North Carolina
|
56-1928817
|
|
(State or other jurisdiction of
|
(I.R.S. Employer
|
|
incorporation or organization)
|
Identification No.)
|
170 Southport Drive
Morrisville, North Carolina
|
27560
|
|
(Address of principal executive offices)
|
(Zip Code)
|
Large accelerated filer
|
o
|
Accelerated filer
|
o
|
|
|
|
|
Non-accelerated filer
|
o
(Do not check if a smaller reporting company)
|
Smaller reporting company
|
x
|
|
|
Page
Number
|
PART I – FINANCIAL INFORMATION
|
||
Item 1.
|
|
|
|
3
|
|
|
4
|
|
|
5
|
|
|
6
|
|
Item 2.
|
17
|
|
Item 3.
|
30
|
|
Item 4.
|
30
|
|
|
||
PART II – OTHER INFORMATION
|
||
Item 1.
|
31
|
|
Item 1A.
|
31
|
|
Item 6.
|
31
|
|
|
32
|
|
June 30, 2014
(unaudited)
|
December 31,
2013
|
||||||
ASSETS
|
|
|
||||||
Current assets:
|
|
|
||||||
Cash and cash equivalents
|
$
|
3,362,813
|
$
|
2,573,405
|
||||
Accounts receivable, net
|
7,816,710
|
10,244,732
|
||||||
Inventory, net
|
12,419,064
|
13,074,428
|
||||||
Prepaid expenses and other assets
|
1,055,610
|
951,635
|
||||||
Deferred income taxes
|
-
|
1,197,832
|
||||||
Total current assets
|
24,654,197
|
28,042,032
|
||||||
Long-term assets:
|
||||||||
Inventory, net
|
29,055,044
|
29,337,674
|
||||||
Property and equipment, net
|
2,163,187
|
1,717,692
|
||||||
Intangible assets, net
|
305,955
|
325,867
|
||||||
Deferred income taxes
|
-
|
2,841,891
|
||||||
Other assets
|
349,466
|
58,696
|
||||||
Total long-term assets
|
31,873,652
|
34,281,820
|
||||||
TOTAL ASSETS
|
$
|
56,527,849
|
$
|
62,323,852
|
||||
|
||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
||||||||
Current liabilities:
|
||||||||
Accounts payable
|
$
|
3,659,900
|
$
|
3,670,551
|
||||
Accrued cooperative advertising
|
196,000
|
188,000
|
||||||
Accrued expenses and other liabilities
|
713,860
|
642,186
|
||||||
Total current liabilities
|
4,569,760
|
4,500,737
|
||||||
Long-term liabilities:
|
||||||||
Accrued rent
|
575,907
|
-
|
||||||
Accrued income taxes
|
401,496
|
395,442
|
||||||
Total long-term liabilities
|
977,403
|
395,442
|
||||||
Total liabilities
|
5,547,163
|
4,896,179
|
||||||
Commitments and contingencies
|
||||||||
Shareholders’ equity:
|
||||||||
Common stock, no par value
|
53,949,001
|
53,949,001
|
||||||
Additional paid-in capital – stock-based compensation
|
10,751,470
|
9,940,980
|
||||||
Accumulated deficit
|
(13,719,785
|
)
|
(6,462,308
|
)
|
||||
Total shareholders’ equity
|
50,980,686
|
57,427,673
|
||||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
|
$
|
56,527,849
|
$
|
62,323,852
|
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
||||||||||||||
|
2014
|
2013
|
2014
|
2013
|
||||||||||||
Net sales
|
$
|
7,841,647
|
$
|
6,512,500
|
$
|
13,909,200
|
$
|
13,017,574
|
||||||||
Costs and expenses:
|
||||||||||||||||
Cost of goods sold
|
5,324,981
|
3,389,315
|
8,988,023
|
6,271,293
|
||||||||||||
Sales and marketing
|
2,171,614
|
2,532,995
|
4,366,225
|
4,779,204
|
||||||||||||
General and administrative
|
2,376,466
|
1,344,408
|
3,752,681
|
2,193,785
|
||||||||||||
Research and development
|
9,514
|
9,041
|
11,501
|
15,024
|
||||||||||||
Loss on abandonment of assets
|
-
|
95,052
|
2,201
|
95,052
|
||||||||||||
Total costs and expenses
|
9,882,575
|
7,370,811
|
17,120,631
|
13,354,358
|
||||||||||||
Loss from operations
|
(2,040,928
|
)
|
(858,311
|
)
|
(3,211,431
|
)
|
(336,784
|
)
|
||||||||
Other income (expense):
|
||||||||||||||||
Interest income
|
20
|
6,972
|
49
|
14,474
|
||||||||||||
Interest expense
|
(188
|
)
|
(234
|
)
|
(318
|
)
|
(974
|
)
|
||||||||
Total other (expense) income, net
|
(168
|
)
|
6,738
|
(269
|
)
|
13,500
|
||||||||||
Loss before income taxes
|
(2,041,096
|
)
|
(851,573
|
)
|
(3,211,700
|
)
|
(323,284
|
)
|
||||||||
Income tax net (expense) benefit
|
(4,152,987
|
)
|
359,988
|
(4,045,777
|
)
|
137,972
|
||||||||||
Net loss
|
$
|
(6,194,083
|
)
|
$
|
(491,585
|
)
|
$
|
(7,257,477
|
)
|
$
|
(185,312
|
)
|
||||
|
||||||||||||||||
Net loss per common share:
|
||||||||||||||||
Basic
|
$
|
(0.31
|
)
|
$
|
(0.02
|
)
|
$
|
(0.36
|
)
|
$
|
(0.01
|
)
|
||||
Diluted
|
$
|
(0.31
|
)
|
$
|
(0.02
|
)
|
$
|
(0.36
|
)
|
$
|
(0.01
|
)
|
||||
|
||||||||||||||||
Weighted average number of shares used in computing net loss per common share:
|
||||||||||||||||
Basic
|
20,262,299
|
19,812,397
|
20,229,979
|
19,736,068
|
||||||||||||
Diluted
|
20,262,299
|
19,812,397
|
20,229,979
|
19,736,068
|
|
Six Months Ended June 30,
|
|||||||
|
2014
|
2013
|
||||||
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
||||||
Net loss
|
$
|
(7,257,477
|
)
|
$
|
(185,312
|
)
|
||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
|
||||||||
Depreciation and amortization
|
588,745
|
384,749
|
||||||
Amortization of bond premium
|
-
|
2,706
|
||||||
Stock-based compensation
|
810,490
|
743,633
|
||||||
Provision for uncollectible accounts
|
682,725
|
(60,805
|
)
|
|||||
Provision for sales returns
|
(845,000
|
)
|
(135,000
|
)
|
||||
Provision for inventory reserves
|
69,000
|
75,000
|
||||||
Provision (benefit) for deferred income taxes
|
4,039,723
|
(150,832
|
)
|
|||||
Loss on abandonment of assets
|
2,201
|
95,052
|
||||||
Changes in assets and liabilities:
|
||||||||
Accounts receivable
|
2,590,297
|
476,974
|
||||||
Interest receivable
|
-
|
(891
|
)
|
|||||
Inventory
|
868,994
|
(3,664,506
|
)
|
|||||
Prepaid expenses and other assets, net
|
(394,745
|
)
|
(392,819
|
)
|
||||
Accounts payable
|
(10,651
|
)
|
430,126
|
|||||
Accrued cooperative advertising
|
8,000
|
108,000
|
||||||
Accrued income taxes
|
6,054
|
5,810
|
||||||
Other accrued liabilities
|
647,581
|
(40,620
|
)
|
|||||
Net cash provided by (used in) operating activities
|
1,805,937
|
(2,308,735
|
)
|
|||||
|
||||||||
CASH FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Purchases of property and equipment
|
(956,666
|
)
|
(202,610
|
)
|
||||
Patent, license rights, and trademark costs
|
(59,863
|
)
|
(91,678
|
)
|
||||
Net cash used in investing activities
|
(1,016,529
|
)
|
(294,288
|
)
|
||||
|
||||||||
CASH FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Stock option exercises
|
-
|
13,400
|
||||||
Net cash provided by financing activities
|
-
|
13,400
|
||||||
|
||||||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
789,408
|
(2,589,623
|
)
|
|||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
2,573,405
|
11,860,842
|
||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD
|
$
|
3,362,813
|
$
|
9,271,219
|
||||
|
||||||||
Supplemental disclosure of cash flow information:
|
||||||||
Cash paid during the period for interest
|
$
|
318
|
$
|
974
|
||||
Cash paid during the period for income taxes
|
$
|
-
|
$
|
7,050
|
1. | DESCRIPTION OF BUSINESS |
2. | BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES |
3. | SEGMENT INFORMATION AND GEOGRAPHIC DATA |
|
Three Months Ended June 30,
|
|||||||||||||||||||||||
|
2014
|
2013
|
||||||||||||||||||||||
|
Wholesale
|
Direct-to-
Consumer
|
Total
|
Wholesale
|
Direct-to-
Consumer
|
Total
|
||||||||||||||||||
Net sales
|
|
|
|
|
|
|
||||||||||||||||||
Loose jewels
|
$
|
3,837,012
|
$
|
173,327
|
$
|
4,010,339
|
$
|
3,984,058
|
$
|
91,238
|
$
|
4,075,296
|
||||||||||||
Finished jewelry
|
3,012,372
|
818,936
|
3,831,308
|
1,905,430
|
531,774
|
2,437,204
|
||||||||||||||||||
Total
|
$
|
6,849,384
|
$
|
992,263
|
$
|
7,841,647
|
$
|
5,889,488
|
$
|
623,012
|
$
|
6,512,500
|
||||||||||||
|
||||||||||||||||||||||||
Product line cost of goods sold
|
||||||||||||||||||||||||
Loose jewels
|
$
|
2,040,944
|
$
|
25,346
|
$
|
2,066,290
|
$
|
1,334,472
|
$
|
11,795
|
$
|
1,346,267
|
||||||||||||
Finished jewelry
|
2,377,715
|
369,649
|
2,747,364
|
1,330,109
|
290,816
|
1,620,925
|
||||||||||||||||||
Total
|
$
|
4,418,659
|
$
|
394,995
|
$
|
4,813,654
|
$
|
2,664,581
|
$
|
302,611
|
$
|
2,967,192
|
||||||||||||
|
||||||||||||||||||||||||
Product line gross profit
|
||||||||||||||||||||||||
Loose jewels
|
$
|
1,796,068
|
$
|
147,981
|
$
|
1,944,049
|
$
|
2,649,586
|
$
|
79,443
|
$
|
2,729,029
|
||||||||||||
Finished jewelry
|
634,657
|
449,287
|
1,083,944
|
575,321
|
240,958
|
816,279
|
||||||||||||||||||
Total
|
$
|
2,430,725
|
$
|
597,268
|
$
|
3,027,993
|
$
|
3,224,907
|
$
|
320,401
|
$
|
3,545,308
|
||||||||||||
|
||||||||||||||||||||||||
Operating (loss) income
|
$
|
(1,008,146
|
)
|
$
|
(1,032,782
|
)
|
$
|
(2,040,928
|
)
|
$
|
624,419
|
$
|
(1,482,730
|
)
|
$
|
(858,311
|
)
|
|||||||
|
||||||||||||||||||||||||
Depreciation and amortization
|
$
|
214,021
|
$
|
96,926
|
$
|
310,947
|
$
|
101,876
|
$
|
90,486
|
$
|
192,362
|
||||||||||||
|
||||||||||||||||||||||||
Capital expenditures
|
$
|
928,341
|
$
|
-
|
$
|
928,341
|
$
|
108,645
|
$
|
5,968
|
$
|
114,613
|
|
Six Months Ended June 30,
|
|||||||||||||||||||||||
|
2014
|
2013
|
||||||||||||||||||||||
|
Wholesale
|
Direct-to-
Consumer
|
Total
|
Wholesale
|
Direct-to-
Consumer
|
Total
|
||||||||||||||||||
Net sales
|
|
|
|
|
|
|
||||||||||||||||||
Loose jewels
|
$
|
7,370,756
|
$
|
320,269
|
$
|
7,691,025
|
$
|
8,278,212
|
$
|
144,998
|
$
|
8,423,210
|
||||||||||||
Finished jewelry
|
4,632,243
|
1,585,932
|
6,218,175
|
3,634,153
|
960,211
|
4,594,364
|
||||||||||||||||||
Total
|
$
|
12,002,999
|
$
|
1,906,201
|
$
|
13,909,200
|
$
|
11,912,365
|
$
|
1,105,209
|
$
|
13,017,574
|
||||||||||||
|
||||||||||||||||||||||||
Product line cost of goods sold
|
||||||||||||||||||||||||
Loose jewels
|
$
|
3,816,079
|
$
|
47,619
|
$
|
3,863,698
|
$
|
3,050,412
|
$
|
18,542
|
$
|
3,068,954
|
||||||||||||
Finished jewelry
|
3,657,816
|
727,796
|
4,385,612
|
1,931,079
|
473,467
|
2,404,546
|
||||||||||||||||||
Total
|
$
|
7,473,895
|
$
|
775,415
|
$
|
8,249,310
|
$
|
4,981,491
|
$
|
492,009
|
$
|
5,473,500
|
||||||||||||
|
||||||||||||||||||||||||
Product line gross profit
|
||||||||||||||||||||||||
Loose jewels
|
$
|
3,554,677
|
$
|
272,650
|
$
|
3,827,327
|
$
|
5,227,800
|
$
|
126,456
|
$
|
5,354,256
|
||||||||||||
Finished jewelry
|
974,427
|
858,136
|
1,832,563
|
1,703,074
|
486,744
|
2,189,818
|
||||||||||||||||||
Total
|
$
|
4,529,104
|
$
|
1,130,786
|
$
|
5,659,890
|
$
|
6,930,874
|
$
|
613,200
|
$
|
7,544,074
|
||||||||||||
|
||||||||||||||||||||||||
Operating (loss) income
|
$
|
(1,
133,003
|
)
|
$
|
(2,
078,428
|
)
|
$
|
(3,211,431
|
)
|
$
|
2,264,325
|
$
|
(2,601,109
|
)
|
$
|
(336,784
|
)
|
|||||||
|
||||||||||||||||||||||||
Depreciation and amortization
|
$
|
393,693
|
$
|
195,052
|
$
|
588,745
|
$
|
192,855
|
$
|
191,894
|
$
|
384,749
|
||||||||||||
|
||||||||||||||||||||||||
Capital expenditures
|
$
|
956,666
|
$
|
-
|
$
|
956,666
|
$
|
189,316
|
$
|
13,294
|
$
|
202,610
|
|
June 30, 2014
|
December 31, 2013
|
||||||||||||||||||||||
|
Wholesale
|
Direct-to-
Consumer
|
Total
|
Wholesale
|
Direct-to-
Consumer
|
Total
|
||||||||||||||||||
Total assets
|
$
|
55,724,771
|
$
|
803,078
|
$
|
56,527,849
|
$
|
61,702,449
|
$
|
621,403
|
$
|
62,323,852
|
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
||||||||||||||
|
2014
|
2013
|
2014
|
2013
|
||||||||||||
Product line cost of goods sold
|
$
|
4,813,654
|
$
|
2,967,192
|
$
|
8,249,310
|
$
|
5,473,500
|
||||||||
Non-capitalized manufacturing and production control expenses
|
256,144
|
208,389
|
411,167
|
608,640
|
||||||||||||
Freight out
|
76,077
|
51,453
|
135,976
|
87,962
|
||||||||||||
Inventory valuation allowances
|
45,000
|
94,000
|
69,000
|
75,000
|
||||||||||||
Other inventory adjustments
|
134,106
|
68,281
|
122,570
|
26,191
|
||||||||||||
Cost of goods sold
|
$
|
5,324,981
|
$
|
3,389,315
|
$
|
8,988,023
|
$
|
6,271,293
|
|
June 30,
2014
|
December 31,
2013
|
||||||
Loose jewels
|
|
|
||||||
Raw materials
|
$
|
5,110,412
|
$
|
3,311,375
|
||||
Work-in-process
|
6,486,882
|
9,526,769
|
||||||
Finished goods
|
21,671,343
|
20,002,881
|
||||||
Finished goods on consignment
|
149,142
|
32,948
|
||||||
Total
|
$
|
33,417,779
|
$
|
32,873,973
|
||||
|
||||||||
Finished jewelry
|
||||||||
Raw materials
|
$
|
283,378
|
$
|
270,043
|
||||
Work-in-process
|
562,916
|
764,355
|
||||||
Finished goods
|
6,781,866
|
8,117,035
|
||||||
Finished goods on consignment
|
355,735
|
299,514
|
||||||
Total
|
$
|
7,983,895
|
$
|
9,450,947
|
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
||||||||||||||
|
2014
|
2013
|
2014
|
2013
|
||||||||||||
Net sales
|
|
|
|
|
||||||||||||
United States
|
$
|
7,267,441
|
$
|
5,373,178
|
$
|
12,976,474
|
$
|
10,485,467
|
||||||||
International
|
574,206
|
1,139,322
|
932,726
|
2,532,107
|
||||||||||||
Total
|
$
|
7,841,647
|
$
|
6,512,500
|
$
|
13,909,200
|
$
|
13,017,574
|
|
June 30,
2014
|
December 31,
2013
|
||||||
Property and equipment, net
|
|
|
||||||
United States
|
$
|
2,163,187
|
$
|
1,717,692
|
||||
International
|
-
|
-
|
||||||
Total
|
$
|
2,163,187
|
$
|
1,717,692
|
|
June 30,
2014
|
December 31,
2013
|
||||||
Intangible assets, net
|
|
|
||||||
United States
|
$
|
54,090
|
$
|
70,830
|
||||
International
|
251,865
|
255,037
|
||||||
Total
|
$
|
305,955
|
$
|
325,867
|
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 |
|
June 30,
2013
|
December 31,
2013
|
||||||
Raw materials
|
$
|
5,393,790
|
$
|
3,581,418
|
||||
Work-in-process
|
7,049,798
|
10,291,124
|
||||||
Finished goods
|
29,185,643
|
28,771,098
|
||||||
Finished goods on consignment
|
552,877
|
407,462
|
||||||
Less inventory reserves
|
(708,000
|
)
|
(639,000
|
)
|
||||
Total
|
$
|
41,474,108
|
$
|
42,412,102
|
||||
|
||||||||
Current portion
|
$
|
12,419,064
|
$
|
13,074,428
|
||||
Long-term portion
|
29,055,044
|
29,337,674
|
||||||
Total
|
$
|
41,474,108
|
$
|
42,412,102
|
6. | INCOME TAXES |
7. | COMMITMENTS AND CONTINGENCIES |
2014
|
$
|
-
|
||
2015
|
553,905
|
|||
2016
|
569,138
|
|||
2017
|
584,789
|
|||
2018
|
600,871
|
|||
Thereafter
|
1,793,725
|
|||
Total
|
$
|
4,102,428
|
8. | LINE OF CREDIT |
9. | STOCK-BASED COMPENSATION |
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
||||||||||||||
|
2014
|
2013
|
2014
|
2013
|
||||||||||||
Employee stock options
|
$
|
209,698
|
$
|
161,227
|
$
|
392,422
|
$
|
300,497
|
||||||||
Restricted stock awards
|
224,281
|
335,740
|
418,068
|
443,136
|
||||||||||||
Income tax benefit
|
(78,349
|
)
|
(162,247
|
)
|
(146,046
|
)
|
(201,184
|
)
|
||||||||
Totals
|
$
|
355,630
|
$
|
334,720
|
$
|
664,444
|
$
|
542,449
|
|
Shares
|
Weighted
Average
Exercise Price
|
||||||
Outstanding, December 31, 2013
|
1,204,297
|
$
|
3.14
|
|||||
Granted
|
215,000
|
$
|
2.89
|
|||||
Exercised
|
-
|
$
|
-
|
|||||
Forfeited
|
(15,775
|
)
|
$
|
2.85
|
||||
Expired
|
(37,576
|
)
|
$
|
3.84
|
||||
Outstanding, June 30, 2014
|
1,365,946
|
$
|
3.09
|
Dividend yield
|
0.0
|
%
|
||
Expected volatility
|
92.9
|
%
|
||
Risk-free interest rate
|
1.61
|
%
|
||
Expected lives (years)
|
5.0
|
Options Outstanding
|
Options Exercisable
|
Options Vested or Expected to Vest
|
||||||||||||||||||||||||||||||||
Balance
as of
6/30/2014
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
Weighted
Average
Exercise
Price
|
Balance
as of
6/30/2014
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
Weighted
Average
Exercise
Price
|
Balance
as of
6/30/2014
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
Weighted
Average
Exercise
Price
|
||||||||||||||||||||||||||
1,365,946
|
7.72
|
$
|
3.09
|
892,453
|
6.99
|
$
|
2.63
|
1,302,584
|
6.99
|
$
|
3.05
|
|
Shares
|
Weighted
Average
Grant Date
Fair Value
|
||||||
Unvested, December 31, 2013
|
350,903
|
$
|
4.26
|
|||||
Granted
|
160,032
|
$
|
2.22
|
|||||
Vested
|
(175,903
|
)
|
$
|
4.00
|
||||
Canceled
|
-
|
$
|
-
|
|||||
Unvested, June 30, 2014
|
335,032
|
$
|
3.42
|
10.
|
NET LOSS PER COMMON SHARE
|
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
||||||||||||||
|
2014
|
2013
|
2014
|
2013
|
||||||||||||
Numerator:
|
|
|
|
|
||||||||||||
Net loss
|
$
|
(6,194,083
|
)
|
$
|
(491,585
|
)
|
$
|
(7,257,477
|
)
|
$
|
(185,312
|
)
|
||||
|
||||||||||||||||
Denominator:
|
||||||||||||||||
Weighted average common shares outstanding:
|
||||||||||||||||
Basic
|
20,262,299
|
19,812,397
|
20,229,979
|
19,736,068
|
||||||||||||
Stock options
|
-
|
-
|
-
|
-
|
||||||||||||
Fully diluted
|
20,262,299
|
19,812,397
|
20,229,979
|
19,736,068
|
||||||||||||
|
||||||||||||||||
Net loss per common share:
|
||||||||||||||||
Basic
|
$
|
(0.31
|
)
|
$
|
(0.02
|
)
|
$
|
(0.36
|
)
|
$
|
(0.01
|
)
|
||||
Diluted
|
$
|
(0.31
|
)
|
$
|
(0.02
|
)
|
$
|
(0.36
|
)
|
$
|
(0.01
|
)
|
11. | MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK |
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
||||||||||||||
|
2014
|
2013
|
2014
|
2013
|
||||||||||||
Customer A
|
36
|
%
|
1
|
%
|
30
|
%
|
16
|
%
|
||||||||
Customer B
|
15
|
%
|
6
|
%
|
17
|
%
|
7
|
%
|
||||||||
Customer C
|
4
|
%
|
6
|
%
|
13
|
%
|
9
|
%
|
||||||||
Customer D
|
9
|
%
|
19
|
%
|
0
|
%
|
10
|
%
|
||||||||
Customer E
|
0
|
%
|
19
|
%
|
0
|
%
|
12
|
%
|
● | Our future financial performance depends upon increased consumer acceptance, growth of sales of our products, and operational execution of our strategic initiatives. |
● | We are currently substantially dependent on a limited number of distributors, jewelry manufacturers, and retailers for the sale of our products. |
● | The execution of our business plans could significantly impact our liquidity . |
● | Our business and our results of operations could be materially adversely affected as a result of our inability to fulfill orders on a timely basis. |
● | The financial difficulties or insolvency of one or more of our major customers or their lack of willingness and ability to market our products could adversely affect results. |
● | We expect to remain dependent upon Cree, Inc., or Cree, for the sole supply of our silicon carbide, or SiC, crystals for the foreseeable future. |
● | Our current wholesale customers may potentially perceive us as a competitor in the finished jewelry business. |
● | We face intense competition in the worldwide jewelry industry. |
● | Our business and our results of operations could be materially adversely affected as a result of general economic and market conditions, including the current economic environment. |
● | We are subject to certain risks due to our international distribution channels and vendors. |
● | Sales of moissanite jewelry could be dependent upon the pricing of precious metals, which is beyond our control. |
● | Seasonality of our business may adversely affect our net sales and operating income. |
● | We may not be able to adequately protect our intellectual property, which could harm the value of our products and brands and adversely affect our business. |
● | A failure of our information technology infrastructure or a failure to protect confidential information of our customers and our network against security breaches could adversely impact our business and operations. |
● | If we fail to evaluate, implement, and integrate strategic acquisition or disposition opportunities successfully, our business may suffer. |
● | Governmental regulation and oversight might adversely impact our operations. |
● | Some anti-takeover provisions of our charter documents and agreements may delay or prevent a takeover of our company. |
● | Developing brand strategies - Our goal is to build multiple strong brands around the moissanite jewel and finished jewelry collections in attractive and desirable jewelry designs, especially those featuring larger center stones that leverage moissanite’s point of differentiation and value proposition. We believe branding will allow us to increase consumer awareness, which we expect to help drive sales and develop consumer brand recognition and loyalty. |
● | Expanding our direct-to-consumer e-commerce business - Our direct-to-consumer e-commerce website, Moissanite.com , features an intuitive site design with robust functionality to enhance the customer experience and convert traffic into sales. We continue to expand the website’s jewelry collections and its loose moissanite jewel assortment by featuring a variety of colors and shapes, and we are investing resources in targeted advertising and marketing campaigns. In 2013 and the first six months of 2014, we continued fine-tuning such marketing efforts to maximize return on investment, increasing product assortment, and building new site functionality designed to increase sales conversion rates. We believe our direct-to-consumer e-commerce sales channel will not only add to our top-line revenues in a significant manner, but will also play a key role in our campaign to increase overall consumer awareness of moissanite. We also envision e-commerce as a part of a broader effort to establish online connections with consumers that build our brands and our business with retail partners. |
● | Developing our direct-to-consumer home party business - In October 2012, our direct-to-consumer home party business, Lulu Avenue ® , began to integrate the custom designs of a well-known jewelry designer into the current jewelry line. The first phase of the integration was completed in March 2013. In April 2013, we hired a President of Lulu Avenue ® whose focus is on the scale-up of the sales force, and in March 2013, we hired a Director of Finance and Administration, who leads the back office technology and supply chain efforts of Lulu Avenue ® . With these key personnel, we completed the final phase of the integration process in 2013. We believe our direct-to-consumer home party sales channel will provide future sales growth in 2014 and play a role in our campaign to increase overall consumer awareness of moissanite. |
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
||||||||||||||
|
2014
|
2013
|
2014
|
2013
|
||||||||||||
Net sales
|
$
|
7,841,647
|
$
|
6,512,500
|
$
|
13,909,200
|
$
|
13,017,574
|
||||||||
Costs and expenses:
|
||||||||||||||||
Cost of goods sold
|
5,324,981
|
3,389,315
|
8,988,023
|
6,271,293
|
||||||||||||
Sales and marketing
|
2,171,614
|
2,532,995
|
4,366,225
|
4,779,204
|
||||||||||||
General and administrative
|
2,376,466
|
1,344,408
|
3,752,681
|
2,193,785
|
||||||||||||
Research and development
|
9,514
|
9,041
|
11,501
|
15,024
|
||||||||||||
Loss on abandonment of assets
|
-
|
95,052
|
2,201
|
95,052
|
||||||||||||
Total costs and expenses
|
9,882,575
|
7,370,811
|
17,120,631
|
13,354,358
|
||||||||||||
Loss from operations
|
(2,040,928
|
)
|
(858,311
|
)
|
(3,211,431
|
)
|
(336,784
|
)
|
||||||||
Other income (expense):
|
||||||||||||||||
Interest income
|
20
|
6,972
|
49
|
14,474
|
||||||||||||
Interest expense
|
(188
|
)
|
(234
|
)
|
(318
|
)
|
(974
|
)
|
||||||||
Total other (expense) income, net
|
(168
|
)
|
6,738
|
(269
|
)
|
13,500
|
||||||||||
Loss before income taxes
|
(2,041,096
|
)
|
(851,573
|
)
|
(3,211,700
|
)
|
(323,284
|
)
|
||||||||
Income tax net (expense) benefit
|
(4,152,987
|
)
|
359,988
|
(4,045,777
|
)
|
137,972
|
||||||||||
Net loss
|
$
|
(6,194,083
|
)
|
$
|
(491,585
|
)
|
$
|
(7,257,477
|
)
|
$
|
(185,312
|
)
|
Three Months Ended June 30,
|
Change
|
Six Months Ended June 30,
|
Change
|
|||||||||||||||||||||||||||||
|
2014
|
2013
|
Dollars
|
Percent
|
2014
|
2013
|
Dollars
|
Percent
|
||||||||||||||||||||||||
Loose jewels
|
$
|
4,010,339
|
$
|
4,075,296
|
$
|
(64,957
|
)
|
-2
|
%
|
$
|
7,691,025
|
$
|
8,423,210
|
$
|
(732,185
|
)
|
-9
|
%
|
||||||||||||||
Finished jewelry
|
3,831,308
|
2,437,204
|
1,394,104
|
57
|
%
|
6,218,175
|
4,594,364
|
1,623,811
|
35
|
%
|
||||||||||||||||||||||
Total consolidated net sales
|
$
|
7,841,647
|
$
|
6,512,500
|
$
|
1,329,147
|
20
|
%
|
$
|
13,909,200
|
$
|
13,017,574
|
$
|
891,626
|
7
|
%
|
|
Three Months Ended June 30,
|
Change
|
Six Months Ended June 30,
|
Change
|
||||||||||||||||||||||||||||
|
2014
|
2013
|
Dollars
|
Percent
|
2014
|
2013
|
Dollars
|
Percent
|
||||||||||||||||||||||||
Product line cost of goods sold
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
Loose jewels
|
$
|
2,066,290
|
$
|
1,346,267
|
$
|
720,023
|
53
|
%
|
$
|
3,863,698
|
$
|
3,068,954
|
$
|
794,744
|
26
|
%
|
||||||||||||||||
Finished jewelry
|
2,747,364
|
1,620,925
|
1,126,439
|
69
|
%
|
4,385,612
|
2,404,546
|
1,981,066
|
82
|
%
|
||||||||||||||||||||||
Total product line cost of goods sold
|
4,813,654
|
2,967,192
|
1,846,462
|
62
|
%
|
8,249,310
|
5,473,500
|
2,775,810
|
51
|
%
|
||||||||||||||||||||||
Non-product line cost of goods sold
|
511,327
|
422,123
|
89,204
|
21
|
%
|
738,713
|
797,793
|
(59,080
|
)
|
-7
|
%
|
|||||||||||||||||||||
Total cost of goods sold
|
$
|
5,324,981
|
$
|
3,389,315
|
$
|
1,935,666
|
57
|
%
|
$
|
8,988,023
|
$
|
6,271,293
|
$
|
2,716,730
|
43
|
%
|
|
Three Months Ended June 30,
|
Change
|
Six Months Ended June 30,
|
Change
|
||||||||||||||||||||||||||||
|
2014
|
2013
|
Dollars
|
Percent
|
2014
|
2013
|
Dollars
|
Percent
|
||||||||||||||||||||||||
Sales and marketing
|
$
|
2,171,614
|
$
|
2,532,995
|
$
|
(361,381
|
)
|
-14
|
%
|
$
|
4,366,225
|
$
|
4,779,204
|
$
|
(412,979
|
)
|
-9
|
%
|
|
Three Months Ended June 30,
|
Change
|
Six Months Ended June 30,
|
Change
|
||||||||||||||||||||||||||||
|
2014
|
2013
|
Dollars
|
Percent
|
2014
|
2013
|
Dollars
|
Percent
|
||||||||||||||||||||||||
General and administrative
|
$
|
2,376,466
|
$
|
1,344,408
|
$
|
1,032,058
|
77
|
%
|
$
|
3,752,681
|
$
|
2,193,785
|
$
|
1,558,896
|
71
|
%
|
|
Three Months Ended June 30,
|
Change
|
Six Months Ended June 30,
|
Change
|
||||||||||||||||||||||||||||
|
2014
|
2013
|
Dollars
|
Percent
|
2014
|
2013
|
Dollars
|
Percent
|
||||||||||||||||||||||||
Research and development
|
$
|
9,514
|
$
|
9,041
|
$
|
473
|
5
|
%
|
$
|
11,501
|
$
|
15,024
|
$
|
(3,523
|
)
|
-23
|
%
|
|
Three Months Ended June 30,
|
Change
|
Six Months Ended June 30,
|
Change
|
||||||||||||||||||||||||||||
|
2014
|
2013
|
Dollars
|
Percent
|
2014
|
2013
|
Dollars
|
Percent
|
||||||||||||||||||||||||
Loss on abandonment of assets
|
$
|
-
|
$
|
95,052
|
$
|
(95,052
|
)
|
-100
|
%
|
$
|
2,201
|
$
|
95,052
|
$
|
(92,851
|
)
|
-98
|
%
|
|
Three Months Ended June 30,
|
Change
|
Six Months Ended June 30,
|
Change
|
||||||||||||||||||||||||||||
|
2014
|
2013
|
Dollars
|
Percent
|
2014
|
2013
|
Dollars
|
Percent
|
||||||||||||||||||||||||
Interest income
|
$
|
20
|
$
|
6,972
|
$
|
(6,952
|
)
|
-100
|
%
|
$
|
49
|
$
|
14,474
|
$
|
(14,425
|
)
|
-100
|
%
|
Exhibit No.
|
Description
|
10.1
|
Second Amendment to Lease, dated April 15, 2014, between Charles & Colvard, Ltd. and Southport Business Park Limited Partnership
|
|
|
10.2
|
Charles & Colvard, Ltd. Short-Term Incentive Plan, effective January 1, 2014 (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K, as filed with the SEC on April 21, 2014)
|
|
|
10.3
|
Charles & Colvard, Ltd. Long-Term Incentive Program, effective January 1, 2014 (incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K, as filed with the SEC on April 21, 2014)
|
10.4
|
Form of Restricted Stock Award Agreement pursuant to the Charles & Colvard, Ltd. Long-Term Incentive Program (incorporated by reference to Exhibit 10.3 to our Current Report on Form 8-K, as filed with the SEC on April 21, 2014)
|
10.5
|
Form of Employee Nonqualified Stock Option Agreement pursuant to the Charles & Colvard, Ltd. Long-Term Incentive Program (incorporated by reference to Exhibit 10.4 to our Current Report on Form 8-K, as filed with the SEC on April 21, 2014)
|
10.6
|
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 by reference to Exhibit 10.1 to our Current Report on Form 8-K, as filed with the SEC on June 30, 2014)
|
31.1
|
Certification by Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
31.2
|
Certification by Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
32.1
|
Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
32.2
|
Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
101
|
The following materials from Charles & Colvard, Ltd.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 formatted in XBRL (eXtensible Business Reporting Language) and furnished electronically herewith: (i) Condensed Consolidated Balance Sheets; (ii) Condensed Consolidated Statements of Operations; (iii) Condensed Consolidated Statements of Cash Flows; and (iv) Notes to Condensed Consolidated Financial Statements.
|
|
|
CHARLES & COLVARD, LTD.
|
|
|
|
|
By:
|
/s/ Randy N. McCullough
|
August 6, 2014
|
|
Randy N. McCullough
|
|
|
President and Chief Executive Officer
|
|
|
|
|
By:
|
/s/ Kyle Macemore
|
August 6, 2014
|
|
Kyle Macemore
|
|
|
Senior Vice President and Chief Financial Officer
|
|
|
(Principal Financial Officer and Chief Accounting Officer)
|
Exhibit No.
|
Description
|
Second Amendment to Lease, dated April 15, 2014, between Charles & Colvard, Ltd. and Southport Business Park Limited Partnership
|
|
|
|
10.2
|
Charles & Colvard, Ltd. Short-Term Incentive Plan, effective January 1, 2014 (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K, as filed with the SEC on April 21, 2014)
|
|
|
10.3
|
Charles & Colvard, Ltd. Long-Term Incentive Program, effective January 1, 2014 (incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K, as filed with the SEC on April 21, 2014)
|
10.4
|
Form of Restricted Stock Award Agreement pursuant to the Charles & Colvard, Ltd. Long-Term Incentive Program (incorporated by reference to Exhibit 10.3 to our Current Report on Form 8-K, as filed with the SEC on April 21, 2014)
|
10.5
|
Form of Employee Nonqualified Stock Option Agreement pursuant to the Charles & Colvard, Ltd. Long-Term Incentive Program (incorporated by reference to Exhibit 10.4 to our Current Report on Form 8-K, as filed with the SEC on April 21, 2014)
|
10.6
|
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 by reference to Exhibit 10.1 to our Current Report on Form 8-K, as filed with the SEC on June 30, 2014)
|
Certification by Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
Certification by Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
101
|
The following materials from Charles & Colvard, Ltd.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 formatted in XBRL (eXtensible Business Reporting Language) and furnished electronically herewith: (i) Condensed Consolidated Balance Sheets; (ii) Condensed Consolidated Statements of Operations; (iii) Condensed Consolidated Statements of Cash Flows; and (iv) Notes to Condensed Consolidated Financial Statements.
|
1. | Page 2 and 3: Section 1.02 — TERM OF THE LEASE |
2. | Page 34 - EXHIBIT B-2 — CHANGES TO LANDLORD'S WORK. Landlord and Tenant acknowledge that the Town of Morrisville has required the following additions to Landlord's Work as depicted in Exhibit A of this Second Amendment: |
· | The removal of a semi-circle drive at front door of the Building that will be replaced with a grassy landscaped area; |
· | Sidewalk extension. |
3. | Page 23 -SECTION 12.03 — SURRENDER OF DEMISED PREMISES. At the end of the first paragraph, add the following: Landlord and Tenant agree that Landlord, at the end of the Term, may require that Tenant remove the expanded concrete pads and sidewalk extension and that the cost of such removal will be split evenly between Landlord and Tenant. |
4. | Tenant warrants that it has had no dealings with any broker or agent in connection with this Second Amendment, other than Aldene “Dee” Creech Osborne, SIOR of NAI Carolantic Realty and Matthew Cooke of Jones Lang LaSalle Brokerage, Inc., and covenants to pay, hold harmless and indemnify Landlord from and against, any and all cost, expense or liability for any compensation, commissions and charges claimed by any other broker or agent with respect to this Second Amendment or the negotiation thereof. |
LANDLORD:
|
|
||
SOUTHPORT BUSINESS PARK LIMITED PARTNERSHIP, a North Carolina limited partnership
|
|
||
By: SOUTHPORT BUSINESS PARK
|
|
||
INVESTORS CORPORATION, a North Carolina corporation, its general partner
|
|
||
BY: |
/s/ Richard G. Sullivan
|
|
|
Richard G. Sullivan
|
|
||
Vice President
|
|
||
|
|
||
TENANT:
|
|
||
CHARLES & COLVARD, LTD, a North Carolina corporation
|
|
||
|
|
||
By: |
/s/ Randy McCullough
|
|
|
Randy McCullough
|
|
||
President & CEO
|
|
1. | I have reviewed this Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2014 of Charles & Colvard, Ltd.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
|
By:
|
/s/ Randy N. McCullough
|
August 6, 2014
|
|
Randy N. McCullough
|
|
|
President and Chief Executive Officer
|
1. | I have reviewed this Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2014 of Charles & Colvard, Ltd.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
|
By:
|
/s/ Kyle Macemore
|
|
Kyle Macemore
|
|
|
|
Senior Vice President and Chief Financial Officer
|