Under certain conditions, shareholders may request us to include a
review to determine the independenceproposal for action at a forthcoming meeting of
its members and made a subjective determination as to each member that no transactions, relationships, or arrangements exist that,our shareholders in the
opinion of the Board of Directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director ofproxy materials for such meeting. All shareholder proposals intended to be presented at our
company. In making these determinations, the Board of Directors reviewed the information provided by the directors with regard to each individual’s business and personal activities as they may relate to us and our management.Meetings of the Board of Directors
Pursuant to our Corporate Governance Standards, all directors are expected to attend meetings of the Board of Directors and their assigned committees. The Board of Directors meets on a regularly scheduled and as needed basis and met 22 times during fiscal 2022. Each incumbent director attended 75% or more of the aggregate of the number of meetings of the Board of Directors held during the period that the individual was a director and the number of meetings of committees on which that director served that were held during the period of that director’s service. We also expect all directors to attend each annual meeting of shareholders. Five directors, comprising all of the nominees for election at the 20212024 Annual Meeting of Shareholders attendedmust be received by us no later than June 29, 2024 for inclusion in the 2021proxy statement and proxy card relating to such meeting. In addition, if a shareholder desires to make a proposal from the floor during our 2024 Annual Meeting of Shareholders.
Board Leadership Structure
Currently, Mr. O’Connell serves asShareholders, even if such proposal is not to be included in our Chief Executive Officer and Mr. Goldman serves as our Chairmanproxy statement, the Bylaws provide that the shareholder must deliver or mail timely written notice of the Board of Directors. The Chairmanproposal to our Corporate Secretary. Notice will be considered timely if it is delivered or mailed to and received at our principal executive office between July 29, 2024 and August 28, 2024, which is not an employeemore than 90 calendar days and not fewer than 60 calendar days prior to the one year anniversary of our company. The Boardthe date of Directors has determinedthe Notice of Annual Meeting of Shareholders for the immediately preceding annual meeting. In the event that it isno annual meeting was held in the best interestprevious year or the date of our company for our Chairmanthe annual meeting has been advanced by more than 30 days or delayed by more than 60 days from the one year anniversary of the previous year’s annual meeting of shareholders, notice by a shareholder to be an independent director at this time. The Boardtimely must be received no earlier than the 90th day prior to such annual meeting and not later than the 60th day prior to such annual meeting or the close of Directors believes that having an independent Chairman furthersbusiness on the Board of Directors’ goal of providing effective, independent leadership and oversight of our company. The Chairman’s responsibilities include establishing Board meeting agendas in collaboration with our Chief Executive Officer and presiding at meetings10th day following the day on which notice of the Board of Directors and shareholders. The Chairman is also tasked with working closely with senior management of our company regarding business strategy and the effective achievement of objectives and strategy following presentation to and approval by the Board of Directors. The Chief Executive Officer has general supervision, direction, and controlmeeting was mailed or public disclosure of the business and affairs of our company in the ordinary course of its business.
To ensure free and open discussion and communication among the non-management directors, such directors meet regularly in executive session in conjunction with regularly scheduled meetingsdate of the Board of Directors. The director who presides at these meetings is chosen by the independent directors. Executive sessions of the independent directors are to occur at least four times a year.
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6meeting was first made, whichever occurs first.
Board’s Role in Risk Oversight
We operate in a complex environment and are subject to a number of significant risks. The Board of Directors works with our senior management to manage the various risks we face. The role of the Board of Directors is one of oversight of our risk management processes and procedures; the role of our management is to implement those processes and procedures on a daily basis and to identify, manage, and mitigate the risks that we face. As part of its oversight role, the Board of Directors regularly discusses, both with and without management present, our risk profile and how our business strategy effectively manages and leverages the risks that we face.
To facilitate its oversight of our company, the Board of Directors has delegated certain functions (including the oversight of risks related to these functions) to Board committees. The Audit Committee reviews and discusses with management our major financial risk exposures and the steps management has taken to monitor and control such exposures, the Compensation Committee evaluates the risks presented by our compensation programs and analyzes these risks when making compensation decisions, and the Nominating and Governance Committee evaluates whether the composition of the Board of Directors is appropriate to respond to the risks that we face. The roles of these committees are discussed in more detail below.
Although the Board of Directors has delegated certain functions to various committees, each of these committees regularly reports to and solicits input from the full Board of Directors regarding its activities. These discussions enable the Board of Directors to monitor our risk exposure and evaluate our risk mitigation efforts.
Anti-Hedging Policy
Our insider trading policy prohibits all directors, officers, and employees of our company, their family members, and any agents, consultants, or other outsiders who are designated as insiders for purposes of the policy from trading in any interest or position relating to the future price of our company’s securities, such as a put, call, or short sale. In addition, the policy prohibits engaging in hedging or monetization transactions with respect to company securities, including zero-cost collars, forward sale contracts or any other similar instruments.
Standing Committees of the Board of Directors
The Board of Directors has established an Audit Committee, a Compensation Committee, and a Nominating and Governance Committee as standing committees of the Board of Directors. Each of these committees is governed by a formal written charter approved by the Board of Directors, copies of which are available on our website at https://ir.charlesandcolvard.com/governance/corporate-governance. Each committee is composed solely of independent directors. The following is a brief description of the responsibilities of each of these standing committees and their composition.
Audit Committee
The Audit Committee represents and assists the Board of Directors in its general oversight of our company’s accounting and financial reporting processes, audits of the financial statements, and internal control and audit functions. The Audit Committee has the authority to, among other things, (i) appoint an independent registered public accounting firm to serve as our external auditor; (ii) review and discuss with such auditor the scope, timing, and results of its audit; (iii) review and discuss with management and the independent registered public accounting firm our internal control over financial reporting and related reports; (iv) review and approve in advance all “related person” transactions, as that term is defined in Item 404 of Regulation S-K; and (v) review our annual financial statements and approve their inclusion in our Annual Report on Form 10-K. The Audit Committee, which held five meetings in fiscal 2022, is currently composed of Ms. Casamento (Chairperson), Ms. Butler, Mr. Goldman, and Mr. Sykes. The Audit Committee was established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
The Board of Directors has determined that each of the members of the Audit Committee is an independent director in accordance with applicable Nasdaq listing rules and the additional independence rules for audit committee members promulgated by the SEC. Each member is able to read and understand fundamental financial statements, including our company’s balance sheet, statement of operations, and cash flow statement. The Board of Directors has determined that Ms. Casamento, Ms. Butler, Mr. Goldman, and Mr. Sykes are “audit committee financial experts” as defined in Item 407(d)(5) of Regulation S-K promulgated by the SEC.
Compensation Committee
The Compensation Committee carries out the overall responsibility of the Board of Directors relating to executive compensation, evaluation, and development. The Compensation Committee has the authority to, among other things, (i) review and approve the corporate goals and objectives with respect to the compensation of our Chief Executive Officer and set the Chief Executive Officer’s annual compensation, including salary, bonus, incentive compensation, and equity compensation; (ii) review and approve the evaluation process and compensation structure for our officers and approve their annual compensation, including salary, bonus, incentive compensation, and equity compensation, and any special or supplemental benefits; (iii) review, approve and when appropriate, recommend to the Board of Directors for approval, incentive and equity compensation plans, which includes the ability to adopt, amend and terminate such plans; and (iv) evaluate and make recommendations to the Board of Directors concerning the compensation for directors, including if applicable, equity-based compensation. Each of the members of the Compensation Committee is an independent director in accordance with Nasdaq listing rules. The Compensation Committee, which held three meetings in fiscal 2022, is currently composed of Ms. Butler (Chairperson), Ms. Casamento, Mr. Goldman, and Mr. Sykes. Although the Compensation Committee may delegate authority to subcommittees to fulfill its responsibilities when appropriate, no such authority was delegated during fiscal 2022.
The Compensation Committee has the authority under its charter to retain outside consultants or advisors as it deems necessary or advisable to assist in carrying out its responsibilities. For fiscal 2022, the Compensation Committee engaged the services of Mercer (US) Inc. (“Mercer”) as its independent outside compensation consultant during fiscal 2022 to assist the company in executive compensation guidance.
Other than advising the compensation committee, neither Mercer nor any of its affiliates maintain any other direct or indirect business relationships with us or any of our subsidiaries. The work performed by Mercer in fiscal 2022 did not raise any conflicts of interest. During fiscal 2022, Mercer provided no services to us other than regarding executive compensation.
In addition to the above, the Compensation Committee received input from the Chief Executive Officer with regard to the structure and potential payout amounts under the 2022 Program (as defined below) for the Chief Financial Officer.
Nominating and Governance Committee
The Nominating and Governance Committee is responsible for, among other things, (i) screening and recommending qualified candidates for election and appointment to the Board of Directors; (ii) recommending to the Board of Directors from time to time an appropriate organizational structure (including size and composition) for the Board of Directors; (iii) monitoring the independence of the Board of Directors and ensuring that the requisite number of directors serving on committees of the Board of Directors meet applicable independence requirements and assisting the Board of Directors in making related determinations; (iv) reviewing from time to time the appropriate qualifications, skills, and characteristics required of directors; (v) developing procedures to receive and evaluate Board of Directors nominations received from shareholders and other third parties; (vi) periodically reviewing and reassessing the adequacy of our company’s corporate governance; conflicts of interest; and business ethics policies, principles, codes of conduct, and guidelines; and formulating and recommending any proposed changes to the Board of Directors; and (vii) conducting an annual review of the effectiveness of the Board of Directors and its committees and presenting its assessment to the full Board of Directors. Each of the members of the Nominating and Governance Committee is an independent director in accordance with Nasdaq listing rules. The Nominating and Governance Committee, which held two meetings in fiscal 2022, is currently composed of Ms. Butler (Chairperson), Ms. Casamento and Mr. Goldman.
Director Nominations
Our Bylaws contain provisions that address the process by which a shareholder may nominate an individual to stand for election to the Board of Directors at our 2024 Annual Meeting of Shareholders. These provisions state that nominations for election as a director must be made in writing and be delivered to or mailed and received at our principal executive office between July 2, 202329, 2024 and August 1, 2023,28, 2024, which is not more than 90 calendar days and not fewer than 60 calendar days prior to the one year anniversary of the date of the Notice of Annual Meeting of Shareholders for the immediately preceding annual meeting. In the case of a special meeting, no annual meeting was held in the previous year, or an annual meeting that is called for a date that is not within 30 days before or 60 days after the anniversary date of the immediately preceding annual meeting, notice must be received no earlier than 90 days prior to such annual meeting or special meeting and no later than 60 days prior to such annual meeting or special meeting, or the close of business on the 10th day following the day on which notice of the meeting was mailed or public disclosure of the date of the meeting was made, whichever occurs first. The Corporate Secretary will provide the Nominating and Governance Committee with a copy of any such notification received by us from a shareholder purporting to nominate a candidate for election as a director. Any shareholder wishing to submit a nomination for a director of our companyCompany should send the nomination to the Corporate Secretary, Charles & Colvard, Ltd., 170 Southport Drive, Morrisville, North Carolina 27560.
When submitting a nomination to us for consideration by the Nominating and Governance Committee, a shareholder must provide the following minimum information for each director nominee: (i) the name, age, business address, and residence address of such person, (ii) the principal occupation or employment of such person, (iii) the class and number of shares of our company that are beneficially owned by such person, (iv) a description of all arrangements or understandings between the shareholder (or the beneficial owner, if any, on whose behalf such nomination is made) and each nominee and any other person or persons (naming such person or persons) pursuant to which the nominations are to be made by the shareholder, (v) any other information relating to such person that is required to be disclosed in solicitations of proxies for elections, or is otherwise required, in each case pursuant to Regulation 14A under the Exchange Act, (including, without limitation, such person’s written consent to being named in the proxy statement, if any, as a nominee and to serving as a director if elected), and (vi) such additional information relating to such person as is deemed sufficient by the Board of Directors to establish that the person meets all minimum qualification standards or other criteria to serve as a director as may have been established by the Board of Directors or applicable law or listing standard. The shareholder also must provide the name and address, as they appear on our company’s books, of the shareholder proposing such business and the beneficial owner, if any, on whose behalf such proposal is made; the class and number of shares of our company that are beneficially owned by the shareholder and the beneficial owner on whose behalf the proposal is made; any material interest, direct or indirect, of the shareholder and such beneficial owner in such business; and a representation that the shareholder is a holder of record of shares of our company entitled to vote at the meeting and intends to appear in person or by proxy at the meeting. Shareholder nominations for a director must be made in a timely manner and otherwise in accordance with our Bylaws and applicable law. In addition, to comply with the universal proxy rules, shareholders who intend to solicit proxies in support of director nominees other than the Board of Directors’ nominees must provide the information required byin accordance with Rule 14a-19 under the Exchange Act no later than September 18, 2023.
It ismust provide notice that sets forth the policy of our company and the Nominating and Governance Committee to evaluate suggestions concerning possible candidates for election to the Board of Directors submitted to us, including those submitted by members of the Board of Directors, shareholders, and third parties. Criteria usedinformation required by the NominatingCompany’s Bylaws and Governance Committee in its evaluation of all candidates for nomination are set forth in our Corporate Governance Standards and include, but are not limited to (i) judgment, character, expertise, skills, and knowledge useful to the oversight of our business; (ii) diversity of viewpoints, backgrounds, ages, experiences, and other demographics; (iii) business or other relevant experience; and (iv) the extent toRule 14a-19(b), which the interplay of the candidate’s expertise, skills, knowledge, and experience with that of other members of the Board of Directors will build a Board of Directors that is effective, collegial, and responsive to the needs of our company. After this evaluation process is concluded, the Nominating and Governance Committee recommends nominees to the Board of Directors for further consideration and approval.
No fees have been paid to any third party to identify or evaluate or assist in identifying or evaluating potential nominees.
Shareholder Communication with the Board
As set forth in our Corporate Governance Standards, it is the policy of our company and the Board of Directors to encourage free and open communication between shareholders and the Board of Directors. Any shareholder wishing to communicate with the Board of Directors should send any communicationnotice must be delivered to the Corporate Secretary Charles & Colvard, Ltd., 170 Southport Drive, Morrisville, North Carolina 27560. Any such communication must be in writing and must statewithin the number of shares beneficially owned by the shareholder making the communication. Our Corporate Secretary will generally forward such communication to the full Board of Directors or to any individual director or directors to whom the communication is directed unless the communication is unduly hostile, threatening, illegal, or similarly inappropriate, in which case the Corporate Secretary has the authority to discard the communication or take appropriate legal action regarding the communication. This process is intended to provide shareholders one means of communicating with directors and is not intended to be exclusive.
Codes of Conduct
The Board of Directors has adopted two separate codes of conduct: a Code of Ethics for Senior Financial Officers that applies to persons holding the offices of the Chief Executive Officer, Chief Financial Officer, Treasurer, and Principal Accounting Officer of our company, and a Code of Business Conduct and Ethics that applies to all of our officers, directors, employees, agents, and representatives (including consultants, advisors, and independent contractors). Each code is available on our website at https://ir.charlesandcolvard.com/governance/corporate-governance. We intend to satisfy the disclosure requirement regarding any material amendment to a provision of either code that applies to the Chief Executive Officer, Chief Financial Officer, Treasurer, and Principal Accounting Officer by posting such information on our website. Any amendments or waivers of either code for any executive officer or director must be approved by the Board of Directors and will be publicly disclosed either by posting such amendment or waiver, along with the reasons for the waiver, on our website at https://ir.charlesandcolvard.com/governance/corporate-governance, by filing a Form 8-K with the SEC, or by issuing a press release in accordance with SEC and Nasdaq requirements.
CERTAIN TRANSACTIONS
Since July 1, 2020, we have not been a participant in or a party to any related person transactions requiring disclosure under the SEC’s rules.
AUDIT COMMITTEE REPORT
The Audit Committee is responsible for overseeing our overall financial reporting process. In fulfilling its responsibilities for the financial statements for fiscal 2022, the Audit Committee:
| ● | reviewed and discussed the audited financial statements for the fiscal year ended June 30, 2022 with management and BDO USA, LLP, Raleigh, NC; PCAOB ID: 243, our independent registered public accounting firm; |
| ● | discussed with BDO USA, LLP the matters required to be discussed by the applicable requirements of the Public Company Accounting Oversight Board (the “PCAOB”) and the SEC; and |
| ● | received the written disclosures and the letter from BDO USA, LLP required by applicable requirements of the PCAOB regarding BDO USA, LLP’s communications with the Audit Committee concerning independence and has discussed with BDO USA, LLP its independence. |
Based on the Audit Committee’s review and discussions referred to above, the Audit Committee recommended to the Board of Directors that the audited financial statements be included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2022 for filing with the SEC.
This Report is submitted by the Audit Committee.
Ms. Benedetta Casamento, Chairperson
Ms. Anne M. Butler
Mr. Neal I. Goldman
Mr. Ollin B. Sykes
INFORMATION CONCERNING EXECUTIVE OFFICERS
Certain information regarding our executive officers is set forth below. Executive officers are appointed by the Board of Directors to hold office until their successors are duly appointed and qualified, or until their resignation, retirement, death, removal, or disqualification. The information appearing below and certain information regarding beneficial ownership of securities by certain executive officers contained in this proxy statement has been furnished to us by the executive officers. Information regarding Mr. O’Connell is included in the director nominee profiles set forth above.
Name | | Age | | Title | | Executive Officer Since |
Don O’Connell | | 56 | | President and Chief Executive Officer | | May 2017 |
Clint J. Pete | | 60 | | Chief Financial Officer and Treasurer | | December 2016 |
Clint J. Pete was appointed as our Chief Financial Officer on May 23, 2017. Mr. Pete previously served as our Interim Chief Financial Officer from December 2016 to May 2017 and as our Corporate Controller from June 2016 to December 2016. Prior to joining our company, Mr. Pete most recently served as Director of Business Planning for Oracle Corporation, a cloud application company, from June 2013 to May 2016. Prior to his employment with Oracle Corporation, Mr. Pete served as Business Unit Controller, Global Signaling Solutions of Tekelec, a telecommunications company, from May 2011 to May 2013. At Tekelec, Mr. Pete also previously served as Global Revenue Controller. Prior to his employment with Tekelec, Mr. Pete served as Vice President of Finance and Controllers at Qualex Inc., a Kodak company. Before joining Qualex Inc., Mr. Pete held various management positions at Ernst & Young, LLP, an international public accounting firm. Mr. Pete holds a Bachelor of Business Administration degree in Accounting and Finance from Texas Tech University and is a Certified Public Accountant.
EXECUTIVE COMPENSATION
The following tables and narrative discussion summarize the compensation we paid for services in all capacities rendered to us during the fiscal years ended June 30, 2022 and 2021 by our principal executive officer and all other “named executive officers.”
Summary Compensation Table
Name and
Principal Position | | Year | | | Salary ($) | | | Bonus ($) | | | Stock Awards ($)(1) | | | Option Awards ($)(1) | | | Non-Equity Incentive Plan Compensation ($) | | | All Other Compensation ($) | | | Total ($) | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Don O’Connell | | 2022 | | | $ | 346,673 | | | $ | 91,163 | (2) | | $ | 531,205 | (3) | | $ | - | | | $ | 175,959 | (4) | | $ | 36,214 | (5) | | $ | 1,181,214 | |
| President and Chief Executive Officer | | 2021 | | | | 335,000 | | | | - | | | | 70,103 | (6) | | | - | | | | - | (7) | | | 38,962 | (8) | | | 444,065 | |
| Clint J. Pete | | 2022 | | | | 263,074 | | | | - | | | | 241,501 | (9) | | | - | | | | 87,980 | (10)
| | | 16,672 | (11) | | | 609,227 | |
| Chief Financial Officer and Treasurer | | 2021 | | | | 254,322 | | | | - | | | | 35,051 | (12) | | | - | | | | - | (13) | | | 12,704 | (14) | | | 302,077 | |
(1) | The amounts shown in these columns reflect the aggregate grant date fair value computed in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification Topic 718, Compensation – Stock Compensation (“ASC Topic 718”), of the restricted stock awards or option awards, as applicable, granted to each of our named executive officers. The assumptions made in determining these values are set forth in Note 12 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended June 30, 2022 filed with the SEC on September 2, 2022.
|
(2)
| Reflects the cash component of a discretionary award granted under the 2018 Plan (as defined below) to Mr. O’Connell on September 13, 2021.
|
(3) | Reflects the equity portion of the performance-based awards granted to Mr. O’Connell under the 2022 Program (as defined below), the 2021 Program (as defined below) and the 2018 Plan, including $144,611 in phantom stock settled only in cash granted under the 2022 Program. Pursuant to ASC Topic 718, the aggregate grant date fair value of the equity portion of this award was $665,487, including $191,610 in phantom stock settled only in cash, assuming that the highest level of performance conditions had been achieved. As a result of the executive team’s level of performance in fiscal 2022 measured against the company and individual performance goals set forth in the 2022 Program, on September 5, 2022 the Compensation Committee determined a 75% achievement level of the company’s shared financial goals, resulting in the cancellation and forfeiture by the company’s executive team of certain of the awards granted under the 2022 Program. As a result of this decision, this amount would be reduced by $103,294, including $36,153 in phantom stock settled only in cash. |
| |
(4) | Reflects the cash portion of the performance-based award granted to Mr. O’Connell under the 2021 Program. |
| |
(5) | Includes $22,673 of housing allowance, $8,406 of 401(k) employer matching contributions, and $5,135 of long-term disability insurance and life insurance premiums. |
| |
(6) | Reflects the equity portion of the performance-based award granted to Mr. O’Connell under the 2021 Program. Pursuant to ASC Topic 718, the aggregate grant date fair value of the equity portion of this award was $88,329 assuming that the highest level of performance conditions had been achieved. |
| |
(7) | No cash bonus was paid in connection with the performance-based award granted to Mr. O’Connell under the 2020 Program (as defined below). |
(8) | Includes $22,866 of housing allowance, $8,995 of 401(k) employer matching contributions, and $7,101 of long-term disability insurance and life insurance premiums. |
| |
(9) | Reflects the equity portion of the performance-based award granted to Mr. Pete under the 2022 Program and the 2021 Program, including $72,306 in phantom stock settled only in cash granted under the 2022 Program. Pursuant to ASC Topic 718, the aggregate grant date fair value of the equity portion of this award was $308,642, including $95,805 in phantom stock settled only in cash, assuming that the highest level of performance conditions had been achieved. As a result of the executive team’s level of performance in fiscal 2022 measured against the company and individual performance goals set forth in the 2022 Program, on September 5, 2022 the Compensation Committee determined a 75% achievement level of the company’s shared financial goals, resulting in the cancellation and forfeiture by the company’s executive team of certain of the awards granted under the 2022 Program. As a result of this decision, this amount would be reduced by $51,647, including $18,076 in phantom stock settled only in cash. |
| |
(10) | Reflects the cash portion of the performance-based award granted to Mr. Pete under the 2021 Program. |
| |
(11) | Includes $5,259 of 401(k) employer matching contributions and $11,413 of long-term disability insurance and life insurance premiums. |
| |
(12) | Reflects the equity portion of the performance-based award granted to Mr. Pete under the 2021 Program. Pursuant to ASC Topic 718, the aggregate grant date fair value of the equity portion of this award was $44,165 assuming that the highest level of performance conditions had been achieved. |
| |
(13) | No cash bonus was paid in connection with the performance-based award granted to Mr. Pete under the 2020 Program (as defined below). |
| |
(14)
| Includes $2,742 of 401(k) employer matching contributions and $9,962 of long-term disability insurance and life insurance premiums. |
Agreements Involving Named Executive Officers
Don O’Connell
In connection with Don O’Connell’s appointment as Chief Operating Officer and Senior Vice President, Supply Chain, we entered into an employment agreement with Mr. O’Connell, effective as of May 23, 2017, with a term of one year that renewed automatically on an annual basis. Under the terms of the employment agreement, Mr. O’Connell received an initial annual base salary of $275,000. In addition, Mr. O’Connell received, on the effective date of the employment agreement, a stock option to purchase 100,000 shares of our common stock. The award vested over a three-year period, with 25% of the option award vesting six months after the grant date and an additional 25% of the option award vesting on each of the following three anniversaries of the grant date. Mr. O’Connell was also entitled to receive such benefits as are made available to our other similarly-situated executive employees, including, but not limited to, life, medical, and disability insurance, as well as retirement benefits.
In connection with Mr. O’Connell’s appointment as President and Chief Executive Officer, we entered into an amended and restated employment agreement with Mr. O’Connell, effective as of June 1, 2020, which superseded Mr. O’Connell’s prior employment agreement, as amended. The amended and restated employment agreement has a term of one year that renews automatically on an annual basis. Under its terms, Mr. O’Connell receives an initial annual base salary of $335,000. Mr. O’Connell is also entitled to receive such benefits as are made available to our other similarly-situated executive employees, including, but not limited to, life, medical, and disability insurance, as well as retirement benefits.
In addition, Mr. O’Connell received, on the effective date of the amended and restated employment agreement, a stock option to purchase 350,000 shares of our common stock. The award vests over a two-year period, with 50% of the option award vesting on the grant date and an additional 25% of the option award vesting on each of the following two anniversaries of the grant date provided Mr. O’Connell remains continuously employed with us through each anniversary. Mr. O’Connell is also entitled to a monthly housing allowance of up to $1,700 per month as long as his primary residence remains outside of North Carolina and an annual aggregate amount of $15,000 per year for the costs of travel to such primary residence.
Pursuant to the employment agreement, if Mr. O’Connell’s employment is terminated by us without cause (as defined in the employment agreement), by Mr. O’Connell for good reason (as defined in the employment agreement), or if the term of the employment agreement expires following our notice of non-renewal, Mr. O’Connell will continue to receive his base salary at the time of termination for a period of one year from such termination, so long as he complies with certain covenants in the employment agreement. We also agreed to accelerate the vesting of all outstanding unvested equity awards held by Mr. O’Connell upon the occurrence of a change of control or termination without cause that occurs within six months immediately prior to a change of control (as defined in the employment agreement), so long as he complies with certain covenants in the employment agreement. During Mr. O’Connell’s employment with us and for a period of one year following termination of his employment, Mr. O’Connell is prohibited from competing with us or attempting to solicit our customers or employees.
Clint J. Pete
In connection with Clint Pete’s appointment as Chief Financial Officer and Treasurer, we entered into an employment agreement with Mr. Pete, effective as of May 23, 2017, with a term of one year that renews automatically on an annual basis. Under the terms of the employment agreement, Mr. Pete received an initial annual base salary of $240,000. On April 9, 2020, Mr. Pete’s employment agreement was amended to increase his base salary to $254,616. Mr. Pete is also entitled to receive such benefits as are made available to our other similarly-situated executive employees, including, but not limited to, life, medical, and disability insurance, as well as retirement benefits.
In addition, Mr. Pete received, on the effective date of the employment agreement, a stock option to purchase 100,000 shares of our common stock. The award vested over a three-year period, with 25% of the option award vesting six months after the grant date and an additional 25% of the option award vesting on each of the following three anniversaries of the grant date provided Mr. Pete remains continuously employed with us through each anniversary.
Pursuant to the employment agreement, if we experience a change of control (as defined in the employment agreement), and Mr. Pete’s employment is terminated within six months after such change of control by us without cause (as defined in the employment agreement) or by Mr. Pete for good reason (as defined in the employment agreement), Mr. Pete will continue to receive his base salary at the time of termination for a period of one year from such termination, so long as he complies with certain covenants in the employment agreement. In addition, Mr. Pete is entitled to receive six months of his base salary in the event we terminate him without cause not occurring within six months following a change of control or if the term of the employment agreement expires following our notice of non-renewal, so long as he complies with certain covenants in the employment agreement. We also agreed to accelerate the vesting of all outstanding unvested equity awards held by Mr. Pete upon the occurrence of a change of control or termination without cause not occurring within six months following a change of control, so long as he complies with certain covenants in the employment agreement. During Mr. Pete’s employment with us and for a period of one year following termination of his employment, Mr. Pete is prohibited from competing with us or attempting to solicit our customers or employees.
Termination and Change of Control Arrangements
As discussed above in “Agreements Involving Named Executive Officers,” we have entered into agreements with certain of our named executive officers that provide for payments and benefits under specified circumstances to such named executive officers upon termination of employment and/or if we experience a change of control. In addition, the Charles & Colvard, Ltd. 2008 Stock Incentive Plan, as amended (the “2008 Plan”), and the Charles & Colvard, Ltd. 2018 Equity Incentive Plan (the “2018 Plan”) provide for adjustments to or accelerated vesting of equity awards under specified circumstances, as described below. The 2008 Plan expired (with respect to future grants) on May 26, 2018.
The 2008 Plan provides that, in the event of a change of control of our company (as defined in the 2008 Plan), the Compensation Committee (taking into account any Internal Revenue Code Section 409A considerations) has sole discretion to determine the effect, if any, on an award, including, but not limited to, the vesting, earning, and/or exercisability of an award. The Compensation Committee’s discretion includes, but is not limited to, the determination that an award will vest, be earned, or become exercisable in whole or in part (and discretion to determine that exercise of an award must occur, if at all, within time period(s) specified by the Compensation Committee, after which time period(s) the award will, unless the Compensation Committee determines otherwise, terminate), will be assumed or substituted for another award, will be cancelled without the payment of consideration, will be cancelled in exchange for a cash payment or other consideration, and/or that other actions (or no action) will be taken with respect to the award. The Compensation Committee also has discretion to determine that acceleration or any other effect of a change of control on an award will be subject to both the occurrence of a change of control event and termination of employment or service of the participant. Any such determination of the Compensation Committee may be, but is not required to be, stated in an individual award agreement.
The 2018 Plan provides that in the event of a participant’s termination of continuous service without cause (as defined in the 2018 Plan) or for good reason (as defined in the 2018 Plan) during the six-month period following a change in control (as defined in the 2018 Plan), notwithstanding any provision of the 2018 Plan or any applicable award agreement to the contrary, all outstanding awards will become 100% vested (or in the case of restricted stock or restricted stock units, the restricted period will expire). In addition, in the event of a change in control, the Compensation Committee may in its discretion and upon at least 10 days’ advance notice to the affected persons, cancel any outstanding awards and pay to the holders thereof, in cash or stock, or any combination thereof, the value of such awards based upon the price per share of common stock received or to be received by other shareholders of our company in the event. In the case of any option or stock appreciation right with an exercise price that equals or exceeds the price paid for a share of common stock in connection with the change in control, the Compensation Committee may cancel the option or stock appreciation right without the payment of consideration therefor. The Compensation Committee also has the power to accelerate the time at which an award may first be exercised or the time during which an award or any part thereof will vest in accordance with the 2018 Plan, notwithstanding the provisions in the award stating the time at which it may first be exercised or the time during which it will vest.
Fiscal 2022 Senior Management Equity Incentive Program
On September 15, 2021, the Compensation Committee approved the Charles & Colvard, Ltd. Fiscal 2022 Senior Management Equity Incentive Program (the “2022 Program”), with effect as of July 1, 2021. The 2022 Program supersedes and replaces all prior management incentive plans or programs.
The 2022 Program provides an incentive opportunity for the company’s executive officers and senior vice presidents (the “FY2022 Eligible Employees”) through the grant of an award expressed in “Units” where each Unit shall consist of (i) a restricted stock award representing 65% of the Unit (the “FY2022 Restricted Stock Component”), to be granted to FY2022 Eligible Employees upon approval of the 2022 Program, and (ii) a cash bonus award representing 35% of the Unit (the “FY2022 Cash Component”), to be paid to FY2022 Eligible Employees on the payroll date following the FY2022 Vesting Date (as defined below) subject to achievement of performance goals.
The value of the FY2022 Restricted Stock Component of a Unit shall be set on the grant date of the Unit under the 2022 Program. The value of the FY2022 Cash Component of a Unit shall be calculated on the FY2022 Vesting Date of the Unit as the product of 0.35 multiplied by the closing price of one share of the company’s common stock on the FY2022 Vesting Date (the “FY2022 Vesting FMV”).
For example, if an award is expressed as 100 Units and all performance goals are achieved at the 100% level (as more fully described below), all 100 Units would fully vest. The FY2022 Restricted Stock Component of the 100 Units would equate to 65 fully vested shares of the company’s common stock. Assuming the FY2022 Vesting FMV is $2.00, the FY2022 Cash Component would equate to $70.00 (100 Units multiplied by 0.35 multiplied by $2.00).
For the avoidance of doubt, the FY2022 Cash Component of a Unit does not represent any security interest in the company, and does not in any way represent an ownership interest in the company, nor does it give a FY2022 Eligible Employee any rights as a shareholder of the company.
Units granted under the 2022 Program have both performance and service measures. Achievement of a FY2022 Eligible Employee’s performance measures shall be measured by the Compensation Committee as follows: (1) 65% of each Unit shall be based on the achievement of a Revenue Measure (the “FY2022 Revenue Measure”); (2) 20% of each Unit shall be based on the achievement of an EBITDA Measure (the “FY2022 EBITDA Measure” and, together with the Revenue Measure, the “FY2022 Company Measures”); and (3) 15% of each Unit shall be based on the achievement of Personal Measures (the “FY2022 Personal Measures”), all for the period from July 1, 2021 through June 30, 2022 (the “FY2022 Performance Measurement Period”).
If the company does not achieve 90% of the FY2022 Revenue Measure, the FY2022 Restricted Stock Component of each Unit shall be forfeited and the FY2022 Cash Component of each Unit shall not be paid. The company must achieve at least 90% of the FY2022 Revenue Measure in order for the portion of the Unit attributed to the FY2022 EBITDA Measure and FY2022 Personal Measures to be vested/paid, as applicable. Achievement on a sliding scale from 90% to 125% of the FY2022 Revenue Measure shall result in payment ranging from 75% to 150% of the portion of the Unit attributed to the FY2022 Revenue Measure. FY2022 Eligible Employees may achieve from 0% to 100% of the FY2022 EBITDA Measure and his or her FY2022 Personal Measures. The FY2022 Restricted Stock Component and FY2022 Cash Component of each Unit shall be reduced proportionately by any performance that is measured below 100% accordingly. The FY2022 Personal Measures and FY2022 Company Measures are determined by the Compensation Committee and may be modified by the Compensation Committee during, and after the end of, the FY2022 Performance Measurement Period, subject to the terms of the 2018 Plan. In addition, a FY2022 Eligible Employee must remain in continuous service until July 31, 2022 (the “FY2022 Vesting Date”) for restrictions to fully lapse on the FY2022 Restricted Stock Component and for the FY2022 Cash Component to be paid.
Under the 2022 Program, the Compensation Committee has granted the Chief Executive Officer 150,000 target Units, the Chief Financial Officer 75,000 target Units, and each Senior Vice President 50,000 target Units. The 2022 Program also provides the Compensation Committee discretion to make additional awards above the targeted award level in recognition of extraordinary performance. The FY2022 Restricted Stock Component of all Units granted pursuant to the 2022 Program is issued under and pursuant to the 2018 Plan and subject to the terms of the company’s standard performance-based restricted stock award agreement.
On September 5, 2022, the Compensation Committee reviewed corporate performance for fiscal 2022 and determined the achievement levels of the performance goals under the 2022 Program. As a result of the executive team’s level of performance measured against the company and individual performance goalstimeframes set forth in the 2022 Program,Company’s Bylaws described above.
