☐ |
Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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☒ |
Transition report pursuant to Section 13 of 15(d) of the Securities Exchange Act of 1934
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North Carolina
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56-1928817
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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170 Southport Drive
Morrisville, North Carolina
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27560
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(Address of principal executive offices)
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(Zip Code)
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Title of each class
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Name of each exchange on which registered
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Common Stock, no par value per share
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The Nasdaq Stock Market LLC
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Large accelerated filer
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☐
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Accelerated filer
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☐
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Non-accelerated filer
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☐ (Do not check if a smaller reporting company)
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Smaller reporting company
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☒
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Emerging growth company
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☐
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Page
Number
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PART I
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Item 1.
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2
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Item 1A.
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19
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Item 1B.
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27
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Item 2.
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27
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Item 3.
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27
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Item 4.
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27
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PART II
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Item 5.
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28
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Item 6.
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28
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Item 7.
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29
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Item 7A.
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52
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Item 8.
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53
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Item 9.
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87
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Item 9A.
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87
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Item 9B.
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88
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PART III
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Item 10.
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88
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Item 11.
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88
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Item 12.
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88
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Item 13.
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88
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Item 14.
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88
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PART IV
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Item 15.
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89
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Item 16.
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92
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· |
Drive organic revenue growth and maintain attractive margins
– We plan to continue engaging our target customers through creative and progressive marketing campaigns and to continue leveraging technology to ensure efficiencies in our marketing, sales and customer service functions.
|
· |
Expand our gemstone and jewelry offerings to serve a broad range of customers
– We plan to continue innovating our moissanite gemstone offerings and further enhance our jewelry offerings to include unique, curated collections, and new styles at multiple price points that will appeal to a broader and more sophisticated audience.
|
· |
Target the global market opportunity through continued brand building, focused channel expansion and world-class customer service
– We plan to diversify and expand our global customer base in a low-risk manner by introducing our brand in select markets via cross-border trade, or CBT, initiatives and through established marketplaces.
|
· |
Balance growth-oriented investments to generate sustainable earnings improvement –
We plan to maintain financial flexibility and use data-driven business decisions to balance investments in future growth with consistent near-term financial performance.
|
· |
Catalyze
– Build positive momentum with customers and influencers by being thoughtful and trustworthy in every interaction.
|
· |
Innovate
– Disrupt the jewelry industry through use of technology – in gemstone and jewelry design, business processes and engagement with our audience.
|
· |
Aspire
– Be socially conscious, economically informed and environmentally responsible. Build a sustainable business and give back through community acts.
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· |
Obsess
– Think like a consumer, act like a friend. Constantly seek ways to reduce friction between the brand and our audience.
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· |
Achieve
– Focus attention on the interdependent successes of individual, brand and shareholder.
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· |
Enrich –
Promote personal growth and the ability to effect positive change in the business by cultivating a culture of critical thinking and creativity.
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· |
Social Media
– To reinforce and support our position as the leading source of ethically-sourced, lab-created moissanite, our marketing team manages several social media initiatives that target current and future jewelry consumers to support the promotion and sale of
Charles & Colvard Created Moissanite®.
Our campaigns are focused on driving a consistent message emphasizing the environmentally and socially responsible aspects of our jewels and jewelry, their everlasting beauty, and overall value. Our social media efforts include both owned posts and engagements (our own profiles and activities) as well as paid placement (ads presented to targeted audiences).
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· |
Digital Marketing
– Approximately 71% of consumers begin their buying journeys by using a web search to discover new products and services, according to a recent research study by Forrester Research, Inc., a global independent research, data, and advisory services firm. In short, we believe the typical buyer’s journey is a digital one. Digital marketing encompasses the myriad ways we can be a part of that journey – from Search Engine Marketing (keyword buys and ads) to digital display (banner ads and product re-targeting ads) to video pre-roll (ads playing before third-party
YouTube
videos), and native advertising (long-form content produced in conjunction with digital-media and entertainment outlets). We are using, and continually optimizing, available digital marketing channels and will continue to monitor new forms of paid media as they arise, assessing whether they will be effective in helping us connect with our target audiences.
|
· |
Influencer Campaigns
– Up to 92% of consumers trust an influencer more than an ad or traditional celebrity endorsement, according to
Forbes Magazine
and a study from MuseFind Technologies Inc., a leading U.S. influencer marketing authority. This is a clear indicator of what marketers have already come to accept: that people trust other people more than they trust brands. However, we believe there is a caveat: the influencers that a brand partners with must truly be aligned in mindset. We do not believe that we can simply find someone with millions of followers, pay them to post about our brand and product, and expect to see results. Instead, we believe we must find influencers who embody the same mindset as our brand and believe in the products we bring to market. This takes time, and we plan to continue to build our influencer network throughout fiscal 2019.
|
· |
Cooperative Marketing
– In addition to our programs working directly with influencers, we are also partnering with other brands who have influence with specific segments of our audience. These influencers’ reach and authority allow us to jump start relationships with potential buyers who may not be familiar with Charles & Colvard. For example, based on our research and social media interactions, we have found that a portion of our buyers have military ties. Therefore, we are partnering with
Leading Points
, a program that reaches active and veteran military service members and their families. Separately, we have also partnered with
She Should Run
, which is a non-partisan organization dedicated to help women run for public office. We believe that a large segment of this audience is the woman who is highly-motivated and self-purchasing – the same audience that we aim to reach. And, among other cooperative marketing-related partnerships, we are working with Flont, Inc., or Flont, a fine jewelry rental service, and Cartera Commerce, Inc., or Cartera, which is a membership organization that partners with elite-brand companies that use loyalty programs to reward their customers for ongoing and repeat purchase transactions. We believe that, like us, Flont and Cartera are organizations that understand a new approach to marketing luxury items that the Millennial demographics embody. We will continue to seek new cooperative marketing relationships that we believe will create new exposure opportunities for Charles & Colvard.
|
· |
Sweepstakes
– We believe sweepstakes, especially leveraging social media platforms in partnership with kindred brands, are powerful in acquiring and engaging new audiences. Through the use of sweepstakes in 2017 and the transition period ended June 30, 2018, we increased our email marketing subscribers and social media followers, generated a multitude of user-generated content about our brand and products, and converted new customers. Sweepstakes will be a marketing tactic we intend to expand upon throughout fiscal 2019.
|
· |
A Twist on the Traditional TV Channel
– Throughout our history, we have utilized TV as a channel to reach our consumers. In 2017, we identified a shift in our audience and how they began to disengage from TV and shift to online and streaming video. We are combining our years of knowledge about video marketing, and the power of seeing our product in motion, with our growing expertise in digital marketing. We believe these efforts will culminate in extensive use of video marketing in the form of informational segments delivered on our social media channels, video-style guides on our website,
YouTube
and other third-party owned video channels and branded video campaigns, as well as livestreaming video, as we move forward into fiscal 2019.
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· |
Consumer Education –
Because we believe education of the consumer is so important to the sell-through of moissanite products, we continue to enhance our website and contribute to third party platforms such as social media sites to share extensive educational information about moissanite, in addition to general background information about our company. But we do not believe our value to the marketplace is only realized in our product. As our goal is to lead a revolution in the jewelry industry, we also have a commitment to providing value through education of the jewelry market by bringing to light the environmental and social impact of the trade as a whole. We plan to continue to create content of value on our own site and social channels and to contribute more to third party platforms, sharing extensive educational information about environmentally and socially responsible, lab-grown moissanite.
|
· |
charlesandcolvard.com
– Throughout 2017 and the transition period ended June 30, 2018, we significantly enhanced our transactional website to optimize for the mobile consumer and to reduce friction between our brand and the shopper. Programs such as free shipping, a 60-day returns policy, and an enhanced and optimized shopping experience were rolled out. With data collected through web analytics, and through user surveys that reveal how consumers use the site, we are in a continual state of optimizing the buying experience – making it easier for shoppers to browse, sort and compare. We utilize these data to inform the selection of new, leading-edge technologies to further enhance our users’ experience, including technologies provided by such partners as Amazon Pay, Affirm, Inc., and PayPal Holdings, Inc., or PayPal, for financing purchases, Braintree, a service of PayPal, for ease of transfer, and Flow, which is a company that specializes in facilitating cross-border global trade and e-commerce services. Our goal is to remain continually focused on improving our customers’ experience.
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· |
Cross-Border Trade –
With 84% of global e-commerce sales predicted to take place outside of Europe and North America by 2020, according to statistics from Statista.com (based on data from Shopify Inc., a global cloud-based, multi-channel commerce platform), we are combining regionalized marketing efforts in new geographies with promotional campaigning to drive international consumers to our charlesandcolvard.com web property. Through the application of market-leading CBT technology, such as building our relationship with Flow, we believe CBT to be a significant opportunity in fiscal 2019 and beyond. For example, Flow is widely considered the next-generation for CBT e-commerce transactions and is known worldwide to be revolutionizing how merchants go global. Flow’s platform helps such global enterprises create a positive shopping experience for their international customers while helping to ensure a complete and accurate record of CBT transactions for the enterprise.
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· |
Marketplaces
– As noted previously, a large majority of buyers start their online shopping experience with a web search. In fact, as many as 55% of those searches begin on Amazon, according to BloomReach, Inc., a global content management firm. That number skews even higher within the Millennial demographic in that Amazon is the web search brand Millennials identify as most relevant based on a finding by the Pew Research Center, a renowned nonpartisan fact think tank. Therefore, we have made a point to be prominent on Amazon, achieving Seller-Fulfilled Prime status in 2017, which means we have the option of fulfilling orders with the same benefits of Amazon Prime. This will enable us to be positioned more prominently in Amazon’s search platform and to take advantage of their negotiated shipping rates and service levels that, in turn, will lower our shipping costs. This status is available by Amazon to only those sellers who have a history of fulfilling orders quickly and not running out of stock. We are also prominent on eBay and a multitude of other specialty marketplaces, allowing us to meet our customers where they want to buy.
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· |
Pure-Play E-tailers –
Bain & Company, a global management consulting firm, estimates that 28% of total retail sales will become e-commerce centric by 2030. As consumers become more digitally savvy, new businesses have gained traction by tailoring their product, services and experiences to specific consumer preferences. We believe that these pure-play e-tailers offer unique opportunities for Charles & Colvard to feature our gemstones and connect with their loyal audiences. As our fiscal 2019 strategy evolves, we plan to focus on expanding these relationships and forging new partnerships that enable us to reach differentiated audiences.
|
· |
Drop Ship Retail
– In an effort to smartly expand their assortments, many retailers utilize direct fulfillment from their vendors to their consumers, or drop-ship, as it enables them to offer a more robust assortment online without having to physically take ownership of the goods in their warehouse. These retailers are consistently seeking socially responsible brands to serve the growing demand for conscientious product selection from their audiences. As we have refined charlesandcolvard.com’s post-purchase customer experience to deliver fast shipping and a streamlined returns process, we are leveraging these enhanced processes to support the increasing opportunity among retailers that are incorporating drop-ship as core to their online assortment expansion strategy.
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· |
Trade advertising
– Throughout the year ended December 31, 2017 and the transition period ended June 30, 2018, we continued to target the trade with print advertisements featuring moissanite, with specific emphasis on our
Forever One
TM
moissanite jewels and finished jewelry featuring the
Forever One
TM
jewel in leading trade publications. We intend to continue to deliver meaningful promotion of
Forever One
TM
as we further expand this product line into the wholesale distribution segment. In May 2018, we introduced a new grade of moissanite,
Moissanite by Charles & Colvard
®
, which delivers to the trade a price-sensitive moissanite product that competes with other comparable value-based products making their way to market. To further engage the trade, in 2018, we initiated a webinar series in which experts in gemology, jewelry trends and jewelry trade marketing deliver insights to our distributor and retail partners helping them to communicate better with their end-consumers regarding the qualities of moissanite and the drivers underlying the current growing interest in moissanite. Currently, we have three more webinars planned for fiscal 2019, and based on the response to those broadcasts, we may plan for additional webinars going forward. Additionally, we utilize a
Partner Portal
on our website into which authorized distributor and retail partners can gain secured access to our logos, branding materials, and other marketing-related guidelines.
|
· |
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. During the year ended December 31, 2017 and the transition period ended June 30, 2018, we attended major domestic and international jewelry industry trade shows including JCK, North America’s largest annual jewelry trade event in Las Vegas, and the Hong Kong Gem and Jewellery Fair. We intend to continue investing in these important industry events in fiscal 2019.
|
· |
Cooperative advertising –
We sometimes participate in the cooperative advertising programs of our distributor and retail partners, subject to the customer adhering to our branding guidelines and other conditions. In these programs, we subsidize a portion of their marketing costs in order to create awareness of and exposure for our gemstones and jewelry.
|
· |
Retail
– In order to create awareness and exposure for our gemstones, jewelry, and brands, we sell loose moissanite jewels and finished jewelry featuring moissanite at wholesale prices to nationally recognized and emerging retail customers through a broad range of channels including jewelry chains and department stores. Historically, we also sold loose moissanite jewels and finished jewelry at wholesale prices to television shopping networks. Wholesale orders are received via purchase order and fulfilled from our centralized distribution and fulfillment center. In addition, we have placed loose moissanite jewels and finished jewelry inventory in stores on a consignment basis. We continue to evolve our retail channel strategy as we optimize our historical methods and partners.
|
· |
Domestic Manufacturers and Distributors –
In order to service the vast number of independent jewelers, jewelry stores, and smaller jewelry chains, we sell our loose moissanite jewels to domestic wholesale distributors and finished jewelry manufacturers at distributor prices, that in turn resell the loose jewels or finished jewelry at a markup to independent jewelers and jewelry stores – whether brick-and-mortar, online, or both. In addition, we have placed loose moissanite jewels and finished jewelry inventory with select domestic distributors on a consignment basis. We continue to evaluate our channel strategy for domestic distributors, which may result in a change to our historical domestic distributor methods and partners.
|
· |
International Manufacturers and Distributors –
In order to create global awareness and exposure for our gemstones, jewelry, and brands, we sell loose moissanite jewels and finished jewelry featuring moissanite to international wholesale distributors and finished jewelry manufacturers at distributor prices, that 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 to independent jewelers and jewelry stores in their local markets. We currently have more than 15 international wholesale distributors covering portions of Canada, the UK, Western Europe, Australia and New Zealand, Southeast Asia, the Middle East, and China. In addition, we have placed loose moissanite jewels and finished jewelry inventory with select international distributors on a consignment basis. We continue to evaluate our channel strategy for international distributors, which may result in a change to our historical international distributor methods and partners. A portion of our international sales consists of finished jewels sold internationally that may be re-imported to U.S. retailers.
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Description
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Refractive
Index
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Dispersion
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Hardness
(1)
|
Toughness
|
||||||
Charles & Colvard Created Moissanite
®
|
2.65-2.69
|
0.104
|
9.25 – 9.5
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Excellent
|
||||||
Diamond
|
2.42
|
0.044
|
10
|
Good to Excellent
(2)
|
||||||
Ruby
|
1.77
|
0.018
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9
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Excellent
(3)
|
||||||
Sapphire
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1.77
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0.018
|
9
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Excellent
(3)
|
||||||
Emerald
|
1.58
|
0.014
|
7.50
|
Poor to Good
|
· |
Growing gem-grade raw SiC crystals;
|
· |
Manufacturing rough preforms;
|
· |
Faceting and polishing jewels;
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· |
Inspecting, sorting, and grading; and
|
· |
Engraving.
|
· |
Our exclusive SiC crystal Supply Agreement with Cree, which holds the U.S. patent for micropipe-free silicon carbide material and the related method of manufacture. We believe this core material empowers Charles & Colvard to rise above all other moissanite with an unrivaled level of gemstone clarity.
|
· |
Our mature and innovative supply chain, which we believe enables us to seamlessly manage the complex manufacturing process of both our moissanite gemstones and the varied jewelry options we deliver to a global audience.
|
· |
Our global distribution network, which we have optimized for timely delivery of everything from singular consumer orders to bulk distribution orders.
|
· |
Our significant inventory supply, which we believe positions us to meet the just-in-time needs of our distribution partners. We believe having inventory on the shelf is paramount to delivering for our customers as their demand dictates.
|
· |
Over 20 years of innovation and continuous improvement of our moissanite gemstone. With
Forever One
TM
, we believe that we have achieved a level of perfection that is rarely seen in any gemstone – featuring colorless grades with an innovative cut that we believe reveals optical properties unrivaled by any other jewel. This pinnacle of production is the outcome of continual improvement and artisan craft. Additionally, we believe that with our
Moissanite by Charles & Colvard
®
gemstones we have brought forward a price-conscious alternative to competitive moissanite that we believe exceeds the quality of competitive moissanite – specifically in terms of clarity, as well as in cut and polish. The distinction between
Forever One
TM
and
Moissanite by Charles & Colvard
®
is made through our applied expertise throughout the design and manufacturing processes and the discerning approach we believe we take to ensure the quality of
Forever One
TM
remains far above any other offering available today. By closely evaluating clarity, color, and cut, we are able to determine which gemstones meet our exemplary standards for
Forever One
TM
and those that should bear the
Moissanite by Charles & Colvard
®
name.
|
· |
our ability to continue our relationship with Cree in order to sustain our supply of high-quality SiC crystals;
|
· |
our ability to differentiate
Charles & Colvard Created Moissanite
®
from competing products making their way to market;
|
· |
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 the Charles & Colvard brands, such as
Forever One
TM
and
Moissanite by Charles & Colvard
®
, which are used in 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 our distribution channels 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 the strategy for our Online Channels segment.
|
· |
those found in nature, generally through mining techniques;
|
· |
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
|
· |
simulants, which are similar in appearance to natural gemstone but do not have the same chemical composition, physical properties, or optical characteristics.
|
Neal I. Goldman
Chairman of the Board; President of Goldman Capital Management, Inc., an investment advisory firm.
|
Anne M. Butler
Chief Executive Officer of Butler Advisors, a consulting firm specializing in strategic and operational advising to private equity, venture capital, and institutional investors on direct selling acquisitions and management.
|
Benedetta Casamento
Retail Consultant specializing in finance, business operations, and financial planning and analysis.
|
Jaqui Lividini
Chief Executive Officer and Founding Partner of Lividini & Co., a brand strategy company that specializes in brand development and marketplace positioning, engagement marketing, and retail strategy.
|
Suzanne Miglucci
President and Chief Executive Officer of Charles & Colvard, Ltd.
|
Ollin B. Sykes
|
President of Sykes & Company, P.A., a regional accounting firm specializing in accounting, tax, and financial advisory services.
|
Our current executive officers are the following:
|
Suzanne Miglucci
|
President and Chief Executive Officer
|
Clint J. Pete
|
Chief Financial Officer
|
Don O’Connell
|
Chief Operating Officer
and Senior Vice President, Supply Chain
|
· |
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;
|
· |
our ability to operationally execute our Online Channels segment;
|
· |
our ability to differentiate
Charles & Colvard Created Moissanite
®
from competing products making their way to market;
|
· |
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;
|
· |
our continued ability and the ability of retail jewelers to effectively market and sell finished jewelry featuring moissanite to consumers;
|
· |
our continued ability and the ability of manufacturers, designers, and retail jewelers to select jewelry settings that encourage consumer acceptance of and the demand for our moissanite jewels and finished jewelry; and
|
· |
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 the setting of the loose moissanite jewels in finished jewelry with high-quality workmanship.
|
· |
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 (including labor disputes); 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, including the consequences of recent U.S. led tariff actions;
|
· |
the burdens of complying with a variety of foreign laws and regulations, including foreign taxation, 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. |
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
|
High
|
Low
|
|||||||
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
|
||||
Year Ended December 31, 2017:
|
||||||||
First Quarter
|
$
|
1.19
|
$
|
0.90
|
||||
Second Quarter
|
$
|
1.01
|
$
|
0.84
|
||||
Third Quarter
|
$
|
0.99
|
$
|
0.81
|
||||
Fourth Quarter
|
$
|
1.55
|
$
|
0.80
|
||||
Transition Period Ended June 30, 2018:
|
||||||||
First Quarter
|
$
|
1.60
|
$
|
1.24
|
||||
Second Quarter
|
$
|
1.55
|
$
|
0.90
|
Transition Period Ended June 30, 2018 Results Compared With
Prior Year Period 2017 Results
|
||||
Transition Period Ended June 30, 2018
(
six-month, audited
)
|
Prior Year Period 2017
(
six-month, unaudited
)
|
|||
January 2018 – June 2018
|
January 2017 – June 2017
|
Fiscal Year-End 2017 Results Compared With Fiscal Year-End 2016 Results
|
||||
2017
(
twelve-month, audited
)
|
2016
(
twelve-month, audited
)
|
|||
January 2017 – December 2017
|
January 2016 – December 2016
|
· |
Extended Multi-Year Exclusive Supply Agreement with Cree, Inc.
– In June, we and Cree, our longstanding supplier of SiC material, entered into an amendment to our exclusive Supply Agreement that extends the term of the Supply Agreement by five years, with a unilateral option for renewal for an additional two-year period for a total of seven years. Cree’s patented process for developing micropipe-free SiC material enables the exclusive production of Charles & Colvard’s premium moissanite product,
Forever One
TM
. The amendment also allows for us under certain conditions to purchase alternative SiC material whose standards fall outside of
Forever One
TM
specifications. We believe this provision allows us to remain apprised of emerging moissanite materials and to be proactive with respect to changing product market conditions.
|
· |
Executed New Credit Facility with White Oak Commercial Finance, LLC
– During June and July we negotiated and entered into a $5.00 million
asset-based revolving credit facility with White Oak Commercial Finance, LLC, which replaced our previous asset-based revolving credit facility with a commercial bank. The White Oak Credit Facility may be used for general corporate and working capital purposes, including permitted acquisitions, and matures in July 2021
. The annual borrowing fees associated with
our new White Oak Credit Facility are lower than those in connection with our previous credit facility, and moreover, we believe the borrowing terms and financial covenants underlying the new White Oak Credit Facility are less restrictive than those under our previous credit arrangement. Accordingly, we believe the new White Oak Credit Facility will empower us to be more nimble when executing our strategic plans.
|
· |
Released Moissanite by Charles & Colvard
®
– In May 2018 we introduced
Moissanite by Charles & Colvard
®
, which is a value line of gemstones that offers cost-conscious consumers a competitively-priced option for moissanite jewels.
|
· |
Secured Key Retail Partners –
We broadened our relationship with Helzberg Diamonds stores with the addition of incremental product line styles. We also expanded our online relationship with Walmart migrating from a third-party position on the Walmart marketplace to that of a first-party Walmart.com strategic partnership. Along with these broader relationships come an expanded moissanite selection and a more prominent positioning of the Charles & Colvard brand. We also forged a relationship with Stein Mart, which we believe positions Charles & Colvard’s moissanite brand on steinmart.com alongside other well-known luxury brand consumer options such as Louis Vuitton, Yves Saint Laurent and Fendi.
|
· |
Developed New Co-Promotional Marketing Relationships
– We believe co-promotional marketing relationships are essential for proliferating the Charles & Colvard brand into new and untapped sales channels. We believe that exposure into these innovative marketing channels, which are focused toward Millennials, will make a greater number of consumers aware of the Charles & Colvard brand. During the transition period ended June 30, 2018, we developed relationships with multiple co-promotional companies and customer loyalty platforms such as Flont, which is a jewelry-as-a-service, or JaaS, concept that allows members to regularly refresh their personal jewelry boxes. Flont offers monthly JaaS members four-day jewelry rentals, allowing anyone to have access to and take advantage of high-end designer brand jewelry. Further, we developed a relationship with Cartera, which is a membership organization that partners with elite-brand companies that use loyalty programs to reward their customers for ongoing and repeat purchase transactions. Cartera helps its member customers earn rewards by shopping with their online stores featuring its partners’ product brands. We also developed a co-marketing partner relationship with Leading Points Corporation, or Leading Points, a consumer brand customer-loyalty program developed for products and services delivered into the military exchange distribution channel. Leading Points is a group that helps build brand awareness for its partners’ products and services, which reaches active and veteran military service members and their families. And finally, we partnered with
She Should Run
, which is a non-partisan organization that provides a network for women considering a future run for political office in the U.S. This is an organization that helps build community and provides resources and growth opportunities for these aspiring political leaders.
She Should Run
provides women the opportunity to access resources to help them overcome roadblocks that may prevent them from running for political office.
|
· |
Signed New E-Commerce Marketplace Arrangements –
In 2018, we executed new arrangements with U.S. domestic and international e-commerce marketplaces:
Catch-of-the-Day
, which serves the Australian country-wide web-based e-commerce shopping market; and
Wish Online Shopping
, which is a web-based and mobile e-commerce shopping portal that connects customers directly to global manufacturers. We are currently engaged with
Wish Online Shopping
, which is an emerging shopping portal that we believe resonates with value-oriented consumers and millennials, for U.S. domestic transactions only, with plans going forward to expand this relationship internationally. Both of these e-commerce marketplaces provide Charles & Colvard an opportunity to leverage established marketplaces to enter new domestic regions and international locations. We believe that these types of established e-commerce marketplaces make it less complicated for U.S. enterprises to enter international markets for the purpose of selling and shipping U.S. products globally.
|
· |
Broadened Media Exposure
– In addition to significant exposure in fashion-related print media and other digital-media and entertainment platforms including, among others,
Glamour Magazine
,
Martha Stewart Weddings Magazine
,
Fashionista Magazine
,
E! News
, and
Refinery29
, Charles & Colvard’s moissanite was also featured on
Megyn Kelly TODAY
, a nationally broadcast television show. At the height of the 2018 Winter Olympics television coverage, which was broadcast on the same television network as
Megyn Kelly TODAY
, Charles & Colvard’s moissanite was featured and gifted to audience members during the live broadcast of that program. We believe this type of media-based advertising drives significant product awareness. In this case we believe the exposure on
Megyn Kelly TODAY
led to a significant increase in consumer traffic to the charlesandcolvard.com website and contributed to our record-setting order volume and product sales during the 2018 Valentine’s Day shopping period compared to the same shopping period in prior years.
|
· |
Our total consolidated net sales increased by $876,000, or 7%, to $13.16 million in the transition period ended June 30, 2018 from $12.29 million in the six-month period ended June 30, 2017 (unaudited). The increase in consolidated net sales for the transition period ended June 30, 2018 was due primarily to the increased demand for our
Forever One
TM
gemstones over the six-month period ended June 30, 2017 (unaudited) and higher finished jewelry net sales during the transition period ended June 30, 2018. Online Channels segment net sales during the transition period ended June 30, 2018 of $6.37 million were 45% higher than Online Channels segment net sales during the six months ended June 30, 2017 (unaudited). Improved customer experience and expanded jewelry selections resulted in higher finished jewelry sales and ongoing increased demand for our
Forever One
TM
gemstones during the transition period ended June 30, 2018 as evidenced through our increased presence on e-commerce outlets including marketplaces and through charlesandcolvard.com within our Online Channels segment. Traditional segment net sales for the transition period ended June 30, 2018 of $6.79 million were 14% lower than Traditional segment net sales for the six months ended June 30, 2017 (unaudited), primarily driven by a decrease in loose jewel sales resulting from a large wholesale customer that had a one-time change in its inventory management practices across vendors. This decrease in loose jewel sales was partially offset by strong finished jewelry sales from our brick-and-mortar customers during the transition period ended June 30, 2018.
|
· |
Operating expenses from continuing operations increased by $288,000, or 5%, to $6.46 million in the transition period ended June 30, 2018 from $6.17 million in the six-month period ended June 30, 2017 (unaudited). Of this increase, sales and marketing expenses increased $165,000, or 4%, to $3.86 million, primarily due to increased digital marketing expenses associated with implementing our sales and marketing strategies, offset partially by a decrease in compensation expenses. General and administrative expenses also increased $127,000, or 5%, to $2.60 million primarily as a result of increased compensation-related expenses and professional services expenses, partially offset by a decrease in bank fees principally associated with our prior Wells Fargo Credit Facility and decreases in business taxes and computer-related expenses.
|
· |
Loss before income taxes from continuing operations increased approximately $650,000 to a loss of $1.59 million for the transition period ended June 30, 2018 from a loss before income taxes from continuing operations of $944,000 for the six months ended June 30, 2017 (unaudited). The increase in
loss before income taxes from continuing operations was due
primarily to increased sales of finished jewelry during the transition period ended June 30, 2018, which reflect higher material and labor costs, when compared to cost of goods sold in the same unaudited period of 2017, during which period we sold a higher level of loose jewels. The increase in
loss before income taxes from continuing operations for the transition period ended June 30, 2018 was also adversely impacted by higher sales and marketing as well as general and administrative expenses when compared to those in the same unaudited period of 2017.
|
· |
We recorded a net loss of $1.28 million in
the transition period ended June 30, 2018, compared to a net loss of $962,000 in the six-month period ended June 30, 2017 (unaudited)
. Net loss per share was $0.06 in
the transition period ended June 30,
2018 compared to a net loss per share of $0.05 in
the six-month period ended June 30,
2017 (unaudited).
The increase in net loss was
primarily the result of increased cost of goods sold when compared to these same costs in the six months ended June 30, 2017 (unaudited). We also incurred increased operating expenses
in
the transition period ended June 30, 2018, compared with those in the six-month period ended June 30, 2017 (unaudited), principally related to higher advertising and digital marketing-related expenses
.
These increased costs were partially offset by the favorable impact of the federal income tax benefit in connection with changes in the Tax Act relating to the realization of the recoverable portion of the AMT deferred tax credit carryforward being reclassified from a deferred tax asset to that of an income tax receivable
in
the transition period ended June 30, 2018.
|
· |
We generated negative cash flows from continuing operations of $1.04 million in
the transition period ended June 30, 2018, compared to
negative cash flows of $911,000 from continuing operations
in the six-month period ended June 30, 2017 (unaudited)
.
The primary drivers of our negative cash flow in the transition period ended June 30, 2018 were a net loss of $1.28 million; an increase in inventory of $855,000; an increase in prepaid expenses and other assets of $271,000; a decrease in accounts payable of $295,000 and a decrease in accrued liabilities of $423,000. These factors were partially offset by a decrease in accounts receivable of $1.48 million. In addition, non-cash items totaling $594,000 partially offset the net loss and had a favorable impact on cash flow from continuing operations during the transition period ended June 30, 2018.
|
· |
Cash and cash equivalents at June 30, 2018 were $3.39 million compared to $4.59 million at December 31, 2017. The primary reason for this decrease is the $1.04 million of cash used in operations.
|
· |
Total inventory, including long-term and consignment inventory, was $31.83 million as of June 30, 2018, up from $30.97 million at December 31, 2017. This inventory increase was, in part, due to higher purchases of raw materials and higher levels of work-in-process inventories that were produced to meet anticipated product demand
.
|
Six Months Ended June 30,
|
||||||||
2018
|
2017
|
|||||||
(unaudited)
|
||||||||
Net sales
|
$
|
13,163,048
|
$
|
12,287,174
|
||||
Costs and expenses:
|
||||||||
Cost of goods sold
|
8,298,286
|
7,060,701
|
||||||
Sales and marketing
|
3,856,796
|
3,692,188
|
||||||
General and administrative
|
2,601,554
|
2,474,882
|
||||||
Research and development
|
-
|
3,143
|
||||||
Total costs and expenses
|
14,756,636
|
13,230,914
|
||||||
Loss from operations
|
(1,593,588
|
)
|
(943,740
|
)
|
||||
Other expenses:
|
||||||||
Interest expense
|
(293
|
)
|
(92
|
)
|
||||
Loss on foreign currency exchange
|
(5
|
)
|
-
|
|||||
Total other expenses
|
(298
|
)
|
(92
|
)
|
||||
Loss before income taxes
|
(1,593,886
|
)
|
(943,832
|
)
|
||||
Income tax net benefit (expense)
|
318,060
|
(18,595
|
)
|
|||||
Net loss
|
$
|
(1,275,826
|
)
|
$
|
(962,427
|
)
|
Six Months Ended June 30,
|
|
Change
|
||||||||||||||
|
2018
|
2017
|
|
Dollars
|
Percent
|
|||||||||||
(unaudited)
|
||||||||||||||||
Loose jewels
|
$
|
6,999,998
|
$
|
8,672,363
|
$
|
(1,672,365
|
)
|
-19
|
%
|
|||||||
Finished jewelry
|
6,163,050
|
3,614,811
|
2,548,239
|
70
|
%
|
|||||||||||
Total consolidated net sales
|
$
|
13,163,048
|
$
|
12,287,174
|
$
|
875,874
|
7
|
%
|
Six Months Ended June 30,
|
Change
|
|||||||||||||||
2018
|
2017
|
Dollars
|
Percent
|
|||||||||||||
(unaudited)
|
||||||||||||||||
Product line cost of goods sold:
|
||||||||||||||||
Loose jewels
|
$
|
3,640,224
|
$
|
4,403,274
|
$
|
(763,050
|
)
|
-17
|
%
|
|||||||
Finished jewelry
|
3,435,233
|
1,616,767
|
1,818,466
|
112
|
%
|
|||||||||||
Total product line cost of goods sold
|
7,075,457
|
6,020,041
|
1,055,416
|
18
|
%
|
|||||||||||
Non-product line cost of goods sold
|
1,222,829
|
1,040,660
|
182,169
|
18
|
%
|
|||||||||||
Total cost of goods sold
|
$
|
8,298,286
|
$
|
7,060,701
|
$
|
1,237,585
|
18
|
%
|
Six Months Ended June 30,
|
Change
|
|||||||||||||||
|
2018
|
2017
|
Dollars
|
Percent
|
||||||||||||
(unaudited)
|
||||||||||||||||
Sales and marketing
|
$
|
3,856,796
|
$
|
3,692,188
|
$
|
164,608
|
4
|
%
|
Six Months Ended June 30,
|
|
Change
|
||||||||||||||
|
2018 | 2017 |
|
Dollars |
Percent
|
|||||||||||
(unaudited)
|
||||||||||||||||
General and administrative
|
$
|
2,601,554
|
$
|
2,474,882
|
$
|
126,672
|
5
|
%
|
Six Months Ended June 30,
|
Change
|
|||||||||||||||
|
2018
|
|
2017
|
|
Dollars
|
Percent
|
||||||||||
Loss on foreign currency exchange
|
$
|
5
|
$
|
-
|
$
|
5
|
100
|
%
|
Year Ended December 31,
|
||||||||
2017
|
2016
|
|||||||
Net sales
|
$
|
27,032,964
|
$
|
29,168,128
|
||||
Costs and expenses:
|
||||||||
Cost of goods sold
|
15,470,617
|
20,401,439
|
||||||
Sales and marketing
|
7,477,354
|
7,038,277
|
||||||
General and administrative
|
4,689,823
|
5,544,452
|
||||||
Research and development
|
3,714
|
2,848
|
||||||
Loss on abandonment of property and equipment
|
-
|
117,930
|
||||||
Total costs and expenses
|
27,641,508
|
33,104,946
|
||||||
Loss from operations
|
(608,544
|
)
|
(3,936,818
|
)
|
||||
Other income (expense):
|
||||||||
Interest expense
|
(541
|
)
|
(1,737
|
)
|
||||
Gain on insurance claim settlement
|
183,217
|
-
|
||||||
Gain on foreign currency exchange
|
-
|
-
|
||||||
Total other income (expense), net
|
182,676
|
(1,737
|
)
|
|||||
Loss before income taxes from continuing operations
|
(425,868
|
)
|
(3,938,555
|
)
|
||||
Income tax net expense from continuing operations
|
(27,609
|
)
|
(13,480
|
)
|
||||
Net loss from continuing operations
|
(453,477
|
)
|
(3,952,035
|
)
|
||||
Discontinued operations:
|
||||||||
Loss from discontinued operations
|
-
|
(586,124
|
)
|
|||||
Gain on sale of assets from discontinued operations
|
-
|
12,398
|
||||||
Net loss from discontinued operations
|
-
|
(573,726
|
)
|
|||||
Net loss
|
$
|
(453,477
|
)
|
$
|
(4,525,761
|
)
|
Year Ended December 31,
|
|
Change
|
||||||||||||||
|
2017
|
|
2016
|
|
Dollars
|
Percent
|
||||||||||
Loose jewels
|
$
|
16,580,748
|
$
|
21,451,728
|
$
|
(4,870,980
|
)
|
-23
|
%
|
|||||||
Finished jewelry
|
10,452,216
|
7,716,400
|
2,735,816
|
35
|
%
|
|||||||||||
Total consolidated net sales
|
$
|
27,032,964
|
$
|
29,168,128
|
$
|
(2,135,164
|
)
|
-7
|
%
|
Year Ended December 31,
|
Change
|
|||||||||||||||
2017
|
2016
|
Dollars
|
Percent
|
|||||||||||||
Product line cost of goods sold:
|
||||||||||||||||
Loose jewels
|
$
|
8,524,843
|
$
|
13,916,749
|
$
|
(5,391,906
|
)
|
-39
|
%
|
|||||||
Finished jewelry
|
5,226,660
|
4,148,788
|
1,077,872
|
26
|
%
|
|||||||||||
Total product line cost of goods sold
|
13,751,503
|
18,065,537
|
(4,314,034
|
)
|
-24
|
%
|
||||||||||
Non-product line cost of goods sold
|
1,719,114
|
2,335,902
|
(616,788
|
)
|
-26
|
%
|
||||||||||
Total cost of goods sold
|
$
|
15,470,617
|
$
|
20,401,439
|
$
|
(4,930,822
|
)
|
-24
|
%
|
Year Ended December 31, |
|
Change
|
||||||||||||||
|
2017
|
|
2016
|
|
Dollars
|
Percent
|
||||||||||
Sales and marketing
|
$
|
7,477,354
|
$
|
7,038,277
|
$
|
439,077
|
6
|
%
|
Year Ended December 31,
|
Change
|
|||||||||||||||
2017
|
2016
|
Dollars
|
Percent
|
|||||||||||||
General and administrative
|
$
|
4,689,823
|
$
|
5,544,452
|
$
|
(854,629
|
)
|
-15
|
%
|
Year Ended December 31,
|
Change
|
|||||||||||||||
2017
|
2016
|
Dollars
|
Percent
|
|||||||||||||
Loss on abandonment of property and equipment
|
$
|
-
|
$
|
117,930
|
$
|
(117,930
|
)
|
-100
|
%
|
Year Ended December 31,
|
Change
|
|||||||||||||||
2017
|
2016
|
Dollars
|
Percent
|
|||||||||||||
Gain on insurance claim settlement
|
$
|
183,217
|
$
|
-
|
$
|
183,217
|
100
|
%
|
Page
Number
|
|
Report of Independent Registered Public Accounting Firm
|
54
|
Consolidated Balance Sheets as of June 30, 2018, December 31, 2017 and December 31, 2016
|
55
|
Consolidated Statements of Operations for the six months ended June 30, 2018 and 2017 (unaudited) and the years ended December 31, 2017 and 2016
|
56
|
Consolidated Statements of Shareholders’ Equity for the six months ended June 30, 2018 and the years ended December 31, 2017 and 2016
|
57
|
Consolidated Statements of Cash Flows for the six months ended June 30, 2018 and 2017 (unaudited) and the years ended December 31, 2017 and 2016
|
58
|
Notes to Consolidated Financial Statements
|
59
|
December 31,
|
||||||||||||
June 30, 2018
|
2017
|
2016
|
||||||||||
ASSETS
|
||||||||||||
Current assets:
|
||||||||||||
Cash and cash equivalents
|
$
|
3,393,186
|
$
|
4,594,007
|
$
|
7,427,273
|
||||||
Accounts receivable, net
|
1,765,722
|
3,377,451
|
2,794,626
|
|||||||||
Inventory, net
|
10,979,891
|
11,208,658
|
9,770,206
|
|||||||||
Prepaid expenses and other assets
|
916,162
|
969,857
|
682,083
|
|||||||||
Total current assets
|
17,054,961
|
20,149,973
|
20,674,188
|
|||||||||
Long-term assets:
|
||||||||||||
Inventory, net
|
20,848,647
|
19,764,959
|
18,360,211
|
|||||||||
Property and equipment, net
|
1,144,198
|
1,242,200
|
1,391,116
|
|||||||||
Intangible assets, net
|
34,833
|
8,597
|
8,808
|
|||||||||
Other assets
|
389,868
|
64,978
|
71,453
|
|||||||||
Total long-term assets
|
22,417,546
|
21,080,734
|
19,831,588
|
|||||||||
TOTAL ASSETS
|
$
|
39,472,507
|
$
|
41,230,707
|
$
|
40,505,776
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
||||||||||||
Current liabilities:
|
||||||||||||
Accounts payable
|
$
|
4,170,952
|
$
|
4,466,163
|
$
|
3,977,149
|
||||||
Accrued expenses and other liabilities
|
618,945
|
980,800
|
631,107
|
|||||||||
Total current liabilities
|
4,789,897
|
5,446,963
|
4,608,256
|
|||||||||
Long-term liabilities:
|
||||||||||||
Deferred rent
|
393,051
|
463,526
|
594,916
|
|||||||||
Accrued income taxes
|
471,126
|
461,592
|
433,983
|
|||||||||
Total long-term liabilities
|
864,177
|
925,118
|
1,028,899
|
|||||||||
Total liabilities
|
5,654,074
|
6,372,081
|
5,637,155
|
|||||||||
Commitments and contingencies (Note 9)
|
||||||||||||
Shareholders’ equity:
|
||||||||||||
Common stock, no par value; 50,000,000 shares authorized; 21,705,173, 21,580,102 and 21,369,885 shares issued and outstanding at June 30, 2018, December 31, 2017 and December 31, 2016, respectively
|
54,243,816
|
54,243,816
|
54,243,816
|
|||||||||
Additional paid-in capital
|
14,962,071
|
14,726,438
|
14,282,956
|
|||||||||
Accumulated deficit
|
(35,387,454
|
)
|
(34,111,628
|
)
|
(33,658,151
|
)
|
||||||
Total shareholders’ equity
|
33,818,433
|
34,858,626
|
34,868,621
|
|||||||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
|
$
|
39,472,507
|
$
|
41,230,707
|
$
|
40,505,776
|
Six Months Ended June 30,
|
Year Ended December 31,
|
|||||||||||||||
2018
|
2017
|
2017
|
2016
|
|||||||||||||
(unaudited)
|
||||||||||||||||
Net sales
|
$
|
13,163,048
|
$
|
12,287,174
|
$
|
27,032,964
|
$
|
29,168,128
|
||||||||
Costs and expenses:
|
||||||||||||||||
Cost of goods sold
|
8,298,286
|
7,060,701
|
15,470,617
|
20,401,439
|
||||||||||||
Sales and marketing
|
3,856,796
|
3,692,188
|
7,477,354
|
7,038,277
|
||||||||||||
General and administrative
|
2,601,554
|
2,474,882
|
4,689,823
|
5,544,452
|
||||||||||||
Research and development
|
-
|
3,143
|
3,714
|
2,848
|
||||||||||||
Loss on abandonment of property and equipment
|
-
|
-
|
-
|
117,930
|
||||||||||||
Total costs and expenses
|
14,756,636
|
13,230,914
|
27,641,508
|
33,104, 946
|
||||||||||||
Loss from operations
|
(1,593,588
|
)
|
(943,740
|
)
|
(608,544
|
)
|
(3,936,818
|
)
|
||||||||
Other income (expense):
|
||||||||||||||||
Interest expense
|
(293
|
)
|
(92
|
)
|
(541
|
)
|
(1,737
|
)
|
||||||||
Gain on insurance claim settlement
|
-
|
-
|
183,217
|
-
|
||||||||||||
Loss on foreign currency exchange
|
(5
|
)
|
-
|
-
|
-
|
|||||||||||
Total other income (expense), net
|
(298
|
)
|
(92
|
)
|
182,676
|
(1,737
|
)
|
|||||||||
Loss before income taxes from continuing operations
|
(1,593,886
|
)
|
(943,832
|
)
|
(425,868
|
)
|
(3,938,555
|
)
|
||||||||
Income tax benefit (expense) from continuing operations
|
318,060
|
(18,595
|
)
|
(27,609
|
)
|
(13,480
|
)
|
|||||||||
Net loss from continuing operations
|
(1,275,826
|
)
|
(962,427
|
)
|
(453, 477
|
)
|
(3,952,035
|
)
|
||||||||
Discontinued operations:
|
||||||||||||||||
Loss from discontinued operations
|
-
|
-
|
-
|
(586,124
|
)
|
|||||||||||
Gain on sale of assets from discontinued operations
|
-
|
-
|
-
|
12,398
|
||||||||||||
Net loss from discontinued operations
|
-
|
-
|
-
|
(573,726
|
)
|
|||||||||||
Net loss
|
$
|
(1,275,826
|
)
|
$
|
(962,427
|
)
|
$
|
(453,477
|
)
|
$
|
(4,525,761
|
)
|
||||
Net loss per common share:
|
||||||||||||||||
Basic – continuing operations
|
$
|
(0.06
|
)
|
$
|
(0.05
|
)
|
$
|
(0.02
|
)
|
$
|
(0.19
|
)
|
||||
Basic – discontinued operations
|
-
|
-
|
-
|
(0.03
|
)
|
|||||||||||
Basic – total
|
$
|
(0.06
|
)
|
$
|
(0.05
|
)
|
$
|
(0.02
|
)
|
$
|
(0.22
|
)
|
||||
Diluted – continuing operations
|
$
|
(0.06
|
)
|
$
|
(0.05
|
)
|
$
|
(0.02
|
)
|
$
|
(0.19
|
)
|
||||
Diluted – discontinued operations
|
-
|
-
|
-
|
(0.03
|
)
|
|||||||||||
Diluted – total
|
$
|
(0.06
|
)
|
$
|
(0.05
|
)
|
$
|
(0.02
|
)
|
$
|
(0.22
|
)
|
||||
Weighted average number of shares used in computing net loss per common share:
|
||||||||||||||||
Basic
|
21,406,487
|
21,166,799
|
21,193,793
|
20,926,120
|
||||||||||||
Diluted
|
21,406,487
|
21,166,799
|
21,193,793
|
20,926,120
|
||||||||||||
Common Stock
|
||||||||||||||||||||
Number of
Shares
|
Amount
|
Additional
Paid-in
Capital
|
Accumulated
Deficit
|
Total
Shareholders’
Equity
|
||||||||||||||||
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
|
||||||||||
Stock-based compensation
|
-
|
-
|
443,482
|
-
|
443,482
|
|||||||||||||||
Issuance of restricted stock
|
210,217
|
-
|
-
|
-
|
-
|
|||||||||||||||
Net loss
|
-
|
-
|
-
|
(453,477
|
)
|
(453,477
|
)
|
|||||||||||||
Balance at December 31, 2017
|
21,580,102
|
$
|
54,243,816
|
$
|
14,726,438
|
$
|
(34,111,628
|
)
|
$
|
34,858,626
|
||||||||||
Stock-based compensation
|
-
|
-
|
235,633
|
-
|
235,633
|
|||||||||||||||
Issuance of restricted stock
|
125,071
|
-
|
-
|
-
|
-
|
|||||||||||||||
Net loss
|
-
|
-
|
-
|
(1,275,826
|
)
|
(1,275,826
|
)
|
|||||||||||||
Balance at June 30, 2018
|
21,705,173
|
$
|
54,243,816
|
$
|
14,962,071
|
$
|
(35,387,454
|
)
|
$
|
33,818,433
|
Six Months Ended June 30,
|
Year Ended December 31,
|
|||||||||||||||
2018
|
2017
|
2017
|
2016
|
|||||||||||||
(unaudited)
|
||||||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES:
|
||||||||||||||||
Net loss
|
$
|
(1,275,826
|
)
|
$
|
(962,427
|
)
|
$
|
(453,477
|
)
|
$
|
(4,525,761
|
)
|
||||
Net loss from discontinued operations
|
-
|
-
|
-
|
(573,726
|
)
|
|||||||||||
Net loss from continuing operations
|
(1,275,826
|
)
|
(962,427
|
)
|
(453,477
|
)
|
(3,952,035
|
)
|
||||||||
Adjustments to reconcile net loss from continuing operations to net cash (used in) provided by operating activities of continuing operations:
|
||||||||||||||||
Depreciation and amortization
|
229,993
|
214,164
|
422,018
|
557,393
|
||||||||||||
Stock-based compensation
|
235,633
|
206,086
|
443,482
|
959,134
|
||||||||||||
(Recovery of) provision for uncollectible accounts
|
(4,511
|
)
|
29,000
|
28,000
|
(73,300
|
)
|
||||||||||
Provision for (recovery of) sales returns
|
110,390
|
55,000
|
122,000
|
(316,000
|
)
|
|||||||||||
Provision for inventory reserves
|
-
|
47,000
|
598,000
|
200,000
|
||||||||||||
Provision for accounts receivable discounts
|
22,802
|
-
|
-
|
-
|
||||||||||||
Gain on insurance claim settlement
|
-
|
-
|
(183,217
|
)
|
-
|
|||||||||||
Loss on abandonment of property and equipment
|
-
|
-
|
-
|
117,930
|
||||||||||||
Changes in operating assets and liabilities:
|
||||||||||||||||
Accounts receivable
|
1,483,048
|
718,192
|
(732,825
|
)
|
1,447,325
|
|||||||||||
Inventory
|
(854,921
|
)
|
(1,149,660
|
)
|
(3,503,032
|
)
|
3,998,003
|
|||||||||
Prepaid expenses and other assets, net
|
(271,195
|
)
|
42,044
|
(36,250
|
)
|
162,157
|
||||||||||
Accounts payable
|
(295,211
|
)
|
(112,171
|
)
|
489,014
|
654,001
|
||||||||||
Deferred rent
|
(70,475
|
)
|
(62,307
|
)
|
(131,390
|
)
|
(99,656
|
)
|
||||||||
Accrued income taxes
|
9,534
|
18,595
|
27,609
|
13,480
|
||||||||||||
Accrued expenses and other liabilities
|
(361,855
|
)
|
45,948
|
349,693
|
(333,731
|
)
|
||||||||||
Net cash (used in) provided by operating activities of continuing operations
|
(1,042,594
|
)
|
(910,536
|
)
|
(2,560,375
|
)
|
3,334,701
|
|||||||||
Net cash used in operating activities of discontinued operations
|
-
|
-
|
-
|
(1,125,578
|
)
|
|||||||||||
Net cash (used in) provided by operating activities
|
(1,042,594
|
)
|
(910,536
|
)
|
(2,560,375
|
)
|
2,209,123
|
|||||||||
CASH FLOWS FROM INVESTING ACTIVITIES:
|
||||||||||||||||
Purchases of property and equipment
|
(130,649
|
)
|
(226,633
|
)
|
(271,390
|
)
|
(421,761
|
)
|
||||||||
Intangible assets
|
(27,578
|
)
|
(993
|
)
|
(1,501
|
)
|
(5,615
|
)
|
||||||||
Proceeds from sale of long-term assets
|
-
|
-
|
-
|
250
|
||||||||||||
Net cash used in investing activities of continuing operations
|
(158,227
|
)
|
(227,626
|
)
|
(272,891
|
)
|
(427,126
|
)
|
||||||||
Net cash provided by investing activities of discontinued operations
|
-
|
-
|
-
|
368,671
|
||||||||||||
Net cash used in investing activities
|
(158,227
|
)
|
(227,626
|
)
|
(272,891
|
)
|
(58,455
|
)
|
||||||||
CASH FLOWS FROM FINANCING ACTIVITIES:
|
||||||||||||||||
Stock option exercises
|
-
|
-
|
-
|
2,300
|
||||||||||||
Net cash provided by financing activities of continuing operations
|
-
|
-
|
-
|
2,300
|
||||||||||||
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
|
(1,200,821
|
)
|
(1,138,162
|
)
|
(2,833,266
|
)
|
2,152,968
|
|||||||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
4,594,007
|
7,427,273
|
7,427,273
|
5,274,305
|
||||||||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD
|
$
|
3,393,186
|
$
|
6,289,111
|
$
|
4,594,007
|
$
|
7,427,273
|
||||||||
Supplemental disclosure of cash flow information:
|
||||||||||||||||
Cash paid during the period for interest
|
$
|
293
|
$
|
92
|
$
|
541
|
$
|
1,737
|
1. |
DESCRIPTION OF BUSINESS
|
2. |
BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
|
Six Months
Ended
|
Year Ended December 31,
|
|||||||||||
June 30, 2018
|
2017
|
2016
|
||||||||||
Balance, beginning of period
|
$
|
537,000
|
$
|
415,000
|
$
|
731,000
|
||||||
Additions charged to operations
|
2,462,049
|
3,878,736
|
3,574,297
|
|||||||||
Sales returned
|
(2,351,049
|
)
|
(3,756,736
|
)
|
(3,890,297
|
)
|
||||||
Balance, end of period
|
$
|
648,000
|
$
|
537,000
|
$
|
415,000
|
Six Months Ended
|
Year Ended December 31,
|
|||||||||||
June 30, 2018
|
2017
|
2016
|
||||||||||
Balance, beginning of period
|
$
|
254,000
|
$
|
226,000
|
$
|
1,137,000
|
||||||
(Reductions) additions charged to operations
|
(4,511
|
)
|
28,000
|
(73,300
|
)
|
|||||||
Write-offs, net of recoveries
|
(16,489
|
)
|
-
|
(837,700
|
)
|
|||||||
Balance, end of period
|
$
|
233,000
|
$
|
254,000
|
$
|
226,000
|
As of June 30, 2018
|
||||||||||||
As
Reported
|
Adjustments
|
Without
Adoption
|
||||||||||
Cash and cash equivalents
|
$
|
3,393,186
|
$
|
-
|
$
|
3,393,186
|
||||||
Accounts receivable, net
|
1,765,722
|
-
|
1,765,722
|
|||||||||
Prepaid expenses and other assets
|
916,162
|
(250,000
|
)
|
666,162
|
||||||||
Total inventory, net
|
31,828,538
|
250,000
|
32,078,538
|
|||||||||
Total other long-term assets
|
1,568,899
|
-
|
1,568,899
|
|||||||||
Total assets
|
$
|
39,472,507
|
$
|
-
|
$
|
39,472,507
|
Accounts payable
|
$
|
4,170,952
|
$
|
-
|
$
|
4,170,952
|
||||||
Accrued expenses and other liabilities
|
618,945
|
-
|
618,945
|
|||||||||
Total long-term liabilities
|
864,177
|
-
|
864,177
|
|||||||||
Total liabilities
|
5,654,074
|
-
|
5,654,074
|
|||||||||
Total shareholders’ equity
|
33,818,433
|
-
|
33,818,433
|
|||||||||
Total liabilities and shareholders’ equity
|
$
|
39,472,507
|
$
|
-
|
$
|
39,472,507
|
Six Months Ended June 30, 2018
|
||||||||||||
As
Reported
|
Adjustments
|
Without
Adoption
|
||||||||||
Net sales
|
$
|
13,163,048
|
$
|
-
|
$
|
13,163,048
|
||||||
Costs of goods sold
|
(8,298,286
|
)
|
-
|
(8,298,286
|
)
|
|||||||
Other costs and expenses
|
(6,458,648
|
)
|
-
|
(6,458,648
|
)
|
|||||||
Income tax benefit
|
318,060
|
-
|
318,060
|
|||||||||
Net loss
|
$
|
(1,275,826
|
)
|
$
|
-
|
$
|
(1,275,826
|
)
|
Six Months Ended June 30, 2018
|
||||||||||||
As
Reported
|
Adjustments
|
Without
Adoption
|
||||||||||
Net loss
|
$
|
(1,275,826
|
)
|
$
|
-
|
$
|
(1,275,826
|
)
|
||||
Adjustments to reconcile net loss to net cash used in operating activities, net
|
594,307
|
-
|
594,307
|
|||||||||
Changes in operating assets and liabilities:
|
||||||||||||
Accounts receivable
|
1,483,048
|
-
|
1,483,048
|
|||||||||
Inventory
|
(854,921
|
)
|
250,000
|
(604,921
|
)
|
|||||||
Prepaid expenses and other assets, net
|
(271,195
|
)
|
(250,000
|
)
|
(521,195
|
)
|
||||||
Accounts payable
|
(295,211
|
)
|
-
|
(295,211
|
)
|
|||||||
Deferred rent
|
(70,475
|
)
|
-
|
(70,475
|
)
|
|||||||
Accrued income taxes
|
9,534
|
-
|
9,534
|
|||||||||
Accrued expenses and other liabilities
|
(361,855
|
)
|
-
|
(361,855
|
)
|
|||||||
Net cash used in operating activities
|
(1,042,594
|
)
|
-
|
(1,042,594
|
)
|
|||||||
Purchases of property and equipment
|
(130,649
|
)
|
-
|
(130,649
|
)
|
|||||||
Intangible assets
|
(27,578
|
)
|
-
|
(27,578
|
)
|
|||||||
Net cash used in investing activities
|
(158,227
|
)
|
-
|
(158,227
|
)
|
|||||||
Net decrease in cash and cash equivalents
|
(1,200,821
|
)
|
-
|
(1,200,821
|
)
|
|||||||
Cash and cash equivalents, beginning of period
|
4,594,007
|
-
|
4,594,007
|
|||||||||
Cash and cash equivalents, end of period
|
$
|
3,393,186
|
$
|
-
|
$
|
3,393,186
|
· |
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 issued stock options 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.
|
Six Months Ended June 30,
|
Year Ended December 31,
|
|||||||||||||||
2018
|
2017
|
2017
|
2016
|
|||||||||||||
(unaudited)
|
||||||||||||||||
Numerator:
|
||||||||||||||||
Net loss from continuing operations
|
$
|
(1,275,826
|
)
|
$
|
(962,427
|
)
|
$
|
(453,477
|
)
|
$
|
(3,952,035
|
)
|
||||
Net loss from discontinued operations
|
-
|
-
|
-
|
(573,726
|
)
|
|||||||||||
Net loss
|
$
|
(1,275,826
|
)
|
$
|
(962,427
|
)
|
$
|
(453,477
|
)
|
$
|
(4,525,761
|
)
|
||||
Denominator:
|
||||||||||||||||
Weighted average common shares outstanding:
|
||||||||||||||||
Basic
|
21,406,487
|
21,166,799
|
21,193,793
|
20,926,120
|
||||||||||||
Stock options
|
-
|
-
|
-
|
-
|
||||||||||||
Diluted
|
21,406,487
|
21,166,799
|
21,193,793
|
20,926,120
|
||||||||||||
Net loss per common share:
|
||||||||||||||||
Basic – continuing operations
|
$
|
(0.06
|
)
|
$
|
(0.05
|
)
|
$
|
(0.02
|
)
|
$
|
(0.19
|
)
|
||||
Basic – discontinued operations
|
-
|
-
|
-
|
(0.03
|
)
|
|||||||||||
Basic – total
|
$
|
(0.06
|
)
|
$
|
(0.05
|
)
|
$
|
(0.02
|
)
|
$
|
(0.22
|
)
|
||||
Diluted – continuing operations
|
$
|
(0.06
|
)
|
$
|
(0.05
|
)
|
$
|
(0.02
|
)
|
$
|
(0.19
|
)
|
||||
Diluted – discontinued operations
|
-
|
-
|
-
|
(0.03
|
)
|
|||||||||||
Diluted – total
|
$
|
(0.06
|
)
|
$
|
(0.05
|
)
|
$
|
(0.02
|
)
|
$
|
(0.22
|
)
|
3. |
SEGMENT INFORMATION AND GEOGRAPHIC DATA
|
Six Months Ended June 30, 2018
|
||||||||||||
Traditional
|
Online
Channels
|
Total
|
||||||||||
Net sales
|
||||||||||||
Loose jewels
|
$
|
5,121,660
|
$
|
1,878,338
|
$
|
6,999,998
|
||||||
Finished jewelry
|
1,672,066
|
4,490,984
|
6,163,050
|
|||||||||
Total
|
$
|
6,793,726
|
$
|
6,369,322
|
$
|
13,163,048
|
||||||
Product line cost of goods sold
|
||||||||||||
Loose jewels
|
$
|
2,688,560
|
$
|
951,664
|
$
|
3,640,224
|
||||||
Finished jewelry
|
1,462,371
|
1,972,862
|
3,435,233
|
|||||||||
Total
|
$
|
4,150,931
|
$
|
2,924,526
|
$
|
7,075,457
|
||||||
Product line gross profit
|
||||||||||||
Loose jewels
|
$
|
2,433,100
|
$
|
926,674
|
$
|
3,359,774
|
||||||
Finished jewelry
|
209,695
|
2,518,122
|
2,727,817
|
|||||||||
Total
|
$
|
2,642,795
|
$
|
3,444,796
|
$
|
6,087,591
|
||||||
Operating loss
|
$
|
(1,349,756
|
)
|
$
|
(243,832
|
)
|
$
|
(1,593,588
|
)
|
|||
Depreciation and amortization
|
$
|
170,584
|
$
|
59,409
|
$
|
229,993
|
||||||
Capital expenditures
|
$
|
100,960
|
$
|
29,689
|
$
|
130,649
|
Six Months Ended June 30, 2017
|
||||||||||||
Traditional
|
Online
Channels
|
Total
|
||||||||||
(unaudited)
|
(unaudited)
|
(unaudited)
|
||||||||||
Net sales
|
||||||||||||
Loose jewels
|
$
|
7,099,363
|
$
|
1,573,000
|
$
|
8,672,363
|
||||||
Finished jewelry
|
785,326
|
2,829,485
|
3,614,811
|
|||||||||
Total
|
$
|
7,884,689
|
$
|
4,402,485
|
$
|
12,287,174
|
||||||
Product line cost of goods sold
|
||||||||||||
Loose jewels
|
$
|
3,669,406
|
$
|
733,868
|
$
|
4,403,274
|
||||||
Finished jewelry
|
514,801
|
1,101,966
|
1,616,767
|
|||||||||
Total
|
$
|
4,184,207
|
$
|
1,835,834
|
$
|
6,020,041
|
||||||
Product line gross profit
|
||||||||||||
Loose jewels
|
$
|
3,429,957
|
$
|
839,132
|
$
|
4,269,089
|
||||||
Finished jewelry
|
270,525
|
1,727,519
|
1,998,044
|
|||||||||
Total
|
$
|
3,700,482
|
$
|
2,566,651
|
$
|
6,267,133
|
||||||
Operating loss
|
$
|
(585,838
|
)
|
$
|
(357,902
|
)
|
$
|
(943,740
|
)
|
|||
Depreciation and amortization
|
$
|
151,625
|
$
|
62,539
|
$
|
214,164
|
||||||
Capital expenditures
|
$
|
223,012
|
$
|
3,621
|
$
|
226,633
|
Year Ended December 31, 2017
|
||||||||||||
Traditional
|
Online
Channels
|
Total
|
||||||||||
Net sales
|
||||||||||||
Loose jewels
|
$
|
13,430,776
|
$
|
3,149,972
|
$
|
16,580,748
|
||||||
Finished jewelry
|
2,515,443
|
7,936,773
|
10,452,216
|
|||||||||
Total
|
$
|
15,946,219
|
$
|
11,086,745
|
$
|
27,032,964
|
||||||
Product line cost of goods sold
|
||||||||||||
Loose jewels
|
$
|
6,998,485
|
$
|
1,526,358
|
$
|
8,524,843
|
||||||
Finished jewelry
|
1,610,845
|
3,615,815
|
5,226,660
|
|||||||||
Total
|
$
|
8,609,330
|
$
|
5,142,173
|
$
|
13,751,503
|
||||||
Product line gross profit
|
||||||||||||
Loose jewels
|
$
|
6,432,291
|
$
|
1,623,614
|
$
|
8,055,905
|
||||||
Finished jewelry
|
904,598
|
4,320,958
|
5,225,556
|
|||||||||
Total
|
$
|
7,336,889
|
$
|
5,944,572
|
$
|
13,281,461
|
||||||
Operating (loss) income
|
$
|
(836,797
|
)
|
$
|
228,253
|
$
|
(608,544
|
)
|
||||
Depreciation and amortization
|
$
|
300,308
|
$
|
121,710
|
$
|
422,018
|
||||||
Capital expenditures
|
$
|
123,944
|
$
|
147,446
|
$
|
271,390
|
Year Ended December 31, 2016
|
||||||||||||
Traditional
|
Online
Channels
|
Total
|
||||||||||
Net sales
|
||||||||||||
Loose jewels
|
$
|
19,231,534
|
$
|
2,220,194
|
$
|
21,451,728
|
||||||
Finished jewelry
|
1,075,157
|
6,641,243
|
7,716,400
|
|||||||||
Total
|
$
|
20,306,691
|
$
|
8,861,437
|
$
|
29,168,128
|
||||||
Product line cost of goods sold
|
||||||||||||
Loose jewels
|
$
|
13,107,366
|
$
|
809,383
|
$
|
13,916,749
|
||||||
Finished jewelry
|
1,195,640
|
2,953,148
|
4,148,788
|
|||||||||
Total
|
$
|
14,303,006
|
$
|
3,762,531
|
$
|
18,065,537
|
||||||
Product line gross profit (loss)
|
||||||||||||
Loose jewels
|
$
|
6,124,168
|
$
|
1,410,811
|
$
|
7,534,979
|
||||||
Finished jewelry
|
(120,483
|
)
|
3,688,095
|
3,567,612
|
||||||||
Total
|
$
|
6,003,685
|
$
|
5,098,906
|
$
|
11,102,591
|
||||||
Operating loss
|
$
|
(3,089,559
|
)
|
$
|
(847,259
|
)
|
$
|
(3,936,818
|
)
|
|||
Depreciation and amortization
|
$
|
479,517
|
$
|
77,876
|
$
|
557,393
|
||||||
Capital expenditures
|
$
|
158,702
|
$
|
263,059
|
$
|
421,761
|
Six Months Ended June 30,
|
Year Ended December 31,
|
|||||||||||||||
2018
|
2017
|
2017
|
2016
|
|||||||||||||
(unaudited)
|
||||||||||||||||
Product line cost of goods sold
|
$
|
7,075,457
|
$
|
6,020,041
|
$
|
13,751,503
|
$
|
18,065,537
|
||||||||
Non-capitalized manufacturing and production control expenses
|
805,400
|
722,818
|
1,352,311
|
1,427,924
|
||||||||||||
Freight out
|
272,790
|
173,071
|
417,074
|
376,726
|
||||||||||||
Inventory valuation allowances
|
-
|
47,000
|
598,000
|
200,000
|
||||||||||||
Other inventory adjustments
|
144,639
|
97,771
|
(648,271
|
)
|
331,252
|
|||||||||||
Cost of goods sold
|
$
|
8,298,286
|
$
|
7,060,701
|
$
|
15,470,617
|
$
|
20,401,439
|
Six Months Ended June 30,
|
Year Ended December 31,
|
|||||||||||||||
2018
|
2017
|
|
2017
|
|
2016
|
|||||||||||
(unaudited)
|
||||||||||||||||
Net sales:
|
||||||||||||||||
United States
|
$
|
12,121,003
|
$
|
11,455,660
|
$
|
25,176,220
|
$
|
26,164,660
|
||||||||
International
|
1,042,045
|
831,514
|
1,856,744
|
3,003,468
|
||||||||||||
Total
|
$
|
13,163,048
|
$
|
12,287,174
|
$
|
27,032,964
|
$
|
29,168,128
|
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; and
|
· |
Level 3
- unobservable inputs that are not corroborated by market data.
|
5. |
INVENTORIES
|
December 31,
|
||||||||||||
June 30, 2018
|
2017
|
2016
|
||||||||||
Raw materials
|
$
|
5,083,436
|
$
|
4,853,049
|
$
|
3,106,617
|
||||||
Work-in-process
|
10,659,786
|
9,219,383
|
11,048,126
|
|||||||||
Finished goods
|
17,483,773
|
17,896,992
|
15,057,668
|
|||||||||
Finished goods on consignment
|
523,971
|
1,093,752
|
467,778
|
|||||||||
Supplies inventory
|
45,572
|
75,441
|
17,228
|
|||||||||
Less inventory reserves
|
(1,968,000
|
)
|
(2,165,000
|
)
|
(1,567,000
|
) | ||||||
T
otal inventories
|
$
|
31,828,538
|
$
|
30,973,617
|
$
|
28,130,417
|
Short-term portion
|
10,979,891
|
11,208,658
|
9,770,206
|
|||||||||
Long-term portion
|
20,848,647
|
19,764,959
|
18,360,211
|
|||||||||
T
otal inventories
|
$
|
31,828,538
|
$
|
30,973,617
|
$
|
28,130,417
|
December 31,
|
||||||||||||
June 30, 2018
|
2017
|
2016
|
||||||||||
Loose jewels:
|
||||||||||||
Raw materials
|
$
|
4,487,787
|
$
|
4,288,360
|
$
|
2,586,045
|
||||||
Work-in-process
|
9,463,518
|
8,328,719
|
10,589,424
|
|||||||||
Finished goods
|
10,015,822
|
9,487,245
|
9,455,393
|
|||||||||
Finished goods on consignment
|
29,323
|
26,281
|
5,473
|
|||||||||
Total loose jewels
|
23,996,450
|
22,130,605
|
22,636,335
|
|||||||||
Finished jewelry:
|
||||||||||||
Raw materials
|
595,649
|
564,689
|
520,572
|
|||||||||
Work-in-process
|
1,196,268
|
890,664
|
458,702
|
|||||||||
Finished goods
|
5,517,951
|
6,304,747
|
4,081,275
|
|||||||||
Finished goods on consignment
|
476,648
|
1,007,471
|
416,305
|
|||||||||
Total finished jewelry
|
7,786,516
|
8,767,571
|
5,476,854
|
|||||||||
Total supplies inventory
|
45,572
|
75,441
|
17,228
|
|||||||||
Total inventory
|
$
|
31,828,538
|
$
|
30,973,617
|
$
|
28,130,417
|
6. |
PROPERTY AND EQUIPMENT
|
December 31,
|
||||||||||||
June 30, 2018
|
2017
|
2016
|
||||||||||
Computer software
|
$
|
1,253,894
|
$
|
1,206,465
|
$
|
1,192,922
|
||||||
Machinery and equipment
|
1,048,288
|
1,026,736
|
956,050
|
|||||||||
Computer hardware
|
1,026,987
|
1,009,008
|
874,347
|
|||||||||
Leasehold improvements
|
1,151,659
|
1,126,553
|
1,083,634
|
|||||||||
Furniture and fixtures
|
337,210
|
318,627
|
309,046
|
|||||||||
Total
|
4,818,038
|
4,687,389
|
4,415,999
|
|||||||||
Less accumulated depreciation
|
(3,673,840
|
)
|
(3,445,189
|
)
|
(3,024,883
|
)
|
||||||
Property and equipment, net
|
$
|
1,144,198
|
$
|
1,242,200
|
$
|
1,391,116
|
7. |
INTANGIBLE ASSETS
|
|
Weighted
Average
|
|||||||||||||||
Remaining
|
||||||||||||||||
Amortization
|
||||||||||||||||
December 31,
|
Period | |||||||||||||||
June 30, 2018
|
2017
|
2016
|
(in Years)
|
|||||||||||||
Patents
|
$
|
969,632
|
$
|
958,604
|
$
|
958,604
|
15.0
|
|||||||||
Trademarks
|
73,877
|
57,325
|
55,824
|
9.0
|
||||||||||||
License rights
|
6,718
|
6,718
|
6,718
|
-
|
||||||||||||
Total
|
1,050,227
|
1,022,647
|
1,021,146
|
|||||||||||||
Less accumulated amortization
|
(1,015,394
|
)
|
(1,014,050
|
)
|
(1,012,338
|
)
|
||||||||||
Intangible assets, net
|
$ | 34,833 |
$
|
8,597
|
$
|
8,808
|
8. |
ACCRUED EXPENSES AND OTHER LIABILITIES
|
December 31,
|
||||||||||||
June 30, 2018
|
2017
|
2016
|
||||||||||
Accrued compensation and related benefits
|
$
|
359,077
|
$
|
652,177
|
$
|
443,547
|
||||||
Accrued cooperative advertising
|
60,784
|
134,018
|
50,000
|
|||||||||
Deferred rent
|
139,558
|
131,389
|
115,307
|
|||||||||
Accrued sales tax
|
17,149
|
20,844
|
6,885
|
|||||||||
Other
|
42,377
|
42,372
|
15,368
|
|||||||||
Accrued expenses and other liabilities
|
$
|
618,945
|
$
|
980,800
|
$
|
631,107
|
9. |
COMMITMENTS AND CONTINGENCIES
|
2019
|
$
|
609,039
|
||
2020
|
625,788
|
|||
2021
|
642,997
|
|||
2022
|
219,723
|
|||
Total
|
$
|
2,097,547
|
10. |
LINE OF CREDIT
|
11. |
SHAREHOLDERS’ EQUITY AND STOCK-BASED COMPENSATION
|
Six Months Ended June 30,
|
Year Ended December 31,
|
|||||||||||||||
2018
|
2017
|
2017
|
2016
|
|||||||||||||
(unaudited)
|
||||||||||||||||
Employee stock options
|
$
|
142,096
|
$
|
156,339
|
$
|
336,534
|
$
|
383,778
|
||||||||
Consultant stock options
|
-
|
-
|
-
|
170,622
|
||||||||||||
Restricted stock awards
|
93,537
|
49,747
|
106,948
|
448,906
|
||||||||||||
Total
|
$
|
235,633
|
$
|
206,086
|
$
|
443,482
|
$
|
1,003,306
|
Shares
|
Weighted
Average
Exercise
Price
|
|||||||
Outstanding at 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 at December 31, 2016
|
2,134,898
|
$
|
1.99
|
|||||
Granted
|
836,369
|
$
|
0.94
|
|||||
Forfeited
|
(103,000
|
)
|
$
|
1.22
|
||||
Expired
|
(491,002
|
)
|
$
|
2.95
|
||||
Outstanding at December 31, 2017
|
2,377,265
|
$
|
1.46
|
|||||
Granted
|
216,157
|
$
|
1.27
|
|||||
Forfeited
|
(173,750
|
)
|
$
|
1.05
|
||||
Expired
|
(31,503
|
)
|
$
|
2.17
|
||||
Outstanding at June 30, 2018
|
2,388,169
|
$
|
1.46
|
Six Months
Ended
|
Year Ended December 31,
|
|||||||||||
June 30, 2018
|
2017
|
2016
|
||||||||||
Dividend yield
|
0.0
|
%
|
0.0
|
%
|
0.0
|
%
|
||||||
Expected volatility
|
62.8
|
%
|
63.4
|
%
|
62.2
|
%
|
||||||
Risk-free interest rate
|
2.76
|
%
|
1.90
|
%
|
1.42
|
%
|
||||||
Expected lives (years)
|
5.4
|
5.5
|
5.6
|
Options Outstanding
|
Options Exercisable
|
Options Vested or Expected to Vest
|
||||||||||||||||||||||||||||||||
Balance
as of
6/30/2018
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
Weighted
Average
Exercise
Price
|
Balance
as of
6/30/2018
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
Weighted
Average
Exercise
Price
|
Balance
as of
6/30/2018
|
Weighted
Average
Remaining
Contractual
Life (Years)
|
Weighted
Average
Exercise
Price
|
||||||||||||||||||||||||||
2,388,169
|
7.42
|
$
|
1.46
|
1,914,512
|
7.01
|
$
|
1.54
|
2,260,660
|
7.33
|
$
|
1.48
|
Shares
|
Weighted
Average
Grant Date
Fair Value
|
|||||||
Unvested at December 31, 2015
|
425,000
|
$
|
1.87
|
|||||
Granted
|
509,250
|
$
|
0.93
|
|||||
Vested
|
(321,400
|
)
|
$
|
2.00
|
||||
Canceled
|
(253,450
|
)
|
$
|
1.18
|
||||
Unvested at December 31, 2016
|
359,400
|
$
|
0.91
|
|||||
Granted
|
420,000
|
$
|
1.11
|
|||||
Vested
|
(214,200
|
)
|
$
|
0.92
|
||||
Canceled
|
(209,783
|
)
|
$
|
0.96
|
||||
Unvested at December 31, 2017
|
355,417
|
$
|
1.11
|
|||||
Granted
|
264,000
|
$
|
1.25
|
|||||
Vested
|
(216,488
|
)
|
$
|
1.11
|
||||
Canceled
|
(138,929
|
)
|
$
|
1.11
|
||||
Unvested at June 30, 2018
|
264,000
|
$
|
1.25
|
12. |
INCOME TAXES
|
Six Months Ended June 30,
|
Year Ended December 31,
|
|||||||||||||||
2018
|
2017
|
2017
|
2016
|
|||||||||||||
(unaudited)
|
||||||||||||||||
Current:
|
||||||||||||||||
Federal
|
$
|
327,594
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||||
State
|
(9,534
|
)
|
(18,595
|
)
|
(27,609
|
)
|
(13,480
|
)
|
||||||||
Total current expense
|
318,060
|
(18,595
|
)
|
(27,609
|
)
|
(13,480
|
)
|
|||||||||
Deferred:
|
||||||||||||||||
Federal
|
-
|
-
|
-
|
-
|
||||||||||||
State
|
-
|
-
|
-
|
-
|
||||||||||||
Total deferred expense
|
-
|
-
|
-
|
-
|
||||||||||||
Income tax net expense
|
$
|
318,060
|
$
|
(18,595
|
)
|
$
|
(27,609
|
)
|
$
|
(13,480
|
)
|
December 31,
|
||||||||||||
June 30, 2018
|
2017
|
2016
|
||||||||||
Reversals and accruals
|
$
|
668,813
|
$
|
686,573
|
$
|
1,053,863
|
||||||
Prepaid expenses
|
(38,944
|
)
|
(28,744
|
)
|
(43,774
|
)
|
||||||
Federal NOL carryforwards
|
5,540,016
|
5,185,438
|
8,530,493
|
|||||||||
State NOL carryforwards
|
714,588
|
681,364
|
615,919
|
|||||||||
Hong Kong NOL carryforwards
|
995,566
|
995,566
|
995,566
|
|||||||||
Federal benefit on state taxes under uncertain tax positions
|
96,144
|
94,142
|
136,969
|
|||||||||
Stock-based compensation
|
412,148
|
422,623
|
342,294
|
|||||||||
Research tax credit
|
235,742
|
434,637
|
434,637
|
|||||||||
Alternative minimum tax
|
23,149
|
350,743
|
348,264
|
|||||||||
Contributions carryforward
|
1,923
|
-
|
35,100
|
|||||||||
Depreciation
|
(159,100
|
)
|
(178,670
|
)
|
(286,608
|
)
|
||||||
Accrued rent
|
121,124
|
138,178
|
216,432
|
|||||||||
Loss on impairment of long-lived assets
|
33,157
|
33,864
|
53,042
|
|||||||||
Valuation allowance
|
(8,644,326
|
)
|
(8,815,714
|
)
|
(12,432,197
|
)
|
||||||
Totals
|
-
|
-
|
-
|
|||||||||
Total deferred income tax assets, net
|
$
|
-
|
$
|
-
|
$
|
-
|
|
Six Months Ended
|
Year Ended December 31,
|
||||||||||
June 30, 2018
|
2017
|
2016
|
||||||||||
Anticipated income tax benefit at statutory rate
|
$
|
334,716
|
$
|
144,795
|
$
|
1,534,176
|
||||||
State income tax expense, net of federal tax effect
|
7,755
|
(54,083
|
)
|
(9,350
|
)
|
|||||||
Federal income tax effect of change in tax rate
|
-
|
(3,729,007
|
)
|
-
|
||||||||
Income tax effect of uncertain tax positions
|
37,671
|
(17,946
|
)
|
(8,896
|
)
|
|||||||
Return to provision adjustments
|
-
|
2,982
|
(23,070
|
)
|
||||||||
Stock-based compensation
|
9,855
|
(36,233
|
)
|
(110,066
|
)
|
|||||||
Other changes in deferred income tax assets, net
|
(243,325
|
)
|
(437
|
)
|
(13,118
|
) | ||||||
Decrease (increase) in valuation allowance
|
171,388
|
3,662,320
|
(1,383,156
|
)
|
||||||||
Income tax net benefit (expense)
|
$
|
318,060
|
$
|
(27,609
|
)
|
$
|
(13,480
|
)
|
Balance at December 31, 2015
|
$
|
519,284
|
||
Increases related to prior fiscal year tax positions
|
13,480
|
|||
Balance at December 31, 2016
|
532,764
|
|||
Increases related to prior fiscal year tax positions
|
27,609
|
|||
Balance at December 31, 2017
|
560,373
|
|||
Decreases related to prior fiscal year tax positions
|
(35,670
|
)
|
||
Balance at June 30, 2018
|
$
|
524,703
|
13. |
DISCONTINUED OPERATIONS
|
Net sales
|
$
|
804,585
|
||
Costs and expenses:
|
||||
Cost of goods sold
|
276,100
|
|||
Sales and marketing
|
940,685
|
|||
General and administrative
|
173,913
|
|||
Interest expense
|
11
|
|||
Total costs and expenses
|
1,390,709
|
|||
Loss from discontinued operations
|
(586,124
|
)
|
||
Other income:
|
||||
Gain on sale of long-term assets
|
12,398
|
|||
Total other income, net
|
12,398
|
|||
Pretax loss from discontinued operations
|
$
|
(573,726
|
)
|
14. |
MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK
|
December 31,
|
||||||||||||
June 30, 2018
|
2017
|
2016
|
||||||||||
Customer A
|
23
|
%
|
*
|
%
|
*
|
%
|
||||||
Customer B
|
10
|
%
|
18
|
%
|
** |
%
|
||||||
Customer C
|
***
|
%
|
12
|
%
|
16
|
%
|
Six Months Ended June 30,
|
Year Ended December 31,
|
|||||||||||||||
|
2018
|
2017
|
2017
|
2016
|
||||||||||||
(unaudited) | ||||||||||||||||
Customer A
|
12
|
%
|
26
|
%
|
21
|
%
|
17
|
%
|
||||||||
Customer B
|
12
|
%
|
*
|
%
|
*
|
%
|
*
|
%
|
||||||||
Customer D
|
** |
%
|
**
|
%
|
** |
%
|
23
|
%
|
||||||||
Customer E
|
***
|
%
|
10
|
%
|
***
|
%
|
***
|
%
|
15. |
EMPLOYEE BENEFIT PLAN
|
16. |
SUBSEQUENT EVENT
|
(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
|
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)
|
|
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)
|
|
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)
|
|
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)
|
|
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)
|
|
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)*
|
|
First Amendment to Exclusive Supply Agreement, dated as of June 22, 2018, by and between Charles & Colvard, Ltd. and Cree, Inc. (incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K, as filed with the SEC on June 27, 2018)*
|
|
Credit Agreement, dated as of July 13, 2018, by and among Charles & Colvard, Ltd., charlesandcolvard.com, LLC, Charles & Colvard Direct, LLC, and White Oak Commercial Finance, LLC (incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K, as filed with the SEC on July 17, 2018)
|
|
10.4 |
Security Agreement, dated as of July 13, 2018, by and among Charles & Colvard, Ltd., charlesandcolvard.com, LLC, Charles & Colvard Direct, LLC, and White Oak Commercial Finance, LLC++
|
Intercreditor Agreement, dated as of July 13, 2018, by and among Charles & Colvard, Ltd., charlesandcolvard.com, LLC, Charles & Colvard Direct, LLC, Cree, Inc., and White Oak Commercial Finance, LLC++
|
|
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)
|
CHARLES & COLVARD, LTD.
|
||
By:
|
/s/ Suzanne Miglucci
|
|
September 6, 2018
|
Suzanne Miglucci
|
|
President and Chief Executive Officer
|
By:
|
/s/ Suzanne Miglucci
|
|
September 6, 2018
|
Suzanne Miglucci
|
|
Director, President and Chief Executive Officer
|
||
By:
|
/s/ Clint J. Pete
|
|
September 6, 2018
|
Clint J. Pete
|
|
Chief Financial Officer (Principal Financial Officer and Chief Accounting Officer)
|
||
By:
|
/s/ Neal I. Goldman
|
|
September 6, 2018
|
Neal I. Goldman
|
|
Chairman of the Board of Directors
|
||
By:
|
/s/ Anne M. Butler
|
|
September 6, 2018
|
Anne M. Butler
|
|
Director
|
||
By:
|
/s/ Benedetta Casamento
|
|
September 6, 2018
|
Benedetta Casamento
|
|
Director
|
||
By:
|
/s/ Jaqui Lividini
|
|
September 6, 2018
|
Jaqui Lividini
|
|
Director
|
||
By:
|
/s/ Ollin B. Sykes
|
|
September 6, 2018
|
Ollin B. Sykes
|
|
Director
|
(a)
|
Accounts;
|
(b)
|
Chattel Paper;
|
(c)
|
Deposit Accounts;
|
(d)
|
Documents;
|
(e)
|
General Intangibles;
|
(f)
|
Goods, including Equipment and Fixtures;
|
(g)
|
Instruments;
|
(h)
|
Inventory;
|
(i)
|
Investment Property;
|
(j)
|
Letters of Credit and Letter-of-Credit Rights;
|
(k) |
Money and other assets of Grantor that now or later come into possession, custody, or control of Lender;
|
(l)
|
all Accessions and Supporting Obligations; and
|
GRANTORS:
|
||
|
||
CHARLES & COLVARD, LTD.
|
||
|
||
By:
|
/s/ Clint J. Pete
|
|
|
||
Name: Clint J. Pete
|
||
|
||
Title: Chief Financial Officer
|
||
|
||
charlesandcolvard.com
|
||
|
||
By:
|
/s/ Clint J. Pete
|
|
|
||
Name: Clint J. Pete
|
||
Title: Manager
|
||
|
||
CHARLES & COLVARD DIRECT, LLC
|
||
|
||
By:
|
/s/ Clint J. Pete
|
|
|
||
Name: Clint J. Pete
|
||
|
||
Title: Manager
|
||
|
||
LENDER:
|
WHITE OAK COMMERCIAL FINANCE, LLC
|
||
|
||
By:
|
/s/ Carlos Acedo
|
|
|
||
Name: Carlos Acedo
|
||
|
||
Title: Vice President
|
1. |
Leased Real Property
:
|
2. |
Copyrights, Trademarks, Patents and Licensing Agreements
:
|
Trademark
|
Registration
Number
|
Registration
Date
|
Expiration
Date
|
Trademark
Application
|
Application/Serial
Number
|
Application
Date
|
Patent
Description
|
Registration
Number
|
Registration
Date
|
Expiration
Date
|
Patent
Application
|
Application/Serial
Number
|
Application
Date
|
Copyright
|
Registration Number
|
Registration
Date
|
Name of
Document
|
Date of
Document
|
Licensor
|
Term
|
Licensed
Intellectual
Property
|
3. |
Deposit Accounts, Securities Accounts, Commodity Accounts and other Investment Accounts
:
|
Name and
Address of Bank
|
Account No.
|
Purpose
|
|
||
|
Name
and
Address
of Broker
or Other
Institution
|
Account No.
|
Purpose
|
Types of
Investments
|
Balance as of
[Date]
|
4. |
Locations of Collateral and Books and Records
:
|
Address
|
Owned/Leased/Third Party
*
|
Name/Address of Lessor or Third Party, as Applicable
|
*
|
Indicate in this column next to applicable address whether the locations is owned by the Company, leased by the Company or owned and operated by a third party (e.g., warehouse, processor, consignee, etc.)
|
CHARLES & COLVARD, LTD.
|
By:
|
/s/ Clint J. Pete
|
Name: Clint J. Pete
|
|
Title: Chief Financial Officer
|
CHARLESANDCOLVARD.COM, LLC
|
By:
|
/s/ Clint J. Pete
|
|
Name: Clint J. Pete
|
||
Title: Manager
|
CHARLES & COLVARD DIRECT, LLC
|
By:
|
/s/ Clint J. Pete
|
|
Name: Clint J. Pete
|
||
Title: Manager
|
CREE, INC.
|
By:
|
/s/ Cengiz Balkas
|
|
Cengiz Balkas, Senior VP and General Manager – Wolfspeed
|
WHITE OAK COMMERCIAL FINANCE, LLC
|
By:
|
/s/ Carlos Acedo
|
|
Name: Carlos Acedo
|
||
Title: Vice President
|
WELLS FARGO BANK, NATIONAL ASSOCIATION
|
By:
|
/s/ Kathryn Williams
|
|
Kathryn Williams, Authorized Signatory
|
CHARLES & COLVARD, LTD.
|
By:
|
/s/ Clint J. Pete
|
Name: Clint J. Pete
|
||
Title: Chief Financial Officer and Treasurer
|
CHARLES & COLVARD DIRECT, LLC
|
By:
|
/s/ Clint J. Pete
|
Name: Clint J. Pete
|
||
Title: Manager
|
CHARLESANDCOLVARD.COM, LLC
|
By:
|
/s/ Clint J. Pete
|
Name: Clint J. Pete
|
|
Title: Manager
|
Company Name
|
Jurisdiction
|
|
charlesandcolvard.com, LLC
|
North Carolina
|
|
Charles & Colvard (HK) Ltd.
|
Hong Kong SAR
|
1. |
I have reviewed this Transition Report on Form 10-KT for the transition period ended June 30, 2018 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/ Suzanne Miglucci
|
|
September 6, 2018
|
Suzanne Miglucci
|
|
President and Chief Executive Officer
|
1. |
I have reviewed this Transition Report on Form 10-KT for the transition period ended June 30, 2018 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;
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(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
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(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
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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):
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(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
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(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.
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By:
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/s/ Clint J. Pete
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September 6, 2018
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Clint J. Pete
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Chief Financial Officer
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(1) |
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
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(2) |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
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By:
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/s/ Suzanne Miglucci
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|
Suzanne Miglucci
|
||
President and Chief Executive Officer
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||
September 6, 2018
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(1) |
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
|
(2) |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
|
By:
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/s/ Clint J. Pete
|
|
Clint J. Pete
|
||
Chief Financial Officer
|
||
September 6, 2018
|