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Share Name | Share Symbol | Market | Type |
---|---|---|---|
Charles and Colvard Ltd | NASDAQ:CTHR | NASDAQ | Common Stock |
Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
---|---|---|---|---|---|---|---|---|---|---|
0.00 | 0.00% | 0.3054 | 0.28 | 0.41 | 0 | 11:05:16 |
North Carolina
|
56-1928817
|
|
(State or other jurisdiction of incorporation or organization)
|
(I.R.S. Employer Identification No.)
|
170 Southport Drive
Morrisville, North Carolina
|
27560
|
|
(Address of principal executive offices)
|
(Zip Code)
|
Title of each class
|
Name of each exchange on which registered
|
Common Stock, no par value per share
|
The NASDAQ Stock Market LLC
|
Large accelerated filer
|
☐
|
Accelerated filer
|
☐
|
Non-accelerated filer
|
☐
(Do not check if a smaller reporting company)
|
Smaller reporting company
|
☒
|
Page
Number
|
||
PART I
|
||
Item 1.
|
1
|
|
Item 1A.
|
13
|
|
Item 1B.
|
20
|
|
Item 2.
|
20
|
|
Item 3.
|
20
|
|
Item 4.
|
20
|
|
PART II
|
||
Item 5.
|
20
|
|
Item 6.
|
20
|
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Item 7.
|
21
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Item 7A.
|
34
|
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Item 8.
|
35
|
|
Item 9.
|
63
|
|
Item 9A.
|
63
|
|
Item 9B.
|
64
|
|
PART III
|
||
Item 10.
|
64
|
|
Item 11.
|
64
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Item 12.
|
64
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Item 13.
|
64
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Item 14.
|
64
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PART IV
|
||
Item 15.
|
64
|
|
Item 16.
|
67
|
|
· |
Innovate the Forever One
TM
product line.
We plan to invest research and development funds and efforts into the continued expansion of the
Forever One
TM
offering including new jewel shapes and sizes.
|
· |
Expand our finished jewelry line.
We plan to collaborate with key designers and jewelry suppliers to expand our product line and introduce new collections of fashion, fine, and bridal jewelry.
|
· |
Invest in key retail and wholesale partnerships.
We plan to leverage significant groundwork laid with existing partners whose brands and customers align with ours to amplify our reach into these established markets.
|
· |
Explore new traditional and non-traditional sales channels.
We plan to discover unexplored channels as green field opportunities that may open new and innovative ways to reach the consumer where they are shopping.
|
· |
Convey e-commerce learning to new channels.
We plan to leverage our experience and significant underpinnings in e-commerce to expand our footprint into new channels and regions.
|
· |
Evolve our customer service function.
We plan to continually improve our customer service function with the intention of delivering world-class service to our wholesale partners and direct consumers.
|
· |
Amplify our global marketing efforts.
We plan to carefully measure the return on our marketing investments, and focus our efforts on profitable endeavors that drive interest in the Charles & Colvard brand, pull consumers to our many sales and educational outlets, and drive conversions.
|
· |
Advance toward profitability.
We plan to make calculated investments in our growth while continually striving to reach profitability.
|
Description
|
Refractive
Index
|
Dispersion
|
Hardness
(Mohs Scale)
(2)
|
Toughness
|
|||||||||
Charles & Colvard Created Moissanite
®
|
2.65-2.69
|
0.104
|
9.25
|
Excellent
|
|||||||||
Diamond
|
2.42
|
0.044
|
10
|
Excellent*
|
|||||||||
Ruby
|
1.77
|
0.018
|
9
|
Excellent**
|
|||||||||
Sapphire
|
1.77
|
0.018
|
9
|
Excellent**
|
|||||||||
Emerald
|
1.58
|
0.014
|
7.50
|
Good to Poor
|
1. |
Sources: Gemological Institute of America,
Gem Reference Guide for GIA Colored Stones, Gem Identification and Colored Stone Grading Courses
32-35, 65-82, 87-90 (1995); Cornelius S. Hurlburt, Jr. & Robert C. Kammerling,
Gemology
320-324 (2d Ed. 1991); Kirk-Othmer,
Encyclopedia of Chemical Technology
524-541 (5
th
Ed. 2004);
Institution Of Electrical Engineers, Properties of Silicon Carbide
(Gary L. Harris, Ed., 1995); Robert Webster,
Gems: Their Sources, Descriptions and Identification
889-940 (5
th
Ed. 1994); W. von Muench, “
Silicon Carbide” in Landolt-B
ö
rnstein Numerical Data and Functional Relationships in Science and Technology, New Series, Group III
, Vol. 17C, pp. 403-416 and 585-592 (M. Schultz and H. Weiss, Eds., 1984); Kurt Nassau, Shane F. McClure, Shane Elen & James E. Shigley, “
Synthetic Moissanite: A New Diamond Substitute
”,
Gems & Gemology
, Winter 1997, 260-275; Kurt Nassau. “
Moissanite: A New Synthetic Gemstone Material
”,
Journal of Gemmology
, 425-438 (1999).
|
2. |
The Mohs Scale is a relative scale only, and quantitative comparisons of different gemstone materials cannot be made directly using the Mohs Scale. Moissanite jewels, while harder than all other known gemstones, are approximately one-half as hard as diamond.
|
· |
growing gem-grade raw SiC crystals;
|
· |
manufacturing rough preforms;
|
· |
faceting jewels;
|
· |
polishing jewels; and
|
· |
inspecting, sorting, and grading.
|
· |
Millennials –
This important age group is socially and ethically wired. They proactively seek out goods and services that align with their core principles and become devoted and vocal advocates of brands that embody ‘green’ practices. Our socially responsible and ethically-sourced product aligns directly with the principles and purchasing requirements of the millennial and our quality and price point offer unprecedented value to the cost-conscious millennial. Throughout 2017, Charles & Colvard plans to continue proactively engaging this target market through a multi-channel traditional and digital marketing strategy.
|
· |
Social Media
– To reinforce and support our position as the premier source of moissanite, our marketing team is working on several social media initiatives that target current and future moissanite consumers and support the promotion and sale of
Charles & Colvard Created Moissanite®.
Our campaigns are focused on driving a consistent message emphasizing the ethical origins of our jewels, their everlasting beauty, and overall value. We are using various forms of digital and social media outreach to accomplish greater awareness of the value proposition we offer.
|
· |
Marketing to the trade –
In 2016, we continued to target the trade with print advertisements featuring our
Forever Brilliant
®
moissanite jewels and finished jewelry featuring the
Forever Brilliant
®
jewel in leading trade publications, tagging key distributors to support sales growth. Our September 2015 launch of
Forever One
TM
was a controlled event, and little advertising or promotion accompanied the release. We anticipate continuing to deliver meaningful promotion of
Forever One
TM
in 2017 as we further expand this product line and expect that we will continue to see, as we did in 2016, the wholesale distribution segment transition to
Forever One
TM
.
|
· |
Industry associations
– We maintain relationships with major jewelry industry organizations and jewelry trade publications as an opportunity to communicate with our peers on a consistent basis through media coverage, trade shows, and charitable events, among others.
|
· |
Trade shows –
Our attendance at leading jewelry trade shows as a sponsor, an exhibitor, or a participant has helped us extend our outreach to customers. In 2016, we attended major domestic and international jewelry industry trade shows, including JCK in Las Vegas and the Hong Kong Gem and Jewellery Fair, and we intend to continue investing in these important industry events in 2017.
|
· |
Cooperative advertising –
Some of our loose moissanite jewels wholesale customers participate in our cooperative advertising program, which reimburses, via a credit towards future purchases, a portion of their marketing costs based on the amount of their purchases from us, subject to the customer adhering to our branding guidelines and other conditions. We plan to de-emphasize broad-based cooperative advertising, but we will consider strategic opportunities to utilize this form of advertising.
|
· |
Consumer education
– Because education of the consumer is so important to sell-through of moissanite products, we continue to enhance our website www.charlesandcolvard.com to include extensive educational information about moissanite, in addition to general background information about our company. We expect to launch additional improvements and enhancements to our web presence in 2017.
|
· |
Consumer advertising –
We are supporting our initiative to increase consumer awareness of moissanite and our finished jewelry primarily with various forms of digital communication, including targeted email and via social media outlets.
|
· |
New e-commerce outlets
– We are firm believers in the importance of e-commerce to our growth strategy and are anticipating an expanded e-commerce footprint in 2017 across third-party marketplaces, comparison shopping engines, affiliate networks, digital marketing platforms, social commerce engines, and more.
|
· |
Domestic -
Finished jewelry featuring moissanite is sold through our wholesale distribution segment to consumers through a broad range of channels, including single- and multiple-location independent jewelry stores, jewelry store chains, online retailers, television shopping networks, department stores, and catalogs. We sell our loose moissanite jewels to wholesale distributors and finished jewelry manufacturers, which in turn set them in mountings and sell them to retailers, sell them through their own e-commerce sites, or resell the loose jewels at a markup. We also mount our loose jewels into our own jewelry, which we currently sell at wholesale to home shopping networks, various e-commerce websites, and select retailers. In addition, we have allowed loose moissanite jewels and finished jewelry inventory to be placed in stores on a consignment basis. We continue to evaluate our channel strategy for domestic wholesale distribution, which may result in a change to our historical distribution methods and partners.
|
· |
International -
Our international wholesale distribution currently comprises primarily loose moissanite jewels that are sold to international distributors for resale to jewelry manufacturers and retailers in their local markets. We currently have over 20 international wholesale distributors for loose moissanite jewels covering portions of Western Europe, Australia, India, Southeast Asia, and the Middle East. We have continued to invest in certain international markets that we believe have the most potential with respect to acceptance and sales of the moissanite jewels, including Australia, China, India, Italy, and the United Kingdom. Export sales aggregated approximately $3.00 million, or 10% of total consolidated net sales, and $3.47 million, or 14% of total consolidated net sales, in 2016 and 2015, respectively. It should be noted that a portion of our international sales consists of finished jewels sold internationally that may be re-imported to U.S. retailers.
|
· |
our ability to continue our relationship with Cree in order to sustain our supply of high-quality SiC crystals;
|
· |
our ability to understand the consumer market segment and effectively market to them a compelling value proposition that leads to converted customers;
|
· |
our continued success in developing and promoting brands for our moissanite jewels and finished jewelry featuring moissanite, resulting in increased interest and demand for moissanite jewelry at the consumer level;
|
· |
the continued willingness and ability of our jewelry distributors and other jewelry suppliers, manufacturers, and designers to market and promote
Charles & Colvard Created Moissanite
®
to the retail jewelry trade;
|
· |
the continued willingness of distributors, retailers, and others in the channel of distribution to purchase loose
Charles & Colvard Created Moissanite
®
, and the continued willingness of manufacturers, designers, and retail jewelers to undertake setting of the loose jewels;
|
· |
our continued ability and the ability of manufacturers, designers, and retail jewelers to select jewelry settings that encourage consumer acceptance of and demand for our moissanite jewels and finished jewelry;
|
· |
our continued ability and the ability of jewelry manufacturers and retail jewelers to set loose moissanite jewels in finished jewelry with high-quality workmanship;
|
· |
our continued ability and the ability of retail jewelers to effectively market and sell finished jewelry featuring moissanite, including finished jewelry to consumers; and
|
· |
our ability to operationally execute our direct-to-consumer e-commerce business.
|
· |
natural gemstone, which is found in nature;
|
· |
synthetic gemstone, which has the same chemical composition and essentially the same physical and optical characteristics of natural gemstone but is created in a lab; and
|
· |
simulated or substitute material, which is similar in appearance to natural gemstone but does not have the same chemical composition, physical properties, or optical characteristics.
|
· |
our ability to understand the consumer market segment and effectively market to them a compelling value proposition that leads to converted customers;
|
· |
our ability to reach consumers through traditional and digital channels in order to gain interest in moissanite jewels and jewelry;
|
· |
our continued success in developing and promoting brands for our moissanite jewels and finished jewelry featuring moissanite, resulting in increased interest and demand for moissanite jewelry at the consumer level;
|
· |
the continued willingness and ability of our jewelry distributors and other jewelry suppliers, manufacturers, and designers to market and promote
Charles & Colvard Created Moissanite
®
to the retail jewelry trade;
|
· |
the continued willingness of distributors, retailers, and others in the channel of distribution to purchase loose
Charles & Colvard Created Moissanite
®
, and the continued willingness of manufacturers, designers, and retail jewelers to undertake setting of the loose jewels;
|
· |
our continued ability and the ability of manufacturers, designers, and retail jewelers to select jewelry settings that encourage consumer acceptance of and demand for our moissanite jewels and finished jewelry;
|
· |
our continued ability and the ability of jewelry manufacturers and retail jewelers to set loose moissanite jewels in finished jewelry with high-quality workmanship;
|
· |
our continued ability and the ability of retail jewelers to effectively market and sell finished jewelry featuring moissanite to consumers; and
|
· |
our ability to operationally execute our direct-to-consumer e-commerce business.
|
· |
the adverse effects on U.S.-based companies operating in foreign markets that might result from war; terrorism; changes in diplomatic, trade, or business relationships; or other political, social, religious, or economic instability;
|
· |
the continuing adverse economic effects of any global financial crisis;
|
· |
unexpected changes in, or impositions of, legislative or regulatory requirements;
|
· |
delays resulting from difficulty in obtaining export licenses;
|
· |
tariffs and other trade barriers and restrictions;
|
· |
the burdens of complying with a variety of foreign laws and other factors beyond our control;
|
· |
the potential difficulty of enforcing agreements with foreign customers and suppliers; and
|
· |
the complications related to collecting receivables through a foreign country’s legal system.
|
Item 5. |
High
|
Low
|
|||||||
Year Ended December 31, 2015:
|
||||||||
First Quarter
|
$
|
1.92
|
$
|
1.11
|
||||
Second Quarter
|
$
|
1.68
|
$
|
1.15
|
||||
Third Quarter
|
$
|
1.72
|
$
|
1.14
|
||||
Fourth Quarter
|
$
|
1.45
|
$
|
0.90
|
||||
Year Ended December 31, 2016:
|
||||||||
First Quarter
|
$
|
1.49
|
$
|
0.75
|
||||
Second Quarter
|
$
|
1.26
|
$
|
0.93
|
||||
Third Quarter
|
$
|
1.33
|
$
|
0.85
|
||||
Fourth Quarter
|
$
|
1.23
|
$
|
0.83
|
· |
Expansion of Forever One
TM
. Since its limited launch in September 2015, Charles & Colvard’s
Forever One
™ the world’s first colorless moissanite jewel (graded as D-E-F using the Gemological Institute of America’s color grading scale), has been met with great enthusiasm from channel partners and consumers. In response to this demand, we expanded our
Forever One
TM
product line by offering the jewel in an additional color grade (G-H-I), and in more shapes and sizes, including the innovative Asscher cut, which was released in June 2016.
Forever One
TM
represented more than 55% of all Charles & Colvard loose jewel and finished jewelry sales for the fourth quarter of 2016, and we believe
Forever One
TM
represents the future of premier moissanite to the market.
|
· |
A move up-market.
With the advent of our colorless jewel,
Forever One
TM
, came an opportunity for Charles & Colvard to move up-market – competing directly with diamond for share of wallet. We believe the coupling of this amazing jewel with our new brand presence and jewelry line has elevated Charles & Colvard to the ranks of a premium brand. Market acceptance, as evidenced by our growth in the bridal sector, validates our move into what we believe is an underserved “white space” in the fine jewelry sector. To differentiate ourselves from emerging competition and to ensure our customers that they are receiving a reputable and high-quality jewel, each
Charles & Colvard Created Moissanite
®
jewel is backed by a Limited Lifetime Warranty and Certificate of Authenticity – our commitment to our customers that their purchase is guaranteed to retain its fire and brilliance forever. With the launch of our new e-commerce website, we now offer expanded warranty coverage on our
Forever One
TM
jewels to include protection against usage damage to our moissanite gemstones.
|
· |
Expansion of our jewelry line.
Throughout 2016, Charles & Colvard carefully curated a collection of jewelry ranging from bridal to fashion and fine jewelry. While bridal continues to be a large and fast growing category, we believe the introduction of an expanded selection of everyday fashion and fine jewelry positions Charles & Colvard as a brand that appeal to consumers celebrating a multitude of commemorative moments – from birthdays to anniversaries and more – affording Charles & Colvard more opportunities to sell our wares. This broadened collection is now available to our retail and wholesale partners as well as promoted on Charles & Colvard’s e-commerce site and third-party transactional websites.
|
· |
Growth within our traditional channels.
Charles & Colvard has enjoyed 20 years of partnership with industry leaders in the wholesale and retail spaces. We believe these traditional channels continue to represent fertile ground for our move up-market. Sales efforts in 2016 delivered growth with existing partners and an expanded footprint into new retail and wholesale channels, supporting 21% overall growth in our wholesale sector.
|
· |
Expansion of our direct-to-consumer e-commerce business.
One of the primary channels that benefitted from our 2016 re-branding effort is our direct-to-consumer e-commerce website, charlesandcolvard.com. In October 2016, we announced the launch of our web presence with a new look and feel, an enhanced user experience, the introduction of our new jewelry line, and a singular and unified presence for our company and brand. We re-platformed our web presence on leading-edge technology that positions us to deliver the latest in consumer shopping experiences to our customers. This agile web platform enables us to iterate and refresh our website with new and innovate functionality as new e-commerce and direct-to-consumer strategies make their way to market. We coupled this new presence with an aggressive digital marketing and awareness strategy that drew interest to our new site, and conversions during the 2016 holiday season. Another critical element of our direct-to-consumer strategy is to provide our products for sale through third party e-commerce channels. We executed on this strategy with the release of Charles & Colvard products on marketplaces including Amazon, eBay, Jet and Walmart.com. Additionally, in August 2016, we announced our partnership with Gemvara, a leading online retailer of customizable fine jewelry, which showcases Charles & Colvard Forever One™ on its unique, world-class e-commerce platform.
|
· |
A laser focus on millennials.
Millennials are the largest age group in U.S. history, and they are moving into their prime spending years. Millennials proactively seek out goods and services that align with their core principles, and become devoted and vocal advocates of brands that embody ‘green’ practices. Our socially responsible and ethically-sourced products align directly with the principles and purchasing preferences of the millennial, and our quality and price point offer unprecedented value to the cost-conscious millennial. Throughout 2016, we proactively engaged this market through a multi-channel traditional and digital marketing strategy that we believe has meaningfully increased the awareness of our brand as evidenced through our increased social media following, multiple public relations postings and newfound interaction with this important customer segment.
|
· |
Our total consolidated net sales increased by $3.48 million, or 14%, to $29.17 million in 2016 from $25.69 million in 2015. The increase in consolidated net sales was due primarily to the increase in our wholesale business in both the domestic and international markets through our distributor channels and the sale of approximately $6.77 million of legacy inventory to a large domestic customer as a result of our efforts to reduce these legacy inventories. This increase was partially offset by a decrease in sales of our direct-to-consumer e-commerce business, charlesandcolvard.com, which decreased by 15% to $4.64 million, compared to the prior year.
|
· |
Net loss from continuing operations decreased $1.14 million to a loss of $3.95 million in 2016 from a net loss of $5.09 million. The reduction in net loss was
primarily due to an increased gross profit margin on greater net sales as we implement our new sales and marketing strategies. These improvements were offset in part by the increased operating expenses.
|
· |
Net loss decreased by $5.05 million, to a loss of $4.53 million in 2016 from a net loss of $9.57 million in 2015. Net loss per share was $0.22 in 2016 compared to a net loss per share of $0.47 in 2015.
The reduction in net loss was
primarily due to the discontinuance of our direct-to-consumer home party business and an increased gross profit margin on greater net sales as we implement our new sales and marketing strategies. These improvements were offset in part by the increased operating expenses. We recorded a net loss from continuing operations of $3.95 million for the year ended December 31, 2016, compared to a net loss from continuing operations of $5.09 million for the year ended December 31, 2015.
|
· |
We generated positive cash flows from continuing operations of $3.33 million in 2016 compared to positive cash flows of $5.82 million from continuing operations in 2015.
The primary drivers of positive cash flow in 2016 were a decrease in inventory of $4.00 million, a decrease in accounts receivable of $1.45 million, $1.44 million of net non-cash charges, and an increase in accounts payable of $654,000. These factors more than offset a net loss from operations of $3.95 million and a decrease in accrued expenses of $420,000. We
generated negative
cash flows from discontinued operations of $1.13 million in 2016 versus $4.25 million in 2015.
|
· |
Cash and cash equivalents at December 31, 2016 were $7.43 million compared to $5.27 million at December 31, 2015. The primary reason for this increase is the $2.21 million of cash flow provided by operations.
|
· |
Total inventory, including long-term and consignment inventory, was $28.13 million as of December 31, 2016, down from approximately $32.33 million at December 31, 2015. This decrease is primarily a result of specific efforts to
sell loose jewel legacy inventory of less desirable quality at lower product margins
and includes the sale of
approximately $6.77 million of legacy inventory to a large domestic customer.
|
· |
We continue to carry no long-term debt and believe we can fund our growth strategies for the foreseeable future from operating cash flows.
|
Year Ended December 31,
|
||||||||
2016
|
2015
|
|||||||
Net sales
|
$
|
29,168,128
|
$
|
25,693,292
|
||||
Costs and expenses:
|
||||||||
Cost of goods sold
|
20,401,439
|
18,943,507
|
||||||
Sales and marketing
|
7,038,277
|
5,764,389
|
||||||
General and administrative
|
5,544,452
|
6,031,829
|
||||||
Research and development
|
2,848
|
17,795
|
||||||
Loss on abandonment of property and equipment
|
117,930
|
-
|
||||||
Total costs and expenses
|
33,104,946
|
30,757,520
|
||||||
Loss from operations
|
(3,936,818
|
)
|
(5,064,228
|
)
|
||||
Other income (expense):
|
||||||||
Interest income
|
-
|
11
|
||||||
Interest expense
|
(1,737
|
)
|
(10,359
|
)
|
||||
Gain on sale of long-term assets
|
-
|
125
|
||||||
Total other expense, net
|
(1,737
|
)
|
(10,223
|
)
|
||||
Loss before income taxes from continuing operations
|
(3,938,555
|
)
|
(5,074,457
|
)
|
||||
Income tax net expense from continuing operations
|
(13,480
|
)
|
(12,821
|
)
|
||||
Net loss from continuing operations
|
(3,952,035
|
)
|
(5,087,272
|
)
|
||||
Discontinued Operations:
|
||||||||
Loss from discontinued operations
|
(586,124
|
)
|
(4,485,787
|
)
|
||||
Gain on sale of assets from discontinued operations
|
12,398
|
-
|
||||||
Net loss from discontinued operations
|
(573,726
|
)
|
(4,485,787
|
)
|
||||
Net loss
|
$
|
(4,525,761
|
)
|
$
|
(9,573,059
|
)
|
|
Year Ended December 31,
|
Change
|
||||||||||||||
|
2016
|
2015
|
Dollars
|
Percent
|
||||||||||||
Loose jewels
|
$
|
21,451,728
|
$
|
15,113,249
|
$
|
6,338,479
|
42
|
%
|
||||||||
Finished jewelry
|
7,716,400
|
10,580,043
|
(2,863,643
|
)
|
(27
|
)%
|
||||||||||
Total consolidated net sales
|
$
|
29,168,128
|
$
|
25,693,292
|
$
|
3,474,836
|
14
|
%
|
Year Ended December 31,
|
Change
|
|||||||||||||||
2016
|
2015
|
Dollars
|
Percent
|
|||||||||||||
Product line cost of goods sold
|
||||||||||||||||
Loose jewels
|
$
|
13,916,749
|
$
|
9,459,159
|
$
|
4,457,590
|
47
|
%
|
||||||||
Finished jewelry
|
4,148,788
|
6,296,764
|
(2,147,976
|
)
|
-34
|
%
|
||||||||||
Total product line cost of goods sold
|
18,065,537
|
15,755,923
|
2,309,614
|
15
|
%
|
|||||||||||
Non-product line cost of goods sold
|
2,335,902
|
3,187,584
|
(851,682
|
)
|
-27
|
%
|
||||||||||
Total cost of goods sold
|
$
|
20,401,439
|
$
|
18,943,507
|
$
|
1,457,932
|
8
|
%
|
Year Ended December 31,
|
Change
|
|||||||||||||||
2016
|
2015
|
Dollars
|
Percent
|
|||||||||||||
Sales and marketing
|
$
|
7,038,277
|
$
|
5,764,389
|
$
|
1,273,888
|
22
|
%
|
Year Ended December 31,
|
Change
|
|||||||||||||||
2016
|
2015
|
Dollars
|
Percent
|
|||||||||||||
General and administrative
|
$
|
5,544,452
|
$
|
6,031,829
|
$
|
(487,377
|
)
|
-8
|
%
|
Year Ended December 31,
|
Change
|
|||||||||||||||
2016
|
2015
|
Dollars
|
Percent
|
|||||||||||||
Loss on abandonment of assets
|
$
|
117,930
|
$
|
-
|
$
|
117,930
|
100
|
%
|
Page
Number
|
|
Report of Independent Registered Public Accounting Firm
|
36
|
Consolidated Balance Sheets as of December 31, 2016 and 2015
|
37
|
Consolidated Statements of Operations for the years ended December 31, 2016 and 2015
|
38
|
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2016 and 2015
|
39
|
Consolidated Statements of Cash Flows for the years ended December 31, 2016 and 2015
|
40
|
Notes to Consolidated Financial Statements
|
41
|
December 31,
|
||||||||
2016
|
2015
|
|||||||
ASSETS
|
||||||||
Current assets:
|
||||||||
Cash and cash equivalents
|
$
|
7,427,273
|
$
|
5,274,305
|
||||
Accounts receivable, net
|
2,794,626
|
3,852,651
|
||||||
Inventory, net
|
9,770,206
|
10,739,798
|
||||||
Prepaid expenses and other assets
|
682,083
|
701,105
|
||||||
Assets related to discontinued operations
|
-
|
83,000
|
||||||
Total current assets
|
20,674,188
|
20,650,859
|
||||||
Long-term assets:
|
||||||||
Inventory, net
|
18,360,211
|
21,588,622
|
||||||
Property and equipment, net
|
1,391,116
|
1,615,683
|
||||||
Intangible assets, net
|
8,808
|
71,086
|
||||||
Other assets
|
71,453
|
214,588
|
||||||
Total long-term assets
|
19,831,588
|
23,489,979
|
||||||
TOTAL ASSETS
|
$
|
40,505,776
|
$
|
44,140,838
|
||||
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
||||||||
Current liabilities:
|
||||||||
Accounts payable
|
$
|
3,977,149
|
$
|
3,323,148
|
||||
Accrued cooperative advertising
|
50,000
|
58,000
|
||||||
Accrued expenses and other liabilities
|
581,107
|
891,187
|
||||||
Liabilities related to discontinued operations
|
-
|
349,000
|
||||||
Total current liabilities
|
4,608,256
|
4,621,335
|
||||||
Long-term liabilities:
|
||||||||
Accrued expenses and other liabilities
|
594,916
|
710,223
|
||||||
Accrued income taxes
|
433,983
|
420,503
|
||||||
Total long-term liabilities
|
1,028,899
|
1,130,726
|
||||||
Total liabilities
|
5,637,155
|
5,752,061
|
||||||
Commitments and contingencies (Note 8)
|
||||||||
Shareholders’ equity:
|
||||||||
Common stock, no par value; 50,000,000 shares authorized; 21,369,885 and 21,111,585 shares issued and outstanding at December 31, 2016 and 2015, respectively
|
54,243,816
|
54,240,247
|
||||||
Additional paid-in capital
|
14,282,956
|
13,280,920
|
||||||
Accumulated deficit
|
(33,658,151
|
)
|
(29,132,390
|
)
|
||||
Total shareholders’ equity
|
34,868,621
|
38,388,777
|
||||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
|
$
|
40,505,776
|
$
|
44,140,838
|
Year Ended December 31,
|
||||||||
2016
|
2015
|
|||||||
Net sales
|
$
|
29,168,128
|
$
|
25,693,292
|
||||
Costs and expenses:
|
||||||||
Cost of goods sold
|
20,401,439
|
18,943,507
|
||||||
Sales and marketing
|
7,038,277
|
5,764,389
|
||||||
General and administrative
|
5,544,452
|
6,031,829
|
||||||
Research and development
|
2,848
|
17,795
|
||||||
Loss on abandonment of property and equipment
|
117,930
|
-
|
||||||
Total costs and expenses
|
33,104,946
|
30,757,520
|
||||||
Loss from operations
|
(3,936,818
|
)
|
(5,064,228
|
)
|
||||
Other income (expense):
|
||||||||
Interest income
|
-
|
11
|
||||||
Interest expense
|
(1,737
|
)
|
(10,359
|
)
|
||||
Gain on sale of long-term assets
|
-
|
125
|
||||||
Total other expense, net
|
(1,737
|
)
|
(10,223
|
)
|
||||
Loss before income taxes from continuing operations
|
(3,938,555
|
)
|
(5,074,451
|
)
|
||||
Income tax net expense from continuing operations
|
(13,480
|
)
|
(12,821
|
)
|
||||
Net loss from continuing operations
|
(3,952,035
|
)
|
(5,087,272
|
)
|
||||
Discontinued Operations:
|
||||||||
Loss from discontinued operations
|
(586,124
|
)
|
(4,485,787
|
)
|
||||
Gain on sale of assets from discontinued operations
|
12,398
|
-
|
||||||
Net loss from discontinued operations
|
(573,726
|
)
|
(4,485,787
|
)
|
||||
Net loss
|
$
|
(4,525,761
|
)
|
$
|
(9,573,059
|
)
|
||
Net loss per common share:
|
||||||||
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
|
)
|
||
Weighted average number of shares used in computing net loss per common share:
|
||||||||
Basic
|
20,926,120
|
20,407,764
|
||||||
Diluted
|
20,926,120
|
20,407,764
|
Common Stock
|
||||||||||||||||||||
Number of
Shares
|
Amount
|
Additional
Paid-in
Capital
|
Accumulated
Deficit
|
Total
Shareholders’
Equity
|
||||||||||||||||
Balance at December 31, 2014
|
20,382,333
|
$
|
53,949,001
|
$
|
11,628,503
|
$
|
(19,559,331
|
)
|
$
|
46,018,173
|
||||||||||
Stock-based compensation
|
-
|
-
|
1,770,897
|
-
|
1,770,897
|
|||||||||||||||
Issuance of restricted stock
|
487,500
|
-
|
-
|
-
|
-
|
|||||||||||||||
Stock option exercises
|
241,752
|
291,246
|
(118,480
|
)
|
-
|
172,766
|
||||||||||||||
Net loss
|
-
|
-
|
-
|
(9,573,059
|
)
|
(9,573,059
|
)
|
|||||||||||||
Balance at December 31, 2015
|
21,111,585
|
$
|
54,240,247
|
$
|
13,280,920
|
$
|
(29,132,390
|
)
|
$
|
38,388,777
|
||||||||||
Stock-based compensation
|
-
|
-
|
1,003,305
|
-
|
1,003,305
|
|||||||||||||||
Issuance of restricted stock
|
255,800
|
-
|
-
|
-
|
-
|
|||||||||||||||
Stock option exercises
|
2,500
|
3,569
|
(1,269
|
)
|
-
|
2,300
|
||||||||||||||
Net loss
|
-
|
-
|
-
|
(4,525,761
|
)
|
(4,525,761
|
)
|
|||||||||||||
Balance at December 31, 2016
|
21,369,885
|
$
|
54,243,816
|
$
|
14,282,956
|
$
|
(33,658,151
|
)
|
$
|
34,868,621
|
Year Ended December 31,
|
||||||||
2016
|
2015
|
|||||||
CASH FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net loss
|
$
|
(4,525,761
|
)
|
$
|
(9,573,059
|
)
|
||
Net loss from discontinued operations
|
(573,726
|
)
|
(4,485,787
|
)
|
||||
Net loss from continuing operations
|
(3,952,035
|
)
|
(5,087,272
|
)
|
||||
Adjustments to reconcile net loss to net cash provided by operating activities of continuing operations:
|
||||||||
Depreciation and amortization
|
557,393
|
758,787
|
||||||
Stock-based compensation
|
959,134
|
1,545,144
|
||||||
Provision for uncollectible accounts
|
(73,300
|
)
|
89,462
|
|||||
Provision for sales returns
|
(316,000
|
)
|
(179,000
|
)
|
||||
Provision for inventory reserves
|
200,000
|
436,000
|
||||||
Loss on abandonment of property and equipment
|
117,930
|
-
|
||||||
Gain on sale of long-term assets
|
-
|
(125
|
)
|
|||||
Changes in operating assets and liabilities:
|
||||||||
Accounts receivable
|
1,447,325
|
1,747,140
|
||||||
Inventory
|
3,998,003
|
6,174,209
|
||||||
Prepaid expenses and other assets, net
|
162,157
|
(103,012
|
)
|
|||||
Accounts payable
|
654,001
|
251,517
|
||||||
Accrued cooperative advertising
|
(8,000
|
)
|
(162,000
|
)
|
||||
Accrued income taxes
|
13,480
|
12,821
|
||||||
Accrued expenses and other liabilities
|
(425,387
|
)
|
338,702
|
|||||
Net cash provided by operating activities of continuing operations
|
3,334,701
|
5,822,373
|
||||||
Net cash used in operating activities of discontinued operations
|
(1,125,578
|
)
|
(4,254,480
|
)
|
||||
Net cash provided by operating activities
|
2,209,123
|
1,567,893
|
||||||
CASH FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Purchases of property and equipment
|
(421,761
|
)
|
(407,452
|
)
|
||||
Patent, license rights, and trademark costs
|
(5,615
|
)
|
(45,742
|
)
|
||||
Proceeds from sale of long-term assets
|
250
|
175
|
||||||
Net cash used in investing activities of continuing operations
|
(427,126
|
)
|
(453,019
|
)
|
||||
Net cash provided by (used in) investing activities of discontinued operations
|
368,671
|
(20,676
|
)
|
|||||
Net cash used in investing activities
|
(58,455
|
)
|
(473,695
|
)
|
||||
CASH FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Stock option exercises
|
2,300
|
172,766
|
||||||
Net cash provided by financing activities of continuing operations
|
2,300
|
172,766
|
||||||
NET INCREASE IN CASH AND CASH EQUIVALENTS
|
2,152,968
|
1,266,964
|
||||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
5,274,305
|
4,007,341
|
||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD
|
$
|
7,427,273
|
$
|
5,274,305
|
||||
Supplemental disclosure of cash flow information:
|
||||||||
Cash paid during the year for interest
|
$
|
1,737
|
$
|
10,359
|
1. |
DESCRIPTION OF BUSINESS
|
2. |
BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
|
Year Ended December 31,
|
||||||||
2016
|
2015
|
|||||||
Balance, beginning of period
|
$
|
731,000
|
$
|
910,000
|
||||
Additions charged to operations
|
3,574,297
|
3,651,741
|
||||||
Sales returns
|
(3,890,297
|
)
|
(3,830,741
|
)
|
||||
Balance, end of period
|
$
|
415,000
|
$
|
731,000
|
Year Ended December 31,
|
||||||||
2016
|
2015
|
|||||||
Balance, beginning of period
|
$
|
1,137,000
|
$
|
1,074,000
|
||||
(Reductions) additions charged to operations
|
(73,300
|
)
|
89,462
|
|||||
Write-offs, net of recoveries
|
(837,700
|
)
|
(26,462
|
)
|
||||
Balance, end of period
|
$
|
226,000
|
$
|
1,137,000
|
· |
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 2016 and 2015 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.
|
Year Ended December 31,
|
||||||||
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
|
$
|
(4,525,761
|
)
|
$
|
(9,573,059
|
)
|
||
Denominator:
|
||||||||
Weighted average common shares outstanding:
|
||||||||
Basic
|
20,926,120
|
20,407,764
|
||||||
Stock options
|
-
|
-
|
||||||
Diluted
|
20,926,120
|
20,407,764
|
||||||
Net loss per common share:
|
||||||||
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
|
)
|
3. |
SEGMENT INFORMATION AND GEOGRAPHIC DATA
|
Year Ended December 31, 2016
|
||||||||||||
Wholesale
|
charlesandcolvard
.com
|
Total
|
||||||||||
Net sales
|
||||||||||||
Loose jewels
|
$
|
20,929,322
|
$
|
522,406
|
$
|
21,451,728
|
||||||
Finished jewelry
|
3,601,768
|
4,114,632
|
7,716,400
|
|||||||||
Total
|
$
|
24,531,090
|
$
|
4,637,038
|
$
|
29,168,128
|
||||||
Product line cost of goods sold
|
||||||||||||
Loose jewels
|
$
|
13,851,463
|
$
|
65,286
|
$
|
13,916,749
|
||||||
Finished jewelry
|
2,497,788
|
1,651,000
|
4,148,788
|
|||||||||
Total
|
$
|
16,349,251
|
$
|
1,716,286
|
$
|
18,065,537
|
||||||
Product line gross profit
|
||||||||||||
Loose jewels
|
$
|
7,077,859
|
$
|
457,120
|
$
|
7,534,979
|
||||||
Finished jewelry
|
1,103,980
|
2,463,632
|
3,567,612
|
|||||||||
Total
|
$
|
8,181,839
|
$
|
2,920,752
|
$
|
11,102,591
|
||||||
Operating loss
|
$
|
(1,603,947
|
)
|
$
|
(2,332,871
|
)
|
$
|
(3,936,818
|
)
|
|||
Depreciation and amortization
|
$
|
479,517
|
$
|
77,876
|
$
|
557,393
|
||||||
Total assets
|
$
|
40,167,149
|
$
|
338,627
|
$
|
40,505,776
|
||||||
Capital expenditures
|
$
|
158,702
|
$
|
263,059
|
$
|
421,761
|
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
|
Year Ended December 31,
|
||||||||
2016
|
2015
|
|||||||
Product line cost of goods sold
|
$
|
18,065,537
|
$
|
15,755,923
|
||||
Non-capitalized manufacturing and production control expenses
|
1,427,924
|
1,388,268
|
||||||
Freight out
|
376,726
|
600,751
|
||||||
Inventory valuation allowances
|
200,000
|
436,000
|
||||||
Other inventory adjustments
|
331,252
|
762,565
|
||||||
Cost of goods sold
|
$
|
20,401,439
|
$
|
18,943,507
|
December 31,
|
||||||||
2016
|
2015
|
|||||||
Loose jewels
|
||||||||
Raw materials
|
$
|
2,586,045
|
$
|
6,741,712
|
||||
Work-in-process
|
10,589,424
|
5,516,799
|
||||||
Finished goods
|
9,455,393
|
15,877,436
|
||||||
Finished goods on consignment
|
5,473
|
55,388
|
||||||
Total
|
$
|
22,636,335
|
$
|
28,191,335
|
||||
Finished jewelry
|
||||||||
Raw materials
|
$
|
520,572
|
$
|
190,427
|
||||
Work-in-process
|
458,702
|
514,946
|
||||||
Finished goods
|
4,081,275
|
3,193,569
|
||||||
Finished goods on consignment
|
416,305
|
200,613
|
||||||
Total
|
$
|
5,476,854
|
$
|
4,099,555
|
Year Ended December 31,
|
||||||||
2016
|
2015
|
|||||||
Net sales
|
||||||||
United States
|
$
|
26,164,660
|
$
|
22,224,076
|
||||
International
|
3,003,468
|
3,469,216
|
||||||
Total
|
$
|
29,168,128
|
$
|
25,693,292
|
December 31,
|
||||||||
2016
|
2015
|
|||||||
Property and equipment, net
|
||||||||
United States
|
$
|
1,391,116
|
$
|
1,615,683
|
||||
International
|
-
|
-
|
||||||
Total
|
$
|
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
|
4. |
FAIR VALUE MEASUREMENTS
|
· |
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
|
5. |
INVENTORIES
|
December 31,
|
||||||||
2016
|
2015
|
|||||||
Raw materials
|
$
|
3,106,617
|
$
|
6,932,139
|
||||
Work-in-process
|
11,048,126
|
6,031,745
|
||||||
Finished goods
|
15,074,896
|
20,441,535
|
||||||
Finished goods on consignment
|
467,778
|
293,001
|
||||||
Less inventory reserves
|
(1,567,000
|
)
|
(1,370,000
|
)
|
||||
Total
|
$
|
28,130,417
|
$
|
32,328,420
|
||||
Short-term portion
|
$
|
9,770,206
|
$
|
10,739,798
|
||||
Long-term portion
|
18,360,211
|
21,588,622
|
||||||
Total
|
$
|
28,130,417
|
$
|
32,328,420
|
6. |
PROPERTY AND EQUIPMENT
|
December 31,
|
||||||||
2016
|
2015
|
|||||||
Computer software
|
$
|
1,192,922
|
$
|
1,771,102
|
||||
Machinery and equipment
|
956,050
|
922,532
|
||||||
Computer hardware
|
874,347
|
855,348
|
||||||
Leasehold improvements
|
1,083,634
|
1,030,423
|
||||||
Furniture and fixtures
|
309,046
|
302,064
|
||||||
Total
|
4,415,999
|
4,881,469
|
||||||
Less accumulated depreciation
|
(3,024,883
|
)
|
(3,265,786
|
)
|
||||
Property and equipment, net
|
$
|
1,391,116
|
$
|
1,615,683
|
7. |
INTANGIBLE ASSETS
|
December 31,
|
Weighted
Average
Amortization
|
|||||||||||
Period
|
||||||||||||
2016
|
2015
|
(in Years)
|
||||||||||
Patents
|
$
|
958,604
|
$
|
958,604
|
0.4
|
|||||||
Trademarks
|
55,824
|
50,208
|
1.8
|
|||||||||
License rights
|
6,718
|
6,718
|
0.0
|
|||||||||
Total
|
1,021,146
|
1,015,530
|
||||||||||
Less accumulated amortization
|
(1,012,338
|
)
|
(944,444
|
)
|
||||||||
Intangible assets, net
|
$
|
8,808
|
$
|
71,086
|
8. |
COMMITMENTS AND CONTINGENCIES
|
2017
|
$
|
584,789
|
||
2018
|
600,871
|
|||
2019
|
617,395
|
|||
2020
|
634,373
|
|||
2021
|
541,957
|
|||
Total
|
$
|
2,979,385
|
9. |
LINE OF CREDIT
|
10. |
SHAREHOLDERS’ EQUITY AND STOCK-BASED COMPENSATION
|
Year Ended December 31,
|
||||||||
2016
|
2015
|
|||||||
Employee stock options
|
$
|
383,778
|
$
|
697,269
|
||||
Consultant stock options
|
170,622
|
257,342
|
||||||
Restricted stock awards
|
448,906
|
816,286
|
||||||
Total
|
$
|
1,003,306
|
$
|
1,770,897
|
Shares
|
Weighted
Average
Exercise Price
|
|||||||
Outstanding, December 31, 2014
|
1,665,571
|
$
|
2.93
|
|||||
Granted
|
1,413,765
|
$
|
1.28
|
|||||
Exercised
|
(241,752
|
)
|
$
|
0.71
|
||||
Forfeited
|
(129,434
|
)
|
$
|
3.08
|
||||
Expired
|
(267,073
|
)
|
$
|
3.17
|
||||
Outstanding, December 31, 2015
|
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
|
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
|
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
|
Shares
|
Weighted
Average
Grant Date
Fair Value
|
|||||||
Unvested, December 31, 2014
|
287,006
|
$
|
3.29
|
|||||
Granted
|
487,500
|
$
|
1.38
|
|||||
Vested
|
(349,506
|
)
|
$
|
2.36
|
||||
Canceled
|
-
|
$
|
-
|
|||||
Unvested, December 31, 2015
|
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
|
11. |
INCOME TAXES
|
Year Ended December 31,
|
||||||||
2016
|
2015
|
|||||||
Current:
|
||||||||
Federal
|
$
|
-
|
$
|
-
|
||||
State
|
(13,480
|
)
|
(12,821
|
)
|
||||
Total
|
(13,480
|
)
|
(12,821
|
)
|
||||
Deferred:
|
||||||||
Federal
|
-
|
-
|
||||||
State
|
-
|
-
|
||||||
Total
|
-
|
-
|
||||||
Income tax net expense
|
$
|
(13,480
|
)
|
$
|
(12,821
|
)
|
December 31,
|
||||||||
2016
|
2015
|
|||||||
Reserves and accruals
|
$
|
1,053,863
|
$
|
1,578,374
|
||||
Prepaid expenses
|
(43,774
|
)
|
(50,966
|
)
|
||||
Federal NOL carryforwards
|
8,530,493
|
6,762,537
|
||||||
State NOL carryforwards
|
615,919
|
583,651
|
||||||
Hong Kong NOL carryforwards
|
995,566
|
995,566
|
||||||
Federal benefit on state taxes under uncertain tax positions
|
136,969
|
132,385
|
||||||
Stock-based compensation
|
342.294
|
481,917
|
||||||
Research tax credit
|
434,637
|
434,637
|
||||||
Alternative minimum tax credit
|
348,264
|
348,264
|
||||||
Contributions carryforward
|
35,100
|
33,582
|
||||||
Depreciation
|
(286,608
|
)
|
(312,023
|
)
|
||||
Accrued rent
|
216,432
|
254,404
|
||||||
Loss on impairment of long-lived assets
|
53,042
|
52,226
|
||||||
Valuation allowance
|
(12,432.197
|
)
|
(11,294,554
|
)
|
||||
Total
|
-
|
-
|
||||||
Total deferred income tax assets, net
|
$
|
-
|
$
|
-
|
Year Ended December 31,
|
||||||||
2016
|
2015
|
|||||||
Anticipated income tax benefit at statutory rate
|
$
|
1,534,176
|
$
|
3,315,420
|
||||
State income tax benefit, net of federal tax effect
|
(9,350
|
)
|
35,814
|
|||||
Capital loss carryforward expiration
|
-
|
(9,227
|
)
|
|||||
Income tax effect of uncertain tax positions
|
(8,896
|
)
|
(8,461
|
)
|
||||
Return to provision adjustments
|
(23,070
|
)
|
(82,341
|
)
|
||||
Stock-based compensation
|
(110,066
|
)
|
(215,030
|
)
|
||||
Other changes in deferred income tax assets, net
|
(13,118
|
)
|
(22,414
|
)
|
||||
Increase in valuation allowance
|
(1,383,156
|
)
|
(3,026,582
|
)
|
||||
Income tax net expense
|
$
|
(13,480
|
)
|
$
|
(12,821
|
)
|
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
|
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
|
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
|
)
|
13. |
MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK
|
December 31,
2016
|
December 31,
2015
|
|||||||
Customer A
|
13
|
%
|
** |
%
|
||||
Customer B
|
*
|
%
|
17
|
%
|
||||
Customer C
|
*
|
%
|
14
|
%
|
||||
Customer D
|
*
|
%
|
11
|
%
|
||||
Customer E
|
*
|
%
|
10
|
%
|
Year Ended December 31,
|
||||||||
2016
|
2015
|
|||||||
Customer D
|
23
|
%
|
25
|
%
|
||||
Customer F
|
17
|
%
|
11
|
%
|
14. |
EMPLOYEE BENEFIT PLAN
|
(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.
|
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
|
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, 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)*
|
10.2
|
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)*
|
10.3
|
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)*
|
10.4
|
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)
|
10.5
|
Credit and Security Agreement, dated as of June 25, 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 Current Report on Form 8-K, as filed with the SEC on June 30, 2014)
|
10.6
|
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)
|
10.7
|
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)
|
10.8
|
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)
|
10.10
|
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)*
|
10.11
|
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)
|
10.12
|
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)
|
10.13
|
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)+
|
10.14
|
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)+
|
10.15
|
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 20, 2016)+
|
10.16
|
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)+
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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)+
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10.18
|
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)+
|
10.19
|
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)+
|
10.20
|
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)+
|
10.21
|
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)+
|
10.22
|
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)+
|
10.23
|
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)+
|
10.24
|
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 (incorporated herein by reference to Exhibit 10.42 to our Annual Report on Form 10-K for the year ended December 31, 2015)+
|
10.26
|
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)+
|
10.27
|
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)+
|
CHARLES & COLVARD, LTD.
|
||
By:
|
/s/ Suzanne Miglucci
|
|
March 9, 2017
|
Suzanne Miglucci
|
|
President and Chief Executive Officer
|
By:
|
/s/ Suzanne Miglucci
|
|
March 9, 2017
|
Suzanne Miglucci
|
|
Director, President and Chief Executive Officer
|
||
By:
|
/s/ Clint J. Pete
|
|
March 9, 2017
|
Clint J. Pete
|
|
Interim Chief Financial Officer (Principal Financial Officer and
Principal Accounting Officer)
|
||
By:
|
/s/ Neal I. Goldman
|
|
March 9, 2017
|
Neal I. Goldman
|
|
Executive Chairman of the Board of Directors
|
||
By:
|
/s/ Anne M. Butler
|
|
March 9, 2017
|
Anne M. Butler
|
|
Director
|
||
By:
|
/s/ Jaqui Lividini
|
|
March 9, 2017
|
Jaqui Lividini
|
|
Director
|
||
By:
|
/s/ Ollin B. Sykes
|
|
March 9, 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
|
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, 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)*
|
10.2
|
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)*
|
10.3
|
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)*
|
10.4
|
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)
|
10.5
|
Credit and Security Agreement, dated as of June 25, 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 Current Report on Form 8-K, as filed with the SEC on June 30, 2014)
|
10.6
|
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)
|
10.7
|
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)
|
10.8
|
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)
|
10.10
|
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)*
|
10.11
|
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)
|
10.12
|
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)
|
10.13
|
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)+
|
10.14
|
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)+
|
10.15
|
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 20, 2016)+
|
10.16
|
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)+
|
10.17
|
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)+
|
10.18
|
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)+
|
10.19
|
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)+
|
10.20
|
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)+
|
10.21
|
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)+
|
10.22
|
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)+
|
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