lulu Avenue®, the Company’s former direct-to-consumer home party division of the Company’s wholly owned operating subsidiary, Charles & Colvard Direct, LLC. This finished jewelry was fashion oriented and subject to styling trends that could change with each catalog season, of which there are generally two each year. Typically, in the jewelry industry, slow-moving or discontinued lines are sold as closeouts or liquidated in alternative sales channels. Management reviews the finished jewelry inventory on an ongoing basis for any lower of cost or market and obsolescence issues. Management identified certain fashion finished jewelry inventory that could not be sold due to damage or branding issues and established an obsolescence reserve of $169,000 as of December 31, 2016 and $164,000 as of December 31, 2015, for the carrying costs in excess of any estimated scrap values. As of December 31, 2016 and December 31, 2015, management identified certain finished jewelry featuring moissanite that was obsolete due to damage and other factors that indicate the finished jewelry is unsaleable, and established an obsolescence reserve of $258,000 and $225,000, respectively, for the carrying costs in excess of any estimated scrap values.
Periodically, the Company ships finished goods inventory to wholesale customers on consignment terms. Under these terms, the customer assumes the risk of loss and has an absolute right of return for a specified period. Finished goods on consignment at December 31, 20152016 and 2014December 31, 2015 are net of shrinkage reserves of $37,000$46,000 and $53,000,$36,000, respectively, to allow for certain loose jewels and finished jewelry on consignment with wholesale customers that may not be returned or may be returned in a condition that does not meet the Company’s current grading or quality standards.
Total net loose jewel inventories at December 31, 2016 and December 31, 2015, including inventory on consignment net of reserves, were $22.64 million and $28.19 million, respectively. The loose jewel inventories at December 31, 2016 and December 31, 2015 include shrinkage reserves of $67,000 and $50,000, respectively, which includes $7,000 and $10,000 of shrinkage reserves on inventory on consignment at December 31, 2016 and December 31, 2015, respectively. Loose jewel inventories at December 31, 2016 and December 31, 2015 also include recut reserves of $425,000 and $449,000, respectively.
Total net loose jewel inventories at December 31, 2015 and 2014, including inventory on consignment net of reserves, were $28.19 million and $31.95 million, respectively. The loose jewel inventories at December 31, 2015 and 2014 include shrinkage reserves of $50,000 and $17,000, respectively, which includes $10,000 and $17,000 of shrinkage reserves on inventory on consignment at December 31, 2015 and 2014, respectively. Loose jewel inventories at December 31, 2015 and 2014 also include recut reserves of $449,000 and $216,000, respectively. During the year ended December 31, 2015, management identified an opportunity to sell approximately $2.28 million of slow-moving loose jewel inventory of less desirable quality. As a result of this sale and feedback from customers on the value of some of these goods, the Company determined a lower of cost or market reserve of $352,000 was required on some of the remaining inventory of these lower quality goods. In view of the foregoing factors, management has concluded that no excess or obsolete loose jewel inventory reserve requirements existed as of December 31, 2015 and 2014 on goods other than the lower quality goods noted previously.
Total net jewelry inventories at December 31, 20152016 and 2014,December 31, 2015, including inventory on consignment net of reserves, finished jewelry featuring moissanite manufactured by the Company, since entering the finished jewelry business in 2010, and fashion finished jewelry purchased and owned by the Company which was made for sale through Lulu Avenue®, were $5.48 million and $4.10 million, and $6.93 million, respectively. Jewelry inventories consist primarily of finished goods, a portion of which the Company acquired as part of a January 2009 settlement agreement with a former manufacturer customer to reduce the outstanding receivable to the Company. Due to the lack of a plan to market this inventory at that time, a jewelry inventory reserve was established to reduce the majority of the acquired jewelry inventory value to scrap value, or the amount the Company would expect to obtain by melting the gold in the jewelry and returning to loose-jewel finished goods inventory those jewels that meet grading standards. The scrap reserve established for this acquired inventory at the time of the agreement is adjusted at each reporting period for the market price of gold and has generally declined as the associated jewelry is sold down. At December 31, 2015, the balance decreased to $4,000 from $101,000 at December 31, 2014 as a result of melting a majority of the jewelry, some sell down of the inventory during the year, and change in gold prices. Because the finished jewelry the Company began manufacturing in 2010 after it entered that business was made pursuant to an operational plan to market and sell the inventory, it is not subject to this reserve. The finished jewelry inventories at December 31, 20152016 and 2014December 31, 2015 also include shrinkage reserves of $95,000$102,000 and $192,000,$95,000, respectively, including shrinkage reserves of $27,000$39,000 and $36,000$27,000 on inventory on consignment, respectively; and a repairs reserve of $31,000$29,000 and $127,000,$31,000, respectively.
The need for adjustments to inventory reserves is evaluated on a period-by-period basis.
Property and equipment consists of the following:
| | | December 31, | | | December 31, | |
| | | 2015 | | | 2014 | | | 2016 | | | 2015 | |
| Computer software | | $ | 1,771,102 | | | $ | 1,622,806 | | | $ | 1,192,922 | | | $ | 1,771,102 | |
| Machinery and equipment | | | 922,532 | | | | 818,362 | | | | 956,050 | | | | 922,532 | |
| Computer hardware | | | 855,348 | | | | 750,776 | | | | 874,347 | | | | 855,348 | |
| Leasehold improvements | | | 1,030,423 | | | | 1,002,357 | | | | 1,083,634 | | | | 1,030,423 | |
| Furniture and fixtures | | | 302,064 | | | | 259,944 | | | | 309,046 | | | | 302,064 | |
| Total | | | 4,881,469 | | | | 4,454,245 | | | | 4,415,999 | | | | 4,881,469 | |
| Less accumulated depreciation | | | (3,265,786 | ) | | | (2,594,890 | ) | | | (3,024,883 | ) | | | (3,265,786 | ) |
| Property and equipment, net | | $ | 1,615,683 | | | $ | 1,859,355 | | | $ | 1,391,116 | | | $ | 1,615,683 | |
Depreciation expense for the years ended December 31, 20152016 and 20142015 was approximately $528,000 and $672,000, respectively.
Included in total depreciation expense are approximately $26,000 and $946,000, respectively.$98,000 for the years ended December 31, 2016 and 2015, respectively, related to discontinued operations.
Intangible assets consist of the following:
| | | | December 31, | | | Weighted Average Amortization | |
| | December 31, | | | Weighted Average Amortization Period | | Period |
| | | 2015 | | | 2014 | | | (in Years) | | | 2016 | | | 2015 | | | (in Years) | |
| Patents | | $ | 958,604 | | | $ | 912,862 | | | | 0.4 | | | $ | 958,604 | | | $ | 958,604 | | | | 0.4 | |
| Trademarks | | | 50,208 | | | | 50,208 | | | | 1.8 | | | | 55,824 | | | | 50,208 | | | | 1.8 | |
| License rights | | | 6,718 | | | | 6,718 | | | | 0.0 | | | | 6,718 | | | | 6,718 | | | | 0.0 | |
| Total | | | 1,015,530 | | | | 969,788 | | | | | | | | 1,021,146 | | | | 1,015,530 | | | | | |
| Less accumulated amortization | | | (944,444 | ) | | | (752,841 | ) | | | | | | | (1,012,338 | ) | | | (944,444 | ) | | | | |
| Intangible assets, net | | $ | 71,086 | | | $ | 216,947 | | | | | | | $ | 8,808 | | | $ | 71,086 | | | | | |
Amortization expense for the years ended December 31, 20152016 and 20142015 was approximately $192,000$68,000 and $162,000,$192,000, respectively. Amortization expense on existing intangible assets is estimated to be $63,000$8,000 for 2017, and $1,000 for 2018.
Included in total amortization expense are approximately $13,000 and $6,700 for the years ended December 31, 2016 and $8,000 for 2017.2015, respectively, related to discontinued operations.
| 8. | COMMITMENTS AND CONTINGENCIES |
Lease Commitments
In March 2004, the Company entered into a seven-year lease, beginning in August 2004, for approximately 16,500 square feet of mixed-use space from an unaffiliated third-party at a base cost with escalations throughout the lease term plus additional common-area expenses based on the Company’s proportionate share of the lessor’s operating costs. The lease provided for two rent holidays, during which no rent was payable, and a moving allowance. In January 2011, the Company amended the lease effective January 1, 2011 to extend the term through January 2017 in exchange for a reduced rental rate and 50% rent abatement in the first 12 months of the extended term. The amended lease included 3% annual rent escalations and a one-time option to terminate the lease effective as of July 31, 2014. The Company exercised this right to terminate the lease by giving notice to the lessor prior to October 31, 2013. The cost to terminate the lease effective July 31, 2014 was approximately $112,000, which the Company paid at the time notice was given to terminate the lease. This amount reflects all unamortized lease transaction costs, including, without limitation, all rent abated since January 1, 2011, plus two months’ rent at the then-current rental rate. On December 9, 2013, the Company entered into a Lease Agreement, as amended on December 23, 2013 and April 15, 2014 (the “Lease Agreement”), for a new corporate headquarters, which occupies approximately 36,350 square feet of office, storage, and light manufacturing space. The Company took possession of the leased property on May 23, 2014 once certain improvements to the leased space were completed, and did not have access to the property before this date. These improvements and other lease signing and moving incentives offered by the landlord totaled approximately $550,000 and $73,000, respectively, which will be amortized over the life of the lease until October 31, 2021. Included in the Lease Agreement is a seven-month rent abatement period effective June 2014 through December 2014.
The Company recognizes rent expense on a straight-line basis, giving consideration to the rent holidays and escalations, the lease signing and moving allowance to be paid to the Company, and the rent abatement.
As of December 31, 2015,2016, the Company’s future minimum payments under the operating leases were as follows:
| 2016 | | $ | 569,138 | | |
| | | | | |
| 2017 | | | 584,789 | | | $ | 584,789 | |
| 2018 | | | 600,871 | | | | 600,871 | |
| 2019 | | | 617,395 | | | | 617,395 | |
| 2020 | | | 634,373 | | | | 634,373 | |
| Thereafter | | | 541,957 | | |
| 2021 | | | | 541,957 | |
| Total | | $ | 3,548,523 | | | $ | 2,979,385 | |
Rent expense for the years ended December 31, 20152016 and 20142015 was approximately $539,000 and $504,000, respectively.
Included in total rent expense are approximately $40,000 and $373,000, respectively.$66,000 for the years ended December 31, 2016 and 2015, respectively, related to discontinued operations.
Purchase Commitments
On June 6, 1997, the Company entered into an amended and restated exclusive supply agreement with Cree, Inc. (“Cree”). The exclusive supply agreement had an initial term of ten years that was extended in January 2005 to July 2015. In connection with the amended and restated exclusive supply agreement, the Company committed to purchase from Cree a minimum of 50%, by dollar volume, of its raw material SiC crystal requirements. If the Company’s orders required Cree to expand beyond specified production levels, the Company committed to purchase certain minimum quantities. Effective February 8, 2013, the Company entered into an amendment to a prior letter agreement with Cree, which provided a framework for the Company’s purchases of SiC crystals under the amended and restated exclusive supply agreement. Pursuant to this amendment, the Company agreed to purchase at least $4.00 million of SiC crystals in an initial new order. After the initial new order, the Company agreed to issue non-cancellable, quarterly orders that must equal or exceed a set minimum order quantity. The total purchase commitment under the amendment (as subsequently amended) until July 2015, including the initial new order, was dependent upon the grade of the material and ranged between approximately $7.64 million and approximately $18.56 million.
On December 12, 2014, the Company entered into a new exclusive supply agreement (the “Supply Agreement”) with Cree, (the “New Supply Agreement”Inc. (“Cree”), which superseded and replaced (with respect to materials ordered subsequent to the effective date of the New Supply Agreement) the exclusive supply agreement that was set to expire in 2015. Under the New Supply Agreement, subject to certain terms and conditions, the Company agreed to exclusively purchase from Cree, and Cree agreed to exclusively supply, 100% of the Company’s required SiC materials in quarterly installments that must equal or exceed a set minimum order quantity. The initial term of the New Supply Agreement will expire on June 24, 2018, unless extended by the parties. The Company also has one option to unilaterally extend the term of the agreement for an additional two-year period, subject to certain conditions. The Company’s total purchase commitment under the New Supply Agreement until June 2018 is dependent upon the size of the SiC material and ranges between approximately $29.6$29.60 million and approximately $31.5$31.50 million. As of December 31, 2016, the Company’s remaining purchase commitment through June 2018 under the Supply Agreement ranges from approximately $14.54 million to approximately $16.44 million.
During the year ended December 31, 20152016 and 2014,2015, the Company purchased approximately $6.86$8.20 million and $5.84$6.86 million, respectively, of SiC crystals from Cree.
On September 20, 2013, the Company obtained a $10,000,000 revolving line of credit (the “Line of Credit”) from PNC Bank, National Association (“PNC Bank”) for general corporate and working capital purposes. The Line of Credit was evidenced by a Committed Line of Credit Note, dated September 20, 2013 (the “Note”), which was set to mature on June 15, 2015. The interest rate under the Note was the one-month LIBOR rate (adjusted daily) plus 1.50%, calculated on an actual/360 basis.
The Line of Credit was also governed by a loan agreement, dated September 20, 2013, and was guaranteed by Charles & Colvard Direct, LLC, and Moissanite.com, LLC. The Line of Credit was secured by a lien on substantially all assets of the Company and its subsidiaries.
Effective June 25, 2014, the Line of Credit was terminated concurrent with the Company entering into a new banking relationship with Wells Fargo Bank, National Association (“Wells Fargo”). The Company had not utilized the Line of Credit. The Company recognized the remaining $19,000 of deferred legal expenses associated with this Line of Credit upon termination.
On June 25, 2014, the Company and its wholly owned subsidiaries, Charles & Colvard Direct, LLC, and Moissanite.com, LLC (now charlesandcolvard.com, LLC) (collectively, the “Borrowers”), obtained a $10,000,000 asset-backed revolving credit facility (the “Credit Facility”) from Wells Fargo.Fargo Bank, National Association (“Wells Fargo”). The Credit Facility will be used for general corporate and working capital purposes, including transaction fees and expenses incurred in connection therewith and the issuance of letters of credit up to a $1,000,000 sublimit. The Credit Facility will mature on June 25, 2017.
The Credit Facility includes a $5,000,000 sublimit for advances that are supported by a 90% guaranty provided by the U.S. Export-Import Bank. Advances under the Credit Facility are limited to a borrowing base, which is computed by applying specified advance rates to the value of the Borrowers’ eligible accounts and inventory, less reserves. Advances against inventory are further subject to an initial $3,000,000 maximum. The Borrowers must maintain a minimum of $1,000,000 in excess availability at all times. There are no other financial covenants.
Each advance accrues interest at a rate equal to Wells Fargo’s 3-month LIBOR rate plus 2.50%, calculated on an actual/360 basis and payable monthly in arrears. Principal outstanding during an event of default accrues interest at a rate of 3% in excess of the above rate. Any advance may be prepaid in whole or in part at any time. In addition, the maximum line amount may be reduced by the Company in whole or part at any time, subject to a fee equal to 2% of any reduction in the first year after closing, 1% of any reduction in the second year after closing, and 0% thereafter. There are no mandatory prepayments or line reductions.
The Credit Facility is secured by a lien on substantially all assets of the Borrowers, each of which is jointly and severally liable for all obligations thereunder. Wells Fargo’s security interest in certain SiC materials is subordinate to Cree’s security interest in such materials pursuant to the New Supply Agreement and an Intercreditor Agreement with Wells Fargo.
The Credit Facility is evidenced by a credit and security agreement, dated as of June 25, 2014, andas amended as of September 16, 2014 and December 12, 2014 (collectively, the(the “Credit Agreement”), and customary ancillary documents. The Credit Agreement contains customary covenants, representations and cash dominion provisions, including a financial reporting covenant and limitations on dividends, distributions, debt, contingent obligations, liens, loans, investments, mergers, acquisitions, divestitures, subsidiaries, affiliate transactions, and changes in control.
Events of default under the Credit Facility include, without limitation, (1) any impairment of the Export-Import Bank guaranty, unless the guaranteed advances are repaid within two business days, (2) an event of default under any other indebtedness of the Borrowers in excess of $200,000, and (3) a material adverse change in the ability of the Borrowers to perform their obligations under the Credit Agreement or in the Borrowers’ assets, liabilities, businesses or prospects, or other circumstances that Wells Fargo believes may impair the prospect of repayment. If an event of default occurs, Wells Fargo is entitled to take enforcement action, including acceleration of amounts due under the Credit Agreement and foreclosure upon collateral.
The Credit Agreement contains other customary terms, including indemnity, expense reimbursement, yield protection, and confidentiality provisions. Wells Fargo is permitted to assign the Credit Facility.
As of December 31, 2015,2016, the Company had not borrowed against the Credit Facility.
| 10. | SHAREHOLDERS’ EQUITY AND STOCK-BASED COMPENSATION |
Common Stock
The Company is authorized to issue 50,000,000 shares of common stock, no par value. As of December 31, 20152016 and 2014,2015, it had 21,111,58521,369,885 and 20,382,33321,111,585 shares of common stock outstanding, respectively. Holders of common stock are entitled to one vote for each share held.
In November 2009, the Board of Directors authorized a repurchase program for up to 1,000,000 shares of the Company’s common stock. On August 6, 2013, the Board authorized the extension of the Company’s share repurchase program for an additional 12 months. The program, which was originally authorized on November 13, 2009, authorized the Company to repurchase up to 1,000,000 shares of the Company’s common stock until August 12, 2014 in open market or in privately negotiated transactions. The Company expected to use available cash to finance these purchases and would determine the timing and amount of stock repurchases based on the Company’s evaluation of market conditions, the market price of the Company’s common stock, and management’s assessment of the Company’s liquidity and cash flow needs. The Company had no obligations to repurchase shares under the program and the program could be suspended or terminated at any time. The Company did not repurchase any shares under this program during the year ended December 31, 2014. The Company did not extend the plan past its expiration due to covenants within the Credit Facility described in Note 9, “Line of Credit.”
Preferred Stock
The Board of Directors is authorized, without further shareholder approval, to issue up to 10,000,000 shares of preferred stock, no par value. The preferred stock may be issued from time to time in one or more series. No shares of preferred stock had been issued as of December 31, 2015.2016.
Equity Compensation Plans
1997 Omnibus Stock Plan
In 1997, the Company adopted the 1997 Omnibus Stock Plan of Charles & Colvard, Ltd. (the “1997 Omnibus Plan”). The 1997 Omnibus Plan authorized the Company to grant stock options, stock appreciation rights, and restricted stock awards (collectively, “awards”) to selected employees, independent contractors, and directors of the Company and related corporations in order to promote a closer identification of their interests with those of the Company and its shareholders. All stock options granted under the 1997 Omnibus Plan have an exercise price equal to the market price of the Company’s common stock on the date the stock option was granted. Stock options granted to employees under the 1997 Omnibus Plan generally vest over three years and have terms of up to 10 years, with the exception of stock options granted in 2005 under the Executive Compensation Plan (which is governed by and subject to the 1997 Omnibus Plan) that vested immediately and stock options granted in 2006 under the Executive Compensation Plan that vested at the end of three years. Stock options granted to the Board of Directors under the 1997 Omnibus Plan generally vested over one year and have terms of up to 10 years. The terms of stock options granted to independent contractors varied depending on the specific grant, but the terms are no longer than 10 years. Restricted stock awards granted to members of the Board of Directors vested at the end of one year. The 1997 Omnibus Plan expired (with respect to future grants) on September 30, 2007. As of December 31, 20152016 and 2014,2015, there were 5400 and 11,776540 stock options outstanding under the 1997 Omnibus Plan, respectively.
2008 Stock Incentive Plan
In May 2008, the shareholders of the Company approved the adoption of the Charles & Colvard, Ltd. 2008 Stock Incentive Plan, as amended on March 31, 2015 and approved by the shareholders of the Company on May 20, 2015 (theand further amended on March 15, 2016 and approved by the shareholders of the Company on May 18, 2016 (the “2008 Plan”), which replaced the 1997 Omnibus Plan. The 2008 Plan authorizes the Company to grant stock options, stock appreciation rights, restricted stock, and other equity awards to selected employees, directors, and independent contractors. The aggregate number of shares of the Company’s common stock that may be issued pursuant to awards granted under the 2008 Plan shall not exceed the sum of 4,500,0006,000,000 plus any shares of common stock subject to an award granted under the 1997 Omnibus Plan or any other stock incentive plan maintained by the Company prior to the 2008 Plan (each, a “Prior Plan”) that is forfeited, cancelled, terminated, expires, or lapses for any reason without the issuance of shares pursuant to the award, or shares subject to an award granted under a Prior Plan which shares are forfeited to, or repurchased or reacquired by, the Company. Stock options granted to employees under the 2008 Plan generally vest over threefour years and have terms of up to 10 years. The vesting schedules and terms of stock options granted to independent contractors vary depending on the specific grant, but the terms are no longer than 10 years. Restricted stock awards granted to members of the Board of Directors vest at the end of one year on the date of the Annual Meeting of Shareholders. The vesting schedules of restricted stock awards granted to employees or independent contractors vary depending on the specific grant but are generally threefour years or less. Only stock options and restricted stock have been granted under the 2008 Plan. As of December 31, 20152016 and 2014,2015, there were 2,212,1602,134,898 and 1,654,1702,441,077 stock options outstanding under the 2008 Plan, respectively.
Stock-Based Compensation
The following table summarizes the components of the Company’s stock-based compensation included in net loss:
| | | Year Ended December 31, | | | Year Ended December 31, | |
| | | 2015 | | | 2014 | | | 2016 | | | 2015 | |
| Employee stock options | | $ | 697,269 | | | $ | 840,568 | | | $ | 383,778 | | | $ | 697,269 | |
| Consultant stock options | | | 257,342 | | | | - | | | | 170,622 | | | | 257,342 | |
| Restricted stock awards | | | 816,286 | | | | 846,955 | | | | 448,906 | | | | 816,286 | |
| Total | | $ | 1,770,897 | | | $ | 1,687,523 | | | $ | 1,003,306 | | | $ | 1,770,897 | |
Due to the Company’s valuation allowance against deferred tax assets as discussed further in Note 11, “Income Taxes,”Taxes”, the income tax benefits for 20152016 and 20142015 were fully reserved.
No stock-based compensation was capitalized as a cost of inventory during the years ended December 31, 2016 and 2015.
Included in total stock-based compensation are approximately $44,000 and $226,000 for the years ended December 31, 2016 and 2015, and 2014.respectively, related to discontinued operations.
Stock Options
The following is a summary of the stock option activity for the years ended December 31, 20152016 and 2014:2015:
| | | Shares | | | Weighted Average Exercise Price | | | Shares | | | Weighted Average Exercise Price | |
| Outstanding, December 31, 2013 | | | 1,204,297 | | | $ | 3.14 | | |
| Granted | | | 535,000 | | | $ | 2.49 | | |
| Exercised | | | - | | | $ | - | | |
| Forfeited | | | (30,775 | ) | | $ | 2.51 | | |
| Expired | | | (42,576 | ) | | $ | 3.64 | | |
| Outstanding, December 31, 2014 | | | 1,665,946 | | | $ | 2.93 | | | | 1,665,571 | | | $ | 2.93 | |
| Granted | | | 1,413,765 | | | $ | 1.28 | | | | 1,413,765 | | | $ | 1.28 | |
| Exercised | | | (241,752 | ) | | $ | 0.71 | | | | (241,752 | ) | | $ | 0.71 | |
| Forfeited | | | (132,731 | ) | | $ | 3.08 | | | | (129,434 | ) | | $ | 3.08 | |
| Expired | | | (492,528 | ) | | $ | 3.17 | | | | (267,073 | ) | | $ | 3.17 | |
| Outstanding, December 31, 2015 | | | 2,212,700 | | | $ | 2.06 | | | | 2,441,077 | | | $ | 2.11 | |
| Granted | | | | 591,005 | | | $ | 1.14 | |
| Exercised | | | | (2,500 | ) | | $ | 0.92 | |
| Forfeited | | | | (449,122 | ) | | $ | 1.43 | |
| Expired | | | | (445,562 | ) | | $ | 2.09 | |
| Outstanding, December 31, 2016 | | | | 2,134,898 | | | $ | 1.99 | |
The weighted average grant date fair value of stock options granted during the years ended December 31, 2016 and 2015 was $0.63 and 2014 was $0.72, and $1.67, respectively. The total fair value of stock options that vested during the years ended December 31, 20152016 and 20142015 was approximately $862,000$780,000 and $805,000,$862,000, respectively. The fair value of each stock option is estimated on the date of grant using the Black-Scholes-Merton option pricing model with the following weighted average assumptions for stock options granted during the years ended December 31, 20152016 and 2014:2015:
| | | Year Ended December 31, | |
| | | 2015 | | | 2014 | |
| Dividend yield | | | 0.0 | % | | | 0.0 | % |
| Expected volatility | | | 63.8 | % | | | 81.1 | % |
| Risk-free interest rate | | | 1.64 | % | | | 1.77 | % |
| Expected lives (years) | | | 5.7 | | | | 5.8 | |
| | | Year Ended December 31, | |
| | | 2016 | | | 2015 | |
| Dividend yield | | | 0.0 | % | | | 0.0 | % |
| Expected volatility | | | 62.2 | % | | | 63.8 | % |
| Risk-free interest rate | | | 1.42 | % | | | 1.64 | % |
| Expected lives (years) | | | 5.6 | | | | 5.7 | |
The following table summarizes information about stock options outstanding at December 31, 2015:2016:
| Options Outstanding | | | Options Exercisable | | | Options Vested or Expected to Vest | |
Balance as of 12/31/2015 | | Weighted Average Remaining Contractual Life (Years) | | | Weighted Average Exercise Price | | | Balance as of 12/31/2015 | | | Weighted Average Remaining Contractual Life (Years) | | | Weighted Average Exercise Price | | | Balance as of 12/31/2015 | | | Weighted Average Remaining Contractual Life (Years) | | | Weighted Average Exercise Price | |
| 2,212,700 | | | 8.26 | | | $ | 2.06 | | | | 1,008,577 | | | | 7.03 | | | $ | 2.47 | | | | 2,113,395 | | | | 8.21 | | | $ | 2.08 | |
| Options Outstanding | | | Options Exercisable | | | Options Vested or Expected to Vest | |
Balance as of 12/31/2016 | | | Weighted Average Remaining Contractual Life (Years) | | | Weighted Average Exercise Price | | | Balance as of 12/31/2016 | | | Weighted Average Remaining Contractual Life (Years) | | | Weighted Average Exercise Price | | | Balance as of 12/31/2016 | | | Weighted Average Remaining Contractual Life (Years) | | | Weighted Average Exercise Price | |
| | 2,134,898 | | | | 6.71 | | | $ | 1.99 | | | | 1,477,644 | | | | 5.65 | | | $ | 2.30 | | | | 2,041,970 | | | | 6.60 | | | $ | 2.02 | |
As of December 31, 2015,2016, the unrecognized stock-based compensation expense related to unvested stock options was approximately $891,000,$323,000, which is expected to be recognized over a weighted average period of approximately 20 months.
The aggregate intrinsic value of stock options outstanding, exercisable, and vested or expected to vest at December 31, 20152016 was approximately $13,000 for each. These amounts are$18,000. This amount is before applicable income taxes and representrepresents the closing market price of the Company’s common stock at December 31, 20152016 less the grant price, multiplied by the number of stock options that had a grant price that is less than the closing market price. This amount represents the amount that would have been received by the optionees had these stock options been exercised on that date. During the years ended December 31, 20152016 and 2014,2015, the aggregate intrinsic value of stock options exercised was approximately $167,000$0 and $0,$167,000, respectively.
Restricted Stock
The following is a summary of the restricted stock activity for the years ended December 31, 20152016 and 2014:2015:
| | | Shares | | | Weighted Average Grant Date Fair Value | | | Shares | | | Weighted Average Grant Date Fair Value | |
| Unvested, December 31, 2013 | | | 350,903 | | | $ | 4.26 | | |
| Granted | | | 185,032 | | | $ | 2.09 | | |
| Vested | | | (248,929 | ) | | $ | 3.77 | | |
| Canceled | | | - | | | $ | - | | |
| Unvested, December 31, 2014 | | | 287,006 | | | $ | 3.29 | | | | 287,006 | | | $ | 3.29 | |
| Granted | | | 487,500 | | | $ | 1.38 | | | | 487,500 | | | $ | 1.38 | |
| Vested | | | (349,506 | ) | | $ | 2.36 | | | | (349,506 | ) | | $ | 2.36 | |
| Canceled | | | - | | | $ | - | | | | - | | | $ | - | |
| Unvested, December 31, 2015 | | | 425,000 | | | $ | 1.87 | | | | 425,000 | | | $ | 1.87 | |
| Granted | | | | 509,250 | | | $ | 0.93 | |
| Vested | | | | (321,400 | ) | | $ | 2.00 | |
| Canceled | | | | (253,450 | ) | | $ | 1.18 | |
| Unvested, December 31, 2016 | | | | 359,400 | | | $ | 0.91 | |
The unvested restricted shares as of December 31, 20152016 are all performance-based restricted shares that will vest, subject to achievement of performance goals, on March 17, 2016.4, 2017. As of December 31, 2015,2016, the estimated unrecognized stock-based compensation expense related to these unvested restricted shares subject to the achievement of performance goals was approximately $295,000,$78,000, all of which is expected to be recognized over a weighted average period of approximately fourtwo months.
Dividends
The Company has not paid any cash dividends during the years ended December 31, 20152016 and 2014.2015.
The Company accounts for income taxes under the liability method. Under the liability method, deferred income taxes are recognized for the income tax consequences of “temporary differences” by applying enacted statutory income tax rates applicable to future years to differences between the financial statement carrying amounts and the income tax bases of existing assets and liabilities.
Income tax net expense comprises the following:
| | | Year Ended December 31, | | | Year Ended December 31, | |
| | | 2015 | | | 2014 | | | 2016 | | | 2015 | |
| Current: | | | | | | | | | | | | |
| Federal | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
| State | | | (12,821 | ) | | | (7,749 | ) | | | (13,480 | ) | | | (12,821 | ) |
| Total | | | (12,821 | ) | | | (7,749 | ) | | | (13,480 | ) | | | (12,821 | ) |
| | | | | | | | | | | | | | | | | |
| Deferred: | | | | | | | | | | | | | | | | |
| Federal | | | - | | | | (3,691,163 | ) | | | - | | | | - | |
| State | | | - | | | | (353,051 | ) | | | - | | | | - | |
| Total | | | - | | | | (4,044,214 | ) | | | - | | | | - | |
| Income tax net expense | | $ | (12,821 | ) | | $ | (4,051,963 | ) | | $ | (13,480 | ) | | $ | (12,821 | ) |
Significant components of the Company’s deferred income tax assets are as follows:
| | | December 31, | | | December 31, | |
| | | 2015 | | | 2014 | | | 2016 | | | 2015 | |
| | | | | | | | | | | | | |
| Reserves and accruals | | $ | 1,578,374 | | | $ | 1,472,997 | | | $ | 1,053,863 | | | $ | 1,578,374 | |
| Prepaid expenses | | | (50,966 | ) | | | (48,427 | ) | | | (43,774 | ) | | | (50,966 | ) |
| Federal NOL carryforwards | | | 6,762,537 | | | | 4,185,179 | | | | 8,530,493 | | | | 6,762,537 | |
| State NOL carryforwards | | | 583,651 | | | | 616,655 | | | | 615,919 | | | | 583,651 | |
| Hong Kong NOL carryforwards | | | 995,566 | | | | 995,566 | | | | 995,566 | | | | 995,566 | |
| Federal benefit on state taxes under uncertain tax positions | | | 132,385 | | | | 128,026 | | | | 136,969 | | | | 132,385 | |
| Stock-based compensation | | | 481,917 | | | | 189,045 | | | | 342.294 | | | | 481,917 | |
| Investment loss | | | - | | | | 9,373 | | |
| Research tax credit | | | 434,637 | | | | 434,637 | | | | 434,637 | | | | 434,637 | |
| Alternative minimum tax credit | | | 348,264 | | | | 348,264 | | | | 348,264 | | | | 348,264 | |
| Contributions carryforward | | | 33,582 | | | | 3,929 | | | | 35,100 | | | | 33,582 | |
| Depreciation | | | (312,023 | ) | | | (418,154 | ) | | | (286,608 | ) | | | (312,023 | ) |
| Accrued rent | | | 254,404 | | | | 297,362 | | | | 216,432 | | | | 254,404 | |
| Loss on impairment of long-lived assets | | | 52,226 | | | | 53,533 | | | | 53,042 | | | | 52,226 | |
| Valuation allowance | | | (11,294,554 | ) | | | (8,267,985 | ) | | | (12,432.197 | ) | | | (11,294,554 | ) |
| Total | | | - | | | | - | | | | - | | | | - | |
| Total deferred income tax assets, net | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
A reconciliation between expected income taxes, computed at the statutory federal income tax rate of 34% applied to pretax accounting loss, and the income tax net expense included in the consolidated statements of operations for the years ended December 31, 20152016 and 20142015 is as follows:
| | | Year Ended December 31, | | | Year Ended December 31, | |
| | | 2015 | | | 2014 | | | 2016 | | | 2015 | |
| Anticipated income tax benefit at statutory rate | | $ | 3,315,420 | | | $ | 3,075,321 | | | $ | 1,534,176 | | | $ | 3,315,420 | |
| State income tax benefit, net of federal tax effect | | | 35,814 | | | | 215,109 | | | | (9,350 | ) | | | 35,814 | |
| Capital loss carryforward expiration | | | (9,227 | ) | | | - | | | | - | | | | (9,227 | ) |
| Income tax effect of uncertain tax positions | | | (8,461 | ) | | | (8,080 | ) | | | (8,896 | ) | | | (8,461 | ) |
| Return to provision adjustments | | | (82,341 | ) | | | (2,751 | ) | | | (23,070 | ) | | | (82,341 | ) |
| Stock-based compensation | | | (215,030 | ) | | | (279,985 | ) | | | (110,066 | ) | | | (215,030 | ) |
| Other changes in deferred income tax assets, net | | | (22,414 | ) | | | 25,493 | | | | (13,118 | ) | | | (22,414 | ) |
| Increase in valuation allowance | | | (3,026,582 | ) | | | (7,077,070 | ) | | | (1,383,156 | ) | | | (3,026,582 | ) |
| Income tax net expense | | $ | (12,821 | ) | | $ | (4,051,963 | ) | | $ | (13,480 | ) | | $ | (12,821 | ) |
As of each reporting date, management considers new evidence, both positive and negative, that could impact its view with regard to future realization of deferred tax assets. Management had previously considered various strategic alternatives that would reduceAs of December 31, 2016 and December 31, 2015, the Company’s pre-tax operating losses, resulting in management determining that a valuation allowance was not necessary at March 31, 2014. During the three months ended June 30, 2014, management determined that such strategic alternatives were no longer in the Company’s best interest. Accordingly, management concluded that the positive evidence was no longer sufficient to offset available negative evidence primarily as a result of the pre-tax operating losses incurred during the six months ended June 30, 2014, and forecastedcontinued to continue through the remainder of 2014. As a result, management concluded thatexist to conclude it was uncertain that the Company would have sufficient future taxable income to utilize its deferred tax assets, and therefore, management establishedthe Company maintained a valuation allowance against the Company’sits deferred tax assets resulting in a tax expenseassets.
59
As of December 31, 2015,2016, the Company had approximately $882,000 of remaining federal income tax credits, $533,000 of which expire between 2018 and 2021 and the balance without an expiration, which can be carried forward to offset future income taxes. As of December 31, 2015,2016, the Company had federal tax net operating loss carryforwards under U.S. GAAP of approximately $19.89$25.13 million, expiring between 2020 and 2035,2036, which can be used to offset against future federal taxable income,income; North Carolina tax net operating loss carryforwards across all of the entities of approximately $18.05$20.25 million expiring between 2023 and 2030,2031; and various other state tax net operating loss carryforwards expiring between 20162021 and 2035,2036, which can be used to offset against future state taxable income.
As of December 31, 2015,2016, there was approximately $6.03 million in net operating loss carryforwards in Hong Kong. In accordance with the Hong Kong tax code, these amounts can be carried forward indefinitely to offset future taxable income in Hong Kong. The Company’s deferred tax assets in Hong Kong were fully reserved with a valuation allowance of $996,000 as of December 31, 20152016 and 20142015 and had been fully reserved in all prior periods due to the uncertainty of future taxable income in this jurisdiction to utilize the deferred tax assets.
Uncertain Tax Positions
The gross liability for income taxes associated with uncertain tax positions at December 31, 20152016 was approximately $519,000.$532,000. This amount is shown net of approximately $98,000 recorded as a direct reduction to the associated deferred tax asset. The gross liability, if recognized, would favorably affect the Company’s effective tax rate.
The Company’s policy for recording interest and penalties associated with tax audits is to record such items as a component of the provision for income taxes. For each of the years ended December 31, 20152016 and 2014,2015, the Company accrued approximately $13,000 and $12,000, respectively, of interest and penalties associated with uncertain tax positions. Including the interest and penalties recorded for uncertain tax positions, there is a total of approximately $152,000 and $139,000$165,000 of interest and penalties included in the accrued income tax liability for uncertain tax positions at each of December 31, 20152016 and 2014, respectively.2015. To the extent interest and penalties are not ultimately incurred with respect to uncertain tax positions, amounts accrued will be reduced and reflected as a reduction of the overall income tax provision.
In all of the significant federal and state jurisdictions where it is required to file income tax returns, the Company has analyzed filing positions for all tax years in which the statute of limitations is open. The only periods subject to examination by the major tax jurisdictions where the Company does business are the 20122013 through 20142015 tax years. The Company does not believe that the outcome of any examination will have a material impact on its consolidated financial statements and does not expect settlement on any uncertain tax positions within the next 12 months.
The following summarizes the activity related to the Company’s gross liability for uncertain tax positions from January 1, 20142015 through December 31, 2015:2016:
| Balance as of January 1, 2015 | | $ | 506,463 | |
| Increases related to prior year tax positions | | | 12,821 | |
| Balance as of December 31, 2015 | | | 519,284 | |
| Increases related to prior year tax positions | | | 13,480 | |
| Balance as of December 31, 2016 | | $ | 532,764 | |
| 12. | DISCONTINUED OPERATIONS |
| Balance as of January 1, 2014 | | $ | 494,222 | |
| Increases related to prior year tax positions | | | 12,241 | |
| Balance as of December 31, 2014 | | | 506,463 | |
| Increases related to prior year tax positions | | | 12,821 | |
| Balance as of December 31, 2015 | | $ | 519,284 | |
On March 4, 2016, the Company and Charles & Colvard Direct, LLC (“Direct”) a wholly owned subsidiary of the Company, entered into an asset purchase agreement (the “Purchase Agreement”) with Yanbal, pursuant to which Yanbal agreed to purchase certain assets of Direct (the “Transferred Assets”). The transactions contemplated by the Purchase Agreement also closed on March 4, 2016 (the “Closing Date”). The Company determined that the sale of these assets represented a strategic shift that will have a major effect on the Company’s operations and financial results. The Company made the decision to divest of these assets after careful analysis of the Company’s core competencies, go-to-market strategies, and intent to advance toward profitability.
Pursuant to the terms of the Purchase Agreement, the Transferred Assets included, among other things, (i) an inventory credit to be used towards $250,000 in existing non-moissanite and moissanite inventory as of the Closing Date, consisting of Direct’s current jewelry offered under the “Lulu Avenue” trademarks, (ii) all existing marketing collateral such as packaging and catalogs for Direct’s current jewelry offered under the “Lulu Avenue” trademarks as of the Closing Date, (iii) certain assigned contracts, (iv) style advisor and customer lists, and (v) all intellectual property rights owned by the Company and Direct and used solely in connection with the operation of Direct’s direct-to-consumer home party business for the sale of fashion jewelry and related products and services in the United States, excluding the “Lulu Avenue” and “Love Knot” trademarks and other “Lulu Avenue” specific intellectual property such as the domain name www.luluavenue.com and all content located on such website (the “Lulu Intellectual Property”). The inventory credit and an exclusive, nontransferable license to use the Lulu Intellectual Property that was also granted to Yanbal on the Closing Date expired on July 31, 2016. After the Closing Date, the Company and Direct may not engage in the direct-to-consumer home party business and may not solicit style advisors or customers of the direct-to-consumer home party business. The Company had also agreed to provide to Yanbal certain transition services, which services ended August 31, 2016.
The purchase price for the Transferred Assets was $500,000 with selling expenses of approximately $131,000, resulting in a net purchase price of approximately $369,000. The Company recorded a liability associated with $35,000 of expense related to certain style advisor incentives and reduced prepaid expenses by $60,000 related to contracts acquired by Yanbal.
The following table presents the major classes of line items constituting assets and liabilities related to discontinued operations:
| | | December 31, 2016 | | | December 31, 2015 | |
| Prepaid expenses and other assets | | $ | - | | | $ | 83,000 | |
| Total assets | | $ | - | | | $ | 83,000 | |
| Accounts payable | | $ | - | | | $ | 140,000 | |
| Accrued expenses and other liabilities | | | - | | | | 209,000 | |
| Total liabilities | | $ | - | | | $ | 349,000 | |
The following table presents the major classes of line items constituting pretax loss from discontinued operations:
| | | Year Ended December 31, | |
| | | 2016 | | | 2015 | |
| Net sales | | $ | 804,585 | | | $ | 5,073,825 | |
| Costs and expenses: | | | | | | | | |
| Cost of goods sold | | | 276,100 | | | | 1,609,200 | |
| Sales and marketing | | | 940,685 | | | | 6,598,122 | |
| General and administrative | | | 173,913 | | | | 1,352,290 | |
| Interest expense | | | 11 | | | | - | |
| Total costs and expenses | | | 1,390,709 | | | | 9,559,612 | |
| Loss from discontinued operations | | | (586,124 | ) | | | (4,485,787 | ) |
| Other income: | | | | | | | | |
| Gain on sale of long-term assets | | | 12,398 | | | | - | |
| Total other income, net | | | 12,398 | | | | - | |
| Pretax loss from discontinued operations | | $ | (573,726 | ) | | $ | (4,485,787 | ) |
12.13. | MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK |
At times, a portion of the Company’s accounts receivable will be due from customers that have individual balances in excess of 10% or more of the Company’s total net accounts receivable. The following is a summary of customers that represent greater than10% or equal to 10%more of total net accounts receivable as of December 31, 20152016 and 2014:2015:
| | | Year Ended December 31, | |
| | | 2015 | | | 2014 | |
| Customer A | | | 17 | % | | | 28 | % |
| Customer B | | | 14 | % | | | 10 | % |
| Customer C | | | 11 | % | | | * | |
| Customer D | | | 10 | % | | | * | |
| | December 31, 2016 | | | December 31, 2015 | |
| Customer A | | | 13 | % | | | ** | % |
| Customer B | | | * | % | | | 17 | % |
| Customer C | | | * | % | | | 14 | % |
| Customer D | | | * | % | | | 11 | % |
| Customer E | | | * | % | | | 10 | % |
*Customers B, C, D, and DE did not have individual balances that represented a significant portion10% or more of total net accounts receivable as of December 31, 2014.2016.
** Customer A did not have an individual balance that represented 10% or more of the total net accounts receivable as of December 31, 2015.
A significant portion of sales is derived from certain customer relationships. The following is a summary of customers that represent greater than or equal to 10% of total gross sales:sales for the years ended December 31, 2016 and 2015:
| | | Year Ended December 31, | |
| | | 2015 | | | 2014 | |
| Customer A | | | 21 | % | | | 28 | % |
| Customer B | | | -1 | % | | | 10 | % |
| | | Year Ended December 31, | |
| | | 2016 | | | 2015 | |
| Customer D | | | 23 | % | | | 25 | % |
| Customer F | | | 17 | % | | | 11 | % |
The Company records its sales return allowance at the corporate level based on several factors including historical sales return activity and specific allowances for known customer returns. For this disclosure, the Company reports the customer activity without effect of specific sales return allowances. Customer B returned goods in excess of its purchases during the year ended December 31, 2015; however, these returns did not affect current period revenue as these returns had been specifically reserved as of December 31, 2014. As these returns were received from Customer B, the Company reduced its sales return allowance related to these returns.
13.14. | EMPLOYEE BENEFIT PLAN |
All full-time employees who meet certain age and length of service requirements are eligible to participate in the Company’s 401(k) Plan. The plan provides for matching contributions by the Company in such amounts as the Board of Directors may annually determine, as well as a 401(k) option under which eligible participants may defer a portion of their salaries. The Company contributed a total of $120,000$102,000 and $129,000$120,000 to the plan during the years ended December 31, 2016 and 2015, and 2014, respectively.
On February 4, 2016, the Company’s Board of Directors made the strategic decision to explore a potential divestiture of the direct-to-consumer home party business operated through Charles & Colvard Direct, LLC. After careful analysis of the Company’s core competencies, go-to-market strategies, and intent to advance toward profitability, the management team and Board of Directors determined a divestiture of this distribution channel to be in both the Company’s and its shareholders’ best interests.
On March 4, 2016, the Company and Charles & Colvard Direct, LLC entered into an asset purchase agreement with Yanbal, pursuant to which Yanbal agreed to purchase certain assets of Charles & Direct, LLC (the “Transferred Assets”). The transactions contemplated by the asset purchase agreement also closed on March 4, 2016 (the “Closing Date”).
Pursuant to the terms of the asset purchase agreement, the Transferred Assets included, among other things, (i) an inventory credit to be used towards $250,000 in existing non-moissanite and moissanite inventory as of the Closing Date, consisting of Charles & Colvard Direct, LLC’s current jewelry offered under the “Lulu Avenue” trademarks, (ii) all existing marketing collateral such as packaging and catalogs for Charles & Colvard Direct, LLC’s current jewelry offered under the “Lulu Avenue” trademarks as of the Closing Date, (iii) certain assigned contracts, (iv) style advisor and customer lists, and (v) all intellectual property rights owned by the Company and Charles & Colvard Direct, LLC and used solely in connection with the operation of Charles & Colvard Direct, LLC’s direct-to-consumer home party business of the sale of fashion jewelry and related products and services in the United States, excluding the “Lulu Avenue” and “Love Knot” trademarks and other “Lulu Avenue” specific intellectual property such as the domain name www.luluavenue.com and all content located on such website (the “Lulu Intellectual Property”). The inventory credit and an exclusive, nontransferable license to use the Lulu Intellectual Property that was also granted to Yanbal on the Closing Date will expire on July 31, 2016. After the Closing Date, the Company and Charles & Colvard Direct, LLC may not engage in the direct-to-consumer home party business and may not solicit style advisors or customers of the direct-to-consumer home party business. The Company has also agreed to provide to Yanbal certain transition services.
The purchase price for the Transferred Assets was $500,000, and Yanbal assumed certain liabilities related to the Transferred Assets. The Purchase Agreement contains various representations, warranties, covenants, and indemnities that are customary for a transaction of this nature.
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
None.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Interim Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2015.2016. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on such evaluation, our Chief Executive Officer and InterimChief Financial Officer concluded that, as of December 31, 2015,2016, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
We routinely review our internal control over financial reporting and from time to time make changes intended to enhance the effectiveness of our internal control over financial reporting. We will continue to evaluate the effectiveness of our disclosure controls and procedures and internal control over financial reporting on an ongoing basis and will take action as appropriate. During the three months ended December 31, 2015,2016, we made no changes to our internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, that we believe materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal control system was designed to provide reasonable assurance to our management and Board of Directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Our internal control over financial reporting includes those policies and procedures that:
| (i) | pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; |
| (ii) | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and |
| (iii) | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements. |
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to the reliability of financial reporting and the preparation of financial statements.
In making the assessment of internal control over financial reporting, our management used the criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013). Based on that assessment and those criteria, management determined that our internal control over financial reporting was effective as of December 31, 2015.2016.
ApprovalAgreement with Former Chief Revenue Officer
In connection with the departure of Steve Larkin, our former Chief Revenue Officer, on January 10, 2017, we have entered into a Separation of Employment Agreement, or the Separation Agreement, with Mr. Larkin dated March 9, 2017. The terms of the Separation Agreement provide that Mr. Larkin has the right to revoke the Separation Agreement until March 29, 2017.
Under the Separation Agreement, in exchange for a standard release of employment claims, Mr. Larkin is entitled to receive severance in an amount equal to $125,000 (less applicable withholdings) on the first payroll date following March 19, 2017, and $65,000 (less applicable withholdings) payable in installments over three months. We will also pay a lump sum for COBRA premiums (less an amount equal to the active employee contribution, if any) for coverage of Mr. Larkin and his eligible dependents for six months if Mr. Larkin timely and properly elects continuation coverage. We have agreed to accelerate the vesting of 25,000 options previously granted to Mr. Larkin and to extend the exercise period of all of Mr. Larkin’s outstanding options to January 10, 2022. We have also agreed to waive the forfeiture of 75,000 shares of restricted stock previously granted to Mr. Larkin and to cause the restrictions on such restricted stock to lapse effective January 10, 2017. The Separation Agreement contains certain confidentiality provisions and other customary terms and conditions. All of Mr. Larkin’s obligations under his Employment Agreement with the Company, dated May 6, 2013, as amended, regarding confidentiality, non-competition, proprietary information, publication, and related matters will continue, except that the Separation Agreement slightly modified the non-competition provision.
Vesting of Awards Granted Under 2016 Senior Management Equity Incentive Program
On March 4, 2016,9, 2017, the Compensation Committee of our Board approved the vesting of certain restricted stock awards granted under the Charles & Colvard, Ltd. 2016 Senior Management Equity Incentive Program, or the 2016 Program, with effect as of January 1, 2016.Program. The 2016 Program supersedes and replaces all prior long-term incentive plans or programs.
The 2016 Program provides a long-term incentive opportunity for our executive officers and vice presidents, orprovided that vesting of the Eligible Employees, through grants of restricted stock awards with both performance and service measures. Achievement of an Eligible Employee’s performance measures will be measured by the Compensation Committee as follows: (i) 50% of each restricted stock award will bewas based on the achievement of both shared company goals, regarding revenue, EBITDA and departmental budgets, or the Company Measures, and (ii) 50% of each restricted stock award will be based on the achievement of individual performance goals, or the Personal Measures, both for the period from January 1, 2016 to December 31, 2016. We must achieve 100%and that certain of the Company Measures must be achieved in order for 50% vesting of the restricted stock award. Forawards to vest.
The Compensation Committee determined that, while the remaining 50% vesting of the restricted stock award, an Eligible Employee may achieve from 0% to 100% of his or her Personal Measures, and 50% of the amount of his or her restricted stock award will be reduced by any performance that is measured below 100% accordingly. If certain EBITDA or revenue thresholds are not achieved, 100% of the restricted stock awards will be forfeited. The Personal Measures and Company Measures are determined byhad not been achieved, the Compensation Committee and may be modified byhad not considered the Compensation Committee to reflect certain typesimpact of eventsthe sale of Lulu Avenue on the Company Measures. Therefore, as permitted by our 2008 Stock Incentive Plan, or the 2008 Plan. In addition, an Eligible Employee must remain in continuous service until March 4, 2017 for restrictions to fully lapse.
Under the 2016 Program, the Compensation Committee hasexercised its discretion to permit the vesting of the restricted stock awards based on the achievement of Personal Measures alone. As a result, the Compensation Committee approved the lapse of restrictions on a total of 124,200 shares of restricted stock granted under the Chief Executive Officer2016 Program, including 67,500 of the 150,000 shares of restricted stock granted to Suzanne Miglucci, our Chief Executive Officer. The remainder of the original awards of restricted stock was forfeited. Clint Pete, our Interim Chief Financial Officer, and Chief Revenue Officer 75,000 shares of restricted stock, and each Vice President 35,000 shares of restricted stock. The 2016 Program also provides the Compensation Committee discretionwas not eligible to make additional equity compensation awards above the target award levelparticipate in recognition of extraordinary performance. All awards granted pursuant to the 2016 Program are issued under and pursuantas he was appointed to his current position too late in the 2008 Plan and subject to the terms of our standard performance-based restricted stock award agreement.year.
Receipt of NASDAQ Deficiency Letter
On March 7, 2016, we received a notification letter from NASDAQ’s Listing Qualifications Department indicating that we are not in compliance with NASDAQ Listing Rule 5450(a)(1), because the minimum bid price of our common stock on the NASDAQ Global Select Market has closed below $1.00 per share for 30 consecutive business days. The notification letter has no immediate effect on the NASDAQ listing or trading in our common stock.
In accordance with NASDAQ Listing Rule 5810(c)(3)(A), we have 180 calendar days, or until September 6, 2016, to regain compliance with the minimum $1.00 bid price per share requirement. To regain compliance, any time before September 6, 2016, the bid price of our common stock must close at $1.00 per share or more for a minimum of 10 consecutive business days.
If we do not regain compliance by September 6, 2016, we expect that NASDAQ will provide written notification to us that our common stock will be delisted. At that time, we may appeal NASDAQ’s delisting determination to a NASDAQ hearing panel. Alternatively, we may be eligible to transfer to The NASDAQ Capital Market in order to receive an additional 180-day grace period if we satisfy all of the requirements, other than the minimum bid price requirement, for listing on The NASDAQ Capital Market.
We intend to actively monitor the bid price of our common stock and will consider available options to regain compliance with the listing requirements.
Title Change of Chief Operating Officer
On March 8, 2016, Steve Larkin’s title changed from Chief Operating Officer to Chief Revenue Officer.
PART III
| Item 10. | Directors, Executive Officers and Corporate Governance |
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
| Item 13. | Certain Relationships and Related Transactions, and Director Independence |
| Item 14. | Principal Accounting Fees and Services |
The information called for in Items 10 through 14 is incorporated by reference from our definitive Proxy Statement relating to our 20162017 Annual Meeting of Shareholders, which will be filed with the SEC within 120 days after the end of fiscal 2015.2016.
PART IV
| Item 15. | Exhibits, Financial Statement Schedules |
(a)(1) and (2). The consolidated financial statements and report of our independent registered public accounting firm are filed as part of this report (see “Index to Financial Statements,” at Part II, Item 8). The financial statement schedules are not included in this Item as they are either not applicable or the information is otherwise included in the consolidated financial statements or the notes to the consolidated financial statements.
(a)(3). The following exhibits have been or are being filed herewith and are numbered in accordance with Item 601 of Regulation S-K:
Exhibit No. | Description |
| | |
| 2.1 | Asset Purchase Agreement, effective March 4, 2016, by and among Yanbal USA, Inc., Charles & Colvard, Ltd., and Charles & Colvard Direct, LLC (incorporated herein by reference to Exhibit 2.1 to our Current Report on Form 8-K, as filed with the SEC on March 8, 2016) |
| | |
| 2.2 | List of Schedules Omitted from Asset Purchase Agreement included as Exhibit 2.1 above (incorporated herein by reference to Exhibit 2.2 to our Current Report on Form 8-K, as filed with the SEC on March 8, 2016) |
| | |
| 3.1 | Restated Articles of Incorporation of Charles & Colvard, Ltd. (incorporated herein by reference to Exhibit 3.1 to our Annual Report on Form 10-K for the year ended December 31, 2004) |
| | |
| 3.2 | Bylaws of Charles & Colvard, Ltd., as amended and restated, effective May 19, 2011 (incorporated herein by reference to Exhibit 3.1 to our Current Report on Form 8-K, as filed with the SEC on May 24, 2011) |
| |
| 4.1 | Specimen Certificate of Common Stock (incorporated herein by reference to Exhibit 4.1 to our Annual Report on Form 10-K for the year ended December 31, 1998) |
| | |
| 10.1 | Amended and Restated Exclusive Supply Agreement, dated as of June 6, 1997, between Cree Research, Inc. and C3, Inc. (incorporated herein by reference to Exhibit 10.11 to our Registration Statement on Form S-1 (File No. 333-36809), as filed with the SEC on September 30, 1997)* |
| |
10.2 | Notice of Extension of Amended and Restated Exclusive Supply Agreement, dated January 6, 2005, from Charles & Colvard, Ltd. to Cree, Inc. (incorporated herein by reference to Exhibit 10.69 to our Current Report on Form 8-K, as filed with the SEC on January 7, 2005) |
10.3 | Letter Agreement, dated January 31, 1996, between Cree Research, Inc. and C3, Inc. (incorporated herein by reference to Exhibit 10.14 to our Registration Statement on Form S-1 (File No. 333-36809), as filed with the SEC on September 30, 1997)* |
| |
10.4 | Letter Agreement, dated November 12, 2007, between Cree, Inc. and Charles & Colvard, Ltd. (incorporated herein by reference to Exhibit 10.108 to our Current Report on Form 8-K, as filed with the SEC on November 13, 2007)* |
| |
10.5 | Letter Agreement, dated September 18, 2008, between Cree, Inc. and Charles & Colvard, Ltd. (incorporated herein by reference to Exhibit 10.123 to our Current Report on Form 8-K, as filed with the SEC on September 24, 2008) |
| |
10.6 | Letter Agreement, effective March 22, 2010, between Cree, Inc. and Charles & Colvard, Ltd. (incorporated herein by reference to Exhibit 10.6 to our Annual Report on Form 10-K for the year ended December 31, 2009)* |
| |
10.7 | Amendment to Letter Agreement, effective February 8, 2013, between Charles & Colvard, Ltd. and Cree, Inc. (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K, as filed with the SEC on February 14, 2013)* |
| |
10.8 | Second Amendment to Letter Agreement, dated September 5, 2013, between Charles & Colvard, Ltd. and Cree, Inc. (incorporated by reference to Exhibit 10.4 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2013)* |
| |
10.9 | Exclusive Supply Agreement, dated as of December 12, 2014, by and among Charles & Colvard, Ltd., Cree, Inc. and, solely for purposes of Section 6(c) of the Exclusive Supply Agreement, Charles & Colvard Direct, LLC and Moissanite.com,moissanite.com, LLC (incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K, as filed with the SEC on December 16, 2014)* |
| | |
10.1010.2 | Letter Agreement, dated February 9, 2005 and effective February 21, 2005, between The Bell Group, d/b/a Rio Grande and Charles & Colvard, Ltd. (incorporated herein by reference to Exhibit 10.73 to our Current Report on Form 8-K, as filed with the SEC on February 23, 2005)* |
| | |
10.1110.3 | Letter Agreement, effective July 11, 2008, between Samuel Aaron Inc. and Charles & Colvard, Ltd. (incorporated herein by reference to Exhibit 10.120 to our Current Report on Form 8-K, as filed with the SEC on July 17, 2008)* |
| | |
10.1210.4 | Licensing Agreement, dated July 11, 2008, by and between Charles and Colvard, Ltd. and Samuel Aaron Inc. (incorporated herein by reference to Exhibit 10.121 to our Current Report on Form 8-K, as filed with the SEC on July 17, 2008) |
| | |
10.13 | Loan Agreement, dated September 20, 2013, between Charles & Colvard, Ltd. and PNC Bank, National Association (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K, as filed with the SEC on September 24, 2013) |
| |
10.14 | Committed Line of Credit Note, dated September 20, 2013, by Charles & Colvard, Ltd. in favor of PNC Bank, National Association (incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K, as filed with the SEC on September 24, 2013) |
| |
10.1510.5 | Credit and Security Agreement, dated as of June 25, 2014, by and among Charles & Colvard, Ltd., Charles & Colvard Direct, LLC, Moissanite.com,moissanite.com, LLC, and Wells Fargo Bank, National Association (incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K, as filed with the SEC on June 30, 2014) |
| | |
10.1610.6 | First Amendment to Credit and Security Agreement, dated as of September 16, 2014, by and among Charles & Colvard, Ltd., Charles & Colvard Direct, LLC, Moissanite.com, LLC, and Wells Fargo Bank, National Association (incorporated herein by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2014) |
10.17 | |
| 10.7 | Second Amendment to Credit and Security Agreement, dated as of December 12, 2014, by and among Charles & Colvard, Ltd., Charles & Colvard Direct, LLC, Moissanite.com, LLC, and Wells Fargo Bank, National Association (incorporated herein by reference to Exhibit 10.3 to our Current Report on Form 8-K, as filed with the SEC on December 16, 2014) |
| | |
10.1810.8 | Third Amendment to Credit and Security Agreement and Other Loan Documents, dated as of September 23, 2016, by and among Charles & Colvard, Ltd., Charles & Colvard Direct, LLC, Moissanite.com, LLC, to be known as charlesandcolvard.com, LLC, and Wells Fargo Bank, National Association (incorporated herein by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2016) |
| |
| 10.9 | Intercreditor Agreement, dated as of December 12, 2014, by and among Charles & Colvard, Ltd., Charles & Colvard Direct, LLC, Moissanite.com, LLC, Cree, Inc., and Wells Fargo Bank, National Association (incorporated herein by reference to Exhibit 10.2 to our Current Report on Form 8-K, as filed with the SEC on December 16, 2014) |
| | |
10.19 | Lease Agreement, dated March 26, 2004, by and between Duke Realty Limited Partnership and Charles & Colvard, Ltd. (incorporated herein by reference to Exhibit 10.62 to our Quarterly Report on Form 10-Q for the quarter ended March 31, 2004) |
| |
10.20 | First Lease Amendment, dated September 22, 2004, by and between Duke Realty Limited Partnership and Charles & Colvard, Ltd. (incorporated herein by reference to Exhibit 10.17 to our Annual Report on Form 10-K for the year ended December 31, 2010) |
| |
10.21 | Second Amendment to Lease Agreement, dated July 30, 2010, by and between Raleigh Flex Owner I, LLC and Charles & Colvard, Ltd. (incorporated herein by reference to Exhibit 10.18 to our Annual Report on Form 10-K for the year ended December 31, 2010) |
| |
10.22 | Third Amendment to Lease Agreement, dated January 1, 2011, by and between Raleigh Flex Owner I, LLC and Charles & Colvard, Ltd. (incorporated herein by reference to Exhibit 10.19 to our Annual Report on Form 10-K for the year ended December 31, 2010) |
| |
10.2310.10 | Lease Agreement, dated December 9, 2013, between Charles & Colvard, Ltd. and Southport Business Park Limited Partnership (incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K, as filed with the SEC on December 12, 2012)* |
| | |
10.2410.11 | First Amendment to Lease, dated December 23, 2013, between Charles & Colvard, Ltd. and Southport Business Park Limited Partnership (incorporated herein by reference to Exhibit 10.20 to our Annual Report on Form 10-K for the year ended December 31, 2013) |
| | |
10.2510.12 | Second Amendment to Lease, dated April 15, 2014, between Charles & Colvard, Ltd. and Southport Business Park Limited Partnership (incorporated herein by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2014) |
| |
10.26 | Board Compensation Program, effective March 16, 2011 (incorporated herein by reference to Exhibit 10.21 to our Annual Report on Form 10-K for the year ended December 31, 2010)+ |
| |
10.27 | Board Compensation Program, effective May 21, 2014 (incorporated herein by reference to Exhibit 10.22 to our Annual Report on Form 10-K for the year ended December 31, 2013)+ |
| |
10.2810.13 | Board Compensation Program, effective January 1, 2015 (incorporated herein by reference to Exhibit 10.28 to our Annual Report on Form 10-K for the year ended December 31, 2014)+ |
| | |
10.2910.14 | Board Compensation Program, effective January 1, 2016 (incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K, as filed with the SEC on September 10, 2015)+ |
| | |
10.3010.15 | Charles & Colvard, Ltd. 2008 Stock Incentive Plan, as amended (incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K, as filed with the SEC on May 21, 2015)20, 2016)+ |
| | |
10.3110.16 | Form of Restricted Stock Award Agreement under the Charles & Colvard, Ltd. 2008 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.115 to our Current Report on Form 8-K, as filed with the SEC on June 2, 2008)+ |
10.32 | |
| 10.17 | Form of Employee Incentive Stock Option Agreement under the Charles & Colvard, Ltd. 2008 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.116 to our Current Report on Form 8-K, as filed with the SEC on June 2, 2008)+ |
| | |
10.3310.18 | Form of Employee Nonqualified Stock Option Agreement under the Charles & Colvard, Ltd. 2008 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.118 to our Current Report on Form 8-K, as filed with the SEC on June 2, 2008)+ |
| | |
10.3410.19 | Form of Director Nonqualified Stock Option Agreement under the Charles & Colvard, Ltd. 2008 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.119 to our Current Report on Form 8-K, as filed with the SEC on June 2, 2008)+ |
| | |
10.3510.20 | Form of Director Nonqualified Stock Option Agreement under the Charles & Colvard, Ltd. 2008 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.28 to our Annual Report on Form 10-K for the year ended December 31, 2013)+ |
| | |
10.36 | Charles & Colvard, Ltd. Short-Term Incentive Plan, effective January 1, 2014 (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K, as filed with the SEC on April 21, 2014)+
|
| |
10.37 | Charles & Colvard, Ltd. Long-Term Incentive Program, effective January 1, 2014 (incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K, as filed with the SEC on April 21, 2014)+ |
| |
10.3810.21 | Form of Restricted Stock Award Agreement pursuant to the Charles & Colvard, Ltd. Long-Term Incentive Program (incorporated herein by reference to Exhibit 10.3 to our Current Report on Form 8-K, as filed with the SEC on April 21, 2014)+ |
| | |
10.3910.22 | Form of Employee Nonqualified Stock Option Agreement pursuant to the Charles & Colvard, Ltd. Long-Term Incentive Program (incorporated herein by reference to Exhibit 10.4 to our Current Report on Form 8-K, as filed with the SEC on April 21, 2014)+ |
| | |
10.4010.23 | Form of Restricted Stock Award Agreement (Performance-Based) under the Charles & Colvard, Ltd. 2008 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.4 to our Current Report on Form 8-K, as filed with the SEC on March 23, 2015)+ |
| | |
10.4110.24 | Charles & Colvard, Ltd. 2015 Senior Management Equity Incentive Program, effective January 1, 2015 (incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K, as filed with the SEC on May 8, 2015)+ |
| | |
10.4210.25 | Charles & Colvard, Ltd. 2016 Senior Management Equity Incentive Program, effective January 1, 2016+2016 (incorporated herein by reference to Exhibit 10.42 to our Annual Report on Form 10-K for the year ended December 31, 2015)+ |
| | |
10.4310.26 | Form of Indemnification Agreement (incorporated herein by reference to Exhibit 10.109 to our Current Report on Form 8-K, as filed with the SEC on December 10, 2007)+ |
| | |
10.44 | Employment Agreement, effective as of November 5, 2009, by and between Charles & Colvard, Ltd. and Randy N. McCullough (incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K, as filed with the SEC on November 12, 2009)+ |
| |
10.4510.27 | Employment Agreement, effective as of May 6, 2013, by and between Charles & Colvard, Ltd. and Steve Larkin (incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K, as filed with the SEC on April 22, 2013)+ |
| |
10.4610.28 | First Amendment to Employment Agreement, dated March 8, 2016, by and between Charles & Colvard, Ltd. and Steve Larkin+Larkin (incorporated herein by reference to Exhibit 10.46 to our Annual Report on Form 10-K for the year ended December 31, 2015)+ |
10.47 | |
| 10.29 | Employment Agreement, effective as of August 5, 2013, by and between Charles & Colvard, Ltd. and Kyle Macemore (incorporated herein by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2013)+ |
| | |
10.48 | Consultant Agreement, dated September 28, 2012, between Charles & Colvard, Ltd. and Anne Butler (incorporated herein by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2012)+ |
| |
10.49 | Separation of Employment Agreement, dated March 23, 2015, between Charles & Colvard, Ltd. and Randall N. McCullough (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K, as filed with the SEC on March 23, 2015)+ |
| |
10.50 | Consulting Agreement, dated March 23, 2015, by and between Charles & Colvard, Ltd. and Randall N. McCullough (incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K, as filed with the SEC on March 23, 2015)+ |
| |
10.51 | Employment Agreement, effective as of March 17, 2015, by and between Charles & Colvard, Ltd. and H. Marvin Beasley (incorporated by reference to Exhibit 10.3 to our Current Report on Form 8-K, as filed with the SEC on March 23, 2015)+ |
| |
10.5210.30 | Employment Agreement, dated December 1, 2015, between Charles & Colvard, Ltd. and Suzanne Miglucci (incorporated herein by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2015)+ |
| | |
10.53 | Transition Agreement, dated December 1, 2015, between Charles & Colvard, Ltd. And H. Marvin Beasley+ |
| |
| 21.1 | Subsidiaries of Charles & Colvard, Ltd. (incorporated herein by reference to Exhibit 21.1 to our Annual Report on Form 10-K for the year ended December 31, 2013) |
| | |
| 23.1 | Consent of BDO USA, LLP |
| | |
| 31.1 | Certification by Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | |
| 31.2 | Certification by Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | |
| 32.1 | Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| | |
| 32.2 | Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| | |
| 101 | The following materials from Charles & Colvard, Ltd.’s Annual Report on Form 10-K for the year ended December 31, 20152016 formatted in XBRL (eXtensible Business Reporting Language) and furnished electronically herewith: (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Operations; (iii) Consolidated Statements of Shareholders’ Equity; (iv) Consolidated Statements of Cash Flows; and (v) Notes to Consolidated Financial Statements. |
| | |
| * | Asterisks located within the exhibit denote information which has been redacted pursuant to a request for confidential treatment filed with the SEC. |
| | |
| + | Management contract or compensatory plan or arrangement. |
None.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | CHARLES & COLVARD, LTD. |
| | | |
| | By: | /s/ Suzanne Miglucci |
March 8, 20169, 2017 | | Suzanne Miglucci |
| | | President and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| | By: | /s/ Suzanne Miglucci |
March 8, 20169, 2017 | | Suzanne Miglucci |
| | | Director, President and Chief Executive Officer |
| | | |
| | By: | /s/ Kyle MacemoreClint J. Pete |
March 8, 20169, 2017 | | Kyle MacemoreClint J. Pete |
| | | Senior Vice President,Interim Chief Financial Officer and Treasurer |
| | (Principal(Principal Financial Officer andPrincipal Accounting Officer) |
| | | |
| | By: | /s/ Neal I. Goldman |
March 8, 20169, 2017 | | Neal I. Goldman |
| | | Executive Chairman of the Board of Directors |
| | | |
| | By: | /s/ Anne M. Butler |
March 8, 20169, 2017 | | Anne M. Butler |
| | | Director |
| | | |
| | By: | /s/ George R. Cattermole |
March 8, 2016 | | George R. Cattermole |
| | Director |
| | |
| By: | /s/ Jaqui Lividini |
March 8, 20169, 2017 | | Jaqui Lividini |
| | | Director |
| | | |
| | By: | /s/ Ollin B. Sykes |
March 8, 20169, 2017 | | Ollin B. Sykes |
| | | Director |
Exhibit No. | Description |
| | |
| 2.1 | Asset Purchase Agreement, effective March 4, 2016, by and among Yanbal USA, Inc., Charles & Colvard, Ltd., and Charles & Colvard Direct, LLC (incorporated herein by reference to Exhibit 2.1 to our Current Report on Form 8-K, as filed with the SEC on March 8, 2016) |
| | |
| 2.2 | List of Schedules Omitted from Asset Purchase Agreement included as Exhibit 2.1 above (incorporated herein by reference to Exhibit 2.2 to our Current Report on Form 8-K, as filed with the SEC on March 8, 2016) |
| | |
| 3.1 | Restated Articles of Incorporation of Charles & Colvard, Ltd. (incorporated herein by reference to Exhibit 3.1 to our Annual Report on Form 10-K for the year ended December 31, 2004) |
| | |
| 3.2 | Bylaws of Charles & Colvard, Ltd., as amended and restated, effective May 19, 2011 (incorporated herein by reference to Exhibit 3.1 to our Current Report on Form 8-K, as filed with the SEC on May 24, 2011) |
| | |
| 4.1 | Specimen Certificate of Common Stock (incorporated herein by reference to Exhibit 4.1 to our Annual Report on Form 10-K for the year ended December 31, 1998) |
| | |
| 10.1 | Amended and Restated Exclusive Supply Agreement, dated as of June 6, 1997, between Cree Research, Inc. and C3, Inc. (incorporated herein by reference to Exhibit 10.11 to our Registration Statement on Form S-1 (File No. 333-36809), as filed with the SEC on September 30, 1997)* |
| |
10.2 | Notice of Extension of Amended and Restated Exclusive Supply Agreement, dated January 6, 2005, from Charles & Colvard, Ltd. to Cree, Inc. (incorporated herein by reference to Exhibit 10.69 to our Current Report on Form 8-K, as filed with the SEC on January 7, 2005) |
| |
10.3 | Letter Agreement, dated January 31, 1996, between Cree Research, Inc. and C3, Inc. (incorporated herein by reference to Exhibit 10.14 to our Registration Statement on Form S-1 (File No. 333-36809), as filed with the SEC on September 30, 1997)* |
| |
10.4 | Letter Agreement, dated November 12, 2007, between Cree, Inc. and Charles & Colvard, Ltd. (incorporated herein by reference to Exhibit 10.108 to our Current Report on Form 8-K, as filed with the SEC on November 13, 2007)* |
| |
10.5 | Letter Agreement, dated September 18, 2008, between Cree, Inc. and Charles & Colvard, Ltd. (incorporated herein by reference to Exhibit 10.123 to our Current Report on Form 8-K, as filed with the SEC on September 24, 2008) |
| |
10.6 | Letter Agreement, effective March 22, 2010, between Cree, Inc. and Charles & Colvard, Ltd. (incorporated herein by reference to Exhibit 10.6 to our Annual Report on Form 10-K for the year ended December 31, 2009)* |
| |
10.7 | Amendment to Letter Agreement, effective February 8, 2013, between Charles & Colvard, Ltd. and Cree, Inc. (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K, as filed with the SEC on February 14, 2013)* |
| |
10.8 | Second Amendment to Letter Agreement, dated September 5, 2013, between Charles & Colvard, Ltd. and Cree, Inc. (incorporated by reference to Exhibit 10.4 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2013)* |
| |
10.9 | Exclusive Supply Agreement, dated as of December 12, 2014, by and among Charles & Colvard, Ltd., Cree, Inc. and, solely for purposes of Section 6(c) of the Exclusive Supply Agreement, Charles & Colvard Direct, LLC and Moissanite.com,moissanite.com, LLC (incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K, as filed with the SEC on December 16, 2014)* |
10.10 | |
| 10.2 | Letter Agreement, dated February 9, 2005 and effective February 21, 2005, between The Bell Group, d/b/a Rio Grande and Charles & Colvard, Ltd. (incorporated herein by reference to Exhibit 10.73 to our Current Report on Form 8-K, as filed with the SEC on February 23, 2005)* |
| | |
10.1110.3 | Letter Agreement, effective July 11, 2008, between Samuel Aaron Inc. and Charles & Colvard, Ltd. (incorporated herein by reference to Exhibit 10.120 to our Current Report on Form 8-K, as filed with the SEC on July 17, 2008)* |
| | |
10.1210.4 | Licensing Agreement, dated July 11, 2008, by and between Charles and Colvard, Ltd. and Samuel Aaron Inc. (incorporated herein by reference to Exhibit 10.121 to our Current Report on Form 8-K, as filed with the SEC on July 17, 2008) |
| | |
10.13 | Loan Agreement, dated September 20, 2013, between Charles & Colvard, Ltd. and PNC Bank, National Association (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K, as filed with the SEC on September 24, 2013) |
| |
10.14 | Committed Line of Credit Note, dated September 20, 2013, by Charles & Colvard, Ltd. in favor of PNC Bank, National Association (incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K, as filed with the SEC on September 24, 2013) |
| |
10.1510.5 | Credit and Security Agreement, dated as of June 25, 2014, by and among Charles & Colvard, Ltd., Charles & Colvard Direct, LLC, Moissanite.com,moissanite.com, LLC, and Wells Fargo Bank, National Association (incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K, as filed with the SEC on June 30, 2014) |
| | |
10.1610.6 | First Amendment to Credit and Security Agreement, dated as of September 16, 2014, by and among Charles & Colvard, Ltd., Charles & Colvard Direct, LLC, Moissanite.com, LLC, and Wells Fargo Bank, National Association (incorporated herein by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2014) |
| | |
10.1710.7 | Second Amendment to Credit and Security Agreement, dated as of December 12, 2014, by and among Charles & Colvard, Ltd., Charles & Colvard Direct, LLC, Moissanite.com, LLC, and Wells Fargo Bank, National Association (incorporated herein by reference to Exhibit 10.3 to our Current Report on Form 8-K, as filed with the SEC on December 16, 2014) |
| | |
10.1810.8 | Third Amendment to Credit and Security Agreement and Other Loan Documents, dated as of September 23, 2016, by and among Charles & Colvard, Ltd., Charles & Colvard Direct, LLC, Moissanite.com, LLC, to be known as charlesandcolvard.com, LLC, and Wells Fargo Bank, National Association (incorporated herein by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2016) |
| 10.9 | Intercreditor Agreement, dated as of December 12, 2014, by and among Charles & Colvard, Ltd., Charles & Colvard Direct, LLC, Moissanite.com, LLC, Cree, Inc., and Wells Fargo Bank, National Association (incorporated herein by reference to Exhibit 10.2 to our Current Report on Form 8-K, as filed with the SEC on December 16, 2014) |
| | |
10.19 | Lease Agreement, dated March 26, 2004, by and between Duke Realty Limited Partnership and Charles & Colvard, Ltd. (incorporated herein by reference to Exhibit 10.62 to our Quarterly Report on Form 10-Q for the quarter ended March 31, 2004) |
| |
10.20 | First Lease Amendment, dated September 22, 2004, by and between Duke Realty Limited Partnership and Charles & Colvard, Ltd. (incorporated herein by reference to Exhibit 10.17 to our Annual Report on Form 10-K for the year ended December 31, 2010) |
| |
10.21 | Second Amendment to Lease Agreement, dated July 30, 2010, by and between Raleigh Flex Owner I, LLC and Charles & Colvard, Ltd. (incorporated herein by reference to Exhibit 10.18 to our Annual Report on Form 10-K for the year ended December 31, 2010) |
| |
10.22 | Third Amendment to Lease Agreement, dated January 1, 2011, by and between Raleigh Flex Owner I, LLC and Charles & Colvard, Ltd. (incorporated herein by reference to Exhibit 10.19 to our Annual Report on Form 10-K for the year ended December 31, 2010) |
10.2310.10 | Lease Agreement, dated December 9, 2013, between Charles & Colvard, Ltd. and Southport Business Park Limited Partnership (incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K, as filed with the SEC on December 12, 2012)* |
| | |
10.2410.11 | First Amendment to Lease, dated December 23, 2013, between Charles & Colvard, Ltd. and Southport Business Park Limited Partnership (incorporated herein by reference to Exhibit 10.20 to our Annual Report on Form 10-K for the year ended December 31, 2013) |
| | |
10.2510.12 | Second Amendment to Lease, dated April 15, 2014, between Charles & Colvard, Ltd. and Southport Business Park Limited Partnership (incorporated herein by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2014) |
| | |
10.26 | Board Compensation Program, effective March 16, 2011 (incorporated herein by reference to Exhibit 10.21 to our Annual Report on Form 10-K for the year ended December 31, 2010)+ |
| |
10.27 | Board Compensation Program, effective May 21, 2014 (incorporated herein by reference to Exhibit 10.22 to our Annual Report on Form 10-K for the year ended December 31, 2013)+ |
| |
10.2810.13 | Board Compensation Program, effective January 1, 2015 (incorporated herein by reference to Exhibit 10.28 to our Annual Report on Form 10-K for the year ended December 31, 2014)+ |
| | |
10.2910.14 | Board Compensation Program, effective January 1, 2016 (incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K, as filed with the SEC on September 10, 2015)+ |
| | |
10.3010.15 | Charles & Colvard, Ltd. 2008 Stock Incentive Plan, as amended (incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K, as filed with the SEC on May 21, 2015)20, 2016)+ |
| | |
10.3110.16 | Form of Restricted Stock Award Agreement under the Charles & Colvard, Ltd. 2008 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.115 to our Current Report on Form 8-K, as filed with the SEC on June 2, 2008)+ |
| | |
10.3210.17 | Form of Employee Incentive Stock Option Agreement under the Charles & Colvard, Ltd. 2008 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.116 to our Current Report on Form 8-K, as filed with the SEC on June 2, 2008)+ |
| | |
10.3310.18 | Form of Employee Nonqualified Stock Option Agreement under the Charles & Colvard, Ltd. 2008 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.118 to our Current Report on Form 8-K, as filed with the SEC on June 2, 2008)+ |
| | |
10.3410.19 | Form of Director Nonqualified Stock Option Agreement under the Charles & Colvard, Ltd. 2008 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.119 to our Current Report on Form 8-K, as filed with the SEC on June 2, 2008)+ |
| | |
10.3510.20 | Form of Director Nonqualified Stock Option Agreement under the Charles & Colvard, Ltd. 2008 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.28 to our Annual Report on Form 10-K for the year ended December 31, 2013)+ |
| | |
10.3610.21 | Charles & Colvard, Ltd. Short-Term Incentive Plan, effective January 1, 2014 (incorporated by referenceForm of Restricted Stock Award Agreement pursuant to Exhibit 10.1 to our Current Report on Form 8-K, as filed with the SEC on April 21, 2014)+
|
| |
10.37 | Charles & Colvard, Ltd. Long-Term Incentive Program effective January 1, 2014 (incorporated herein by reference to Exhibit 10.210.3 to our Current Report on Form 8-K, as filed with the SEC on April 21, 2014)+ |
| | |
10.38 | Form of Restricted Stock Award Agreement pursuant to the Charles & Colvard, Ltd. Long-Term Incentive Program (incorporated by reference to Exhibit 10.3 to our Current Report on Form 8-K, as filed with the SEC on April 21, 2014)+ |
10.3910.22 | Form of Employee Nonqualified Stock Option Agreement pursuant to the Charles & Colvard, Ltd. Long-Term Incentive Program (incorporated herein by reference to Exhibit 10.4 to our Current Report on Form 8-K, as filed with the SEC on April 21, 2014)+ |
| |
10.4010.23 | Form of Restricted Stock Award Agreement (Performance-Based) under the Charles & Colvard, Ltd. 2008 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.4 to our Current Report on Form 8-K, as filed with the SEC on March 23, 2015)+ |
| | |
10.4110.24 | Charles & Colvard, Ltd. 2015 Senior Management Equity Incentive Program, effective January 1, 2015 (incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K, as filed with the SEC on May 8, 2015)+ |
| | |
| 10.25 | Charles & Colvard, Ltd. 2016 Senior Management Equity Incentive Program, effective January 1, 2016+2016 (incorporated herein by reference to Exhibit 10.42 to our Annual Report on Form 10-K for the year ended December 31, 2015)+ |
| | |
10.4310.26 | Form of Indemnification Agreement (incorporated herein by reference to Exhibit 10.109 to our Current Report on Form 8-K, as filed with the SEC on December 10, 2007)+ |
| | |
10.44 | Employment Agreement, effective as of November 5, 2009, by and between Charles & Colvard, Ltd. and Randy N. McCullough (incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K, as filed with the SEC on November 12, 2009)+ |
| |
10.4510.27 | Employment Agreement, effective as of May 6, 2013, by and between Charles & Colvard, Ltd. and Steve Larkin (incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K, as filed with the SEC on April 22, 2013)+ |
| | |
| 10.28 | First Amendment to Employment Agreement, dated March 8, 2016, by and between Charles & Colvard, Ltd. and Steve Larkin+Larkin (incorporated herein by reference to Exhibit 10.46 to our Annual Report on Form 10-K for the year ended December 31, 2015)+ |
| | |
10.4710.29 | Employment Agreement, effective as of August 5, 2013, by and between Charles & Colvard, Ltd. and Kyle Macemore (incorporated herein by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2013)+ |
| | |
10.48 | Consultant Agreement, dated September 28, 2012, between Charles & Colvard, Ltd. and Anne Butler (incorporated herein by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2012)+ |
| |
10.49 | Separation of Employment Agreement, dated March 23, 2015, between Charles & Colvard, Ltd. and Randall N. McCullough (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K, as filed with the SEC on March 23, 2015)+ |
| |
10.50 | Consulting Agreement, dated March 23, 2015, by and between Charles & Colvard, Ltd. and Randall N. McCullough (incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K, as filed with the SEC on March 23, 2015)+ |
| |
10.51 | Employment Agreement, effective as of March 17, 2015, by and between Charles & Colvard, Ltd. and H. Marvin Beasley (incorporated by reference to Exhibit 10.3 to our Current Report on Form 8-K, as filed with the SEC on March 23, 2015)+ |
| |
10.5210.30 | Employment Agreement, dated December 1, 2015, between Charles & Colvard, Ltd. and Suzanne Miglucci (incorporated herein by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2015)+ |
| | |
| Transition Agreement, dated December 1, 2015, between Charles & Colvard, Ltd. And H. Marvin Beasley+ |
21.1 | Subsidiaries of Charles & Colvard, Ltd. (incorporated herein by reference to Exhibit 21.1 to our Annual Report on Form 10-K for the year ended December 31, 2013) |
| | |
| Consent of BDO USA, LLP |
| | |
| Certification by Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | |
| Certification by Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | |
| Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| | |
| Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| | |
| 101 | The following materials from Charles & Colvard, Ltd.’s Annual Report on Form 10-K for the year ended December 31, 20152016 formatted in XBRL (eXtensible Business Reporting Language) and furnished electronically herewith: (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Operations; (iii) Consolidated Statements of Shareholders’ Equity; (iv) Consolidated Statements of Cash Flows; and (v) Notes to Consolidated Financial Statements. |
| | |
| * | Asterisks located within the exhibit denote information which has been redacted pursuant to a request for confidential treatment filed with the SEC. |
| | |
| + | Management contract or compensatory plan or arrangement. |